RS Letters: Tax Scam or Something You Need to Address?

Received a letter from the IRS? Stop, breathe, and contact your tax professional.

Then follow these steps.

Your taxes contain an array of sensitive information, from financial data to your Social Security number or tax ID number. Because of this, there are many scams that unsavory characters attempt to perpetrate by impersonating the IRS or another tax authority. It can be difficult to tell when the IRS is really seeking information versus when you may be the target of a scam.

To help you determine whether the letter you received is a scam or something you need to address, consider the following tips and information.

What Are the Next Steps If You Receive an IRS Letter?

If you receive a legitimate letter from the IRS, you need to take action to address whatever the IRS needs. There are many situations where the IRS is simply sending you a notice, and you may not have to do anything. However, if the IRS is requesting additional information, it is important to completely understand what they need and act quickly to address the letter.

Tax letters can be confusing because it may not be clear what the IRS needs or how you should get the information to them. As your tax professional, we will be able to help you decipher the tax letter and share the right information with the IRS. We are also better able to tell a legitimate letter from a scam as well.

It is of the utmost importance that you get in touch with your tax professional to determine the legitimacy of the IRS contact before any other steps.

Why Would You Receive a Tax Letter?

The IRS almost always initiates a conversation with a taxpayer by sending a letter first. That means that if the IRS needs to speak with you for any reason, you will receive an IRS letter in the mail. Keep in mind that phone calls or emails from the IRS without a corresponding letter are probably part of a scam, rather than a legitimate contact from the IRS.

Some of the most common reasons that the IRS sends letters are:

• You have a tax balance due
• The IRS has a question about your tax return
• Identification verification
• To notify you about a change in your tax return
• You are due a smaller or larger tax refund
• To get additional information about your taxes
• Notification about a delay in processing your return

Read the letter carefully to determine what the IRS needs and how you should respond to any tax problems. Some IRS letters do not require that you take any action.

How Often Does the IRS Send a Tax Letter?

The IRS sends literally millions of letters to taxpayers every year for various reasons. In most cases, the letters do not deal with audits. In fact, the IRS audits just 0.5% of all returns submitted, which amounts to approximately one million tax returns.

What Are the Methods of Communication That the IRS Uses to Contact Taxpayers?

In most cases, communication with the IRS will start with a letter. However, there are a few more time-sensitive situations where the IRS will use a different method of communication to initiate contact. Delinquent tax returns and overdue tax bills are the most common reason. The IRS can occasionally show up to your home or business unannounced to conduct an audit or as part of a criminal investigation. Note that these circumstances are rare; most contact starts with an IRS letter.

Keep in mind that the IRS will never ask for a specific type of payment method, and they do not request payment for overdue taxes over the phone.

How to Avoid a Tax Scam

IRS letters that are actually scams can seem legitimate, but they will generally have a few errors or omissions that signify that the letter is not official. For example, IRS letters will have an identifying number in the upper right-hand corner that matches a file with the IRS. If you call an official IRS number, you should be able to use that identifying number to talk with the right person. Double-check the number on your notice with phone numbers used for the IRS online.

Other things you can do to avoid scam include:

• Never give debit, credit, or bank account information out over the phone
• Never respond to social media or text messages; the IRS does not contact people in this way
• Check your tax account information online at IRS.gov
• Read your tax letter carefully to check for visible signs of errors or omissions

Being careful and not acting too quickly can help you avoid scams and further tax problems.

Remember: contact our office right away so we can put our tax and IRS expertise to work ensuring the contact you’ve received is legitimate.

Contact our office

The Home Energy Saving Tax Credit Is Back

The Residential Energy (Efficient) Property Credit was initially introduced in 2006. The credit’s name is somewhat misleading, and the credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Over the years since it was first introduced, it has provided a tax credit in amounts varying from 10% to 30% of the cost of energy-saving devices installed as part of a taxpayer’s home, with the maximum credit ranging from $500 to $1,500. Currently, the credit percentage is 10%, with a lifetime credit amount limited to $500.

Article Highlights:

• Appropriations Act of 2020
• Residential Energy (Efficient) Property Credit
• Lifetime Credit
• Credit Limits
• Qualifying Property
• Per Item Credit Limits
• Basis Adjustment
• Retroactive Application

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

The Residential Energy (Efficient) Property Credit was initially introduced in 2006. The credit’s name is somewhat misleading, and the credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Over the years since it was first introduced, it has provided a tax credit in amounts varying from 10% to 30% of the cost of energy-saving devices installed as part of a taxpayer’s home, with the maximum credit ranging from $500 to $1,500. Currently, the credit percentage is 10%, with a lifetime credit amount limited to $500.

Since the credit currently has a lifetime credit of $500, that means if you have ever claimed this credit in the past, going all the way back to 2006, you must reduce any credit currently claimed, limited to the $500, by any credit amount you claimed in any prior year. As a result, taxpayers who claimed the maximum credit amount in the past won’t be eligible for any additional credit under this extension.

Generally, this tax credit equals 10% of the cost of the following energy-saving improvements that meet certain Energy Star requirements:

• An advanced main air-circulating fan;
• A natural gas, propane, or oil furnace;
• A natural gas, propane, or oil hot water boiler;
• Energy-efficient heat pumps;
• Energy-efficient water heaters;
• Energy-efficient central air conditioners;
• Insulation;
• Metal roofs with appropriate pigmented coatings;
• Asphalt roofing with appropriate cooling granules;
• Exterior storm windows and skylights;
• Exterior storm doors; and
• Others not listed here.

To qualify for the credit, the home must be the taxpayer’s primary residence and be located in the U.S., the improvement must generally have a life of 5 years or more, and the original use must begin with the taxpayer.

The credit is non-refundable, meaning it can only be used to offset your tax liability to bring it down to zero, and there is no carryover provision, so any portion of the credit not used in the year when the credit is earned is lost.

There are also credit limits for certain items:

• Qualified Windows and Skylights $200
• Qualified Advanced Main Air Circ. $50
• Qualified Hot Water Boilers $150
• Qualified Energy-Efficient Equip. $300

Basis Adjustment – The basis of your home is increased by the amount you spend on an energy-efficient improvement but is then reduced by the amount of the credit. So even if you can’t claim the credit because you’ve exceeded the lifetime credit limit, the cost of the energy-efficient property will increase your home’s basis.

Retroactive Extension – Since this credit was retroactively extended to 2018, if you made qualifying improvements in 2018, you can amend your 2018 return and claim the credit. Since this credit has been extended through 2020, it can also be claimed for energy- efficient improvements made in 2019 and 2020 as long the $500 lifetime credit limit will not be exceeded.

If you have questions about this credit or think you might qualify for the credit in 2018 and want to see if the credit is worth the cost of amending your return, please give this office a call or visit our website at www.gallowaytax.com.

Will Independent Contractors Become Extinct?

Article Highlights:

• New California Legislation
• Employee or Independent Contractor
• Dynamex
• ABC Test
• Impact on Employers
• Impact on Workers
• Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, for a worker to be classified as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.

Background: The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the so-called “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test: Several states, including Massachusetts and New Jersey, have also adopted this so-called ABC test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a simpler, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surly enrich California labor attorneys.

Impacts on Employers: Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back: Some larger employers are fighting back and challenging AB-5. Uber and Doordash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome is no doubt months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. Of course, the safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Please give this office a call if you have further questions.

What Does the $2 Trillion Stimulus Package Mean for You?

The “Coronavirus Aid, Relief, and Economic Security Act” (Cares Act) includes many tax and financial breaks for both individuals and businesses. We broke down many of the essential elements and how they can assist you and your business during this troubling time.

Article Highlights:

• Recovery Rebate 
• Penalty-Free Retirement Withdrawals 
• Waiver of the 2020 RMD Requirement 
• Temporary Removal of Charitable Contribution Limits 
• Employer Student Loan Payments 
• Employer Delayed Payroll Tax Deposits 
• Employer Credit for Retaining Employees 
• Temporary Reinstatement of NOL Carrybacks
• Limitation on Losses
• Prior Year AMT Credit for Corporations
• Limitation on Business Interest
• Loan Guarantees and Subsidies

The “Coronavirus Aid, Relief, and Economic Security Act” (Cares Act) includes many tax and financial breaks for both individuals and businesses. We broke down many of the essential elements and how they can assist you and your business during this troubling time.

Recovery Rebate - The most talked about provision is the “recovery rebates” for individuals. These rebates are actually credits allowed on taxpayers’ 2020 tax returns that will be paid out in advance by the Treasury.

Each eligible individual will receive $1,200 ($2,400 for married couples filing jointly) plus an additional $500 for each qualifying child (under age 17 at years end). These rebates are intended for low- to middle-income individuals, so they are phased out for higher income folks. For unmarried individuals the credit begins to phase out at an AGI of $75,000 and is fully eliminated at $98,990. For those filing as head of household, the phase-out range is $112,500 to $136,490, and for married couples filing jointly it is $150,000 to $197,990.

The Treasury will determine who will receive a check and the amount they are entitled to based on the individual’s 2019 tax return. Where no 2019 return has been filed at the time of the rebate payment, the Treasury will use the 2018 tax return. For those who have not filed either a 2018 or 2019 return, the Treasury will provide a payment to individuals that received 2019 Social Security or Railroad Retirement benefits.

In recent guidance, the IRS has indicated they will be providing an on-line means for taxpayers to provide their direct deposit information so the rebates can be expedited rather than having to wait for a check. The IRS has also indicated they would provide later guidance on how people that are not required to file a return can file in order to obtain an advance rebate. Further details will be provided at www.IRS.gov/coronavirus.

Where an advance rebate is more or less than allowed because an individual’s filing status or family size is different in 2020 or the credit is subject to phase-out based on 2020 income, the adjustment is made on the 2020 tax return. Thus, individuals may be entitled to an additional credit, and if the advance rebate was greater than the actual credit, they will NOT have to repay the excess. This means that individuals who otherwise wouldn’t have a 2020 return filing requirement based on their income will likely have to file to reconcile their advance rebate with their actual credit.

The rebates will not be paid to individuals who are claimed as a dependent of another on a prior year return. Also ineligible for the credit or an advance rebate are those without a Social Security number (or ATIN for an adopted child who doesn’t yet have an SSN).

Additional Key Provisions – The Cares Act is over 500 pages covering tax provisions, economic stimulus, business loans, health care and more. Following is an overview of the key issues relating to individuals and small businesses.

Individuals:

• Penalty Free Retirement Withdrawals - Penalty-free withdrawals from qualified retirement plans (including 401(k)s, TSAs, SEPs and traditional IRAs) are allowed. The withdrawals are limited to $100,000 and the income is taxable over a three-year period with an option to also recontribute the withdrawal over a three-year period.
• RMD Waiver - There is a one-year waiver for the 2020 required minimum distribution (RMD) from qualified plans and traditional IRAs for taxpayers that turned 70.5 in a year before 2020 and those that turn 72 in 2020. This prevents them from having to take a distribution when the stock market is in a decline.
• Charitable Contributions - A suspension of charitable contribution limits applies for 2020. Generally, for cash gifts, tax deductible charitable contributions are limited to 60% of adjusted gross income (AGI). The suspension of the limitation will allow taxpayers to make larger charitable contributions during this trying time. Also included is an above-the-line charitable deduction limited to $300 of cash donations for those that don’t itemize their deductions.
• Student Loan Payments - Employees can exclude from income payments (Up to $5,250) made before January 1, 2021 by their employers towards their student loans. 

Businesses:

• Payroll Deposits Delayed - In order to provide businesses with more financial resources to weather this epidemic, employers can delay payroll tax deposits for 2020 with 50% not due until December 31, 2021, and the balance due by December 31, 2022.
• Employee Retention Credit - In order to help businesses retain employees and keep them employed during this crisis, Congress has provided a refundable employer retention credit equal to 50% of qualified wages. This credit can be used to offset quarterly employment taxes. The qualified wages under this provision are limited to $10,000 per employee in 2020.
• NOL Carryback Reinstated - Under the 2018 tax reform legislation (TCJA), a business net operating loss (NOL) was no longer allowed to be carried back to a prior year, had to be carried forward to the next tax year, and the carryforward loss deduction was limited to 80% of the carryforward year’s taxable income. Under the CARES Act, carryback of losses incurred in 2018 through 2020 has been reinstated and the 80% of taxable income limitation repealed. This is designed so businesses with financial problems can file for tax refunds from the carryback years when they were profitable and had paid income taxes.
• Limitation on Losses – The legislation retroactively turns off the excess active business and farming loss limitation rules implemented as part of tax reform to apply after December 31, 2020 instead of after December 31, 2017.
• Prior Year AMT Credit for Corporations – Allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and provides an election to accelerate claims to 2018, with eligibility for accelerated refunds.
• Limitation on Business Interest - Generally allows businesses to elect to increase the interest limitation from 30% of adjusted taxable income to 50% for 2019 and 2020 and allows businesses to elect to use 2019 adjusted taxable income in calculating their 2020 limitation.
• Loan Guarantees and Subsidies - Includes over $300 billion for Small Business Administration (SBA) loan guarantees and subsidies and additional funding for SBA resources. 

Of course, there are additional details that we will be providing in the days ahead. Please call if you have questions.

Contact our office

Divorced, Separated, Married or Widowed This Year? Unpleasant Surprises May Await You at Tax Time

Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about are the tax ramifications. But the ramifications are real, and the following are some of the major tax complications for each situation.




Article Highlights:

• Separated Taxpayers
• Divorced Taxpayers
• Recently Married Taxpayers
• Widowed Taxpayers
• Filing Status
• Joint and Several Liability
• Who Claims the Children
• Alimony
• Community Property States
• Affordable Care Act

Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about is the tax ramifications. But the ramifications are real, and the following are some of the major tax complications for each situation.

Separated – Separating from a spouse is probably the most complicated life event and is certainly stressful for the family involved. For taxes, a separated couple can file jointly, because they are still married, or file separately.

• Filing Status – If the couple has lived apart from each other for the last 6 months of the year, either or both of them can file as head of household (HH) provided that the spouse(s) claiming HH status paid over half the cost of maintaining a household for a dependent child, stepchild or foster child. A spouse not qualifying for HH status must file as a married person filing separately if the couple chooses not to file a joint return. The married filing separate status is subject to a host of restrictions to keep married couples from filing separately to take unintended advantage of the tax laws.
  
  In most cases, a joint return results in less tax than two returns filed as married separately. However, when married taxpayers file joint returns, both spouses are responsible for the tax on that return (referred to as joint and several liabilities). What this means is that one spouse may be held liable for all of the tax due on a return, even if the other spouse earned all of the income on that return. This holds true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file.
• Children – Who claims the children can be a contentious issue between separated spouses. If they cannot agree, the one with custody for the greater part of the year is entitled to claim the child as a dependent along with all of the associated tax benefits. When determining who had custody for the greater part of the year, the IRS goes by the number of nights the child spent at each parent’s home and ignores the actual hours spent there in a day.
• Alimony – Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. Under tax law prior to tax reform, the recipient of the alimony includes it as income, and the payer deducts it as an above-the-line expense, on their respective separate returns. The tax reform rule is that alimony is non-taxable to the recipient if it is received from divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to treat alimony as non-taxable. Therefore, post-2018 agreement alimony cannot be treated by the recipient as earned income for purposes of an IRA contribution and can’t be deducted by the payer.
  
  A payment for the support of children is not alimony. To be treated as alimony by separated spouses, the payments must be designated and required in a written separation agreement. Voluntary payments do not count as alimony.
• Community Property – Nine U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – are community property states. Generally, community income must be split 50–50 between spouses according to their resident state’s community property law. This often complicates the allocation of income between spouses, and they generally cannot file based upon just their own income.

Divorced – Once a couple is legally divorced, tax issues become clearer because each former spouse will file based upon their own income and the terms of the divorce decree related to spousal support, custody of children and division of property.

• Filing Status – An individual’s marital status as of the last day of the year is used to determine the filing status for that year. So, if a couple is divorced during the year, they can no longer file together on a joint return for that year or future years. They must, unless remarried, either file as single or head of household (HH). To file as HH, an unmarried individual must have paid over half the cost of maintaining a household for a dependent child or dependent relative who also lived in the home for more than half the year (exception: a dependent parent need not live in their child’s home for the child to qualify for HH status). If both ex-spouses meet the requirements, then both can file as head of household.
• Children – Normally, the divorce agreement will specify which parent is the custodial parent. Tax law specifies that the custodial parent is the one entitled to claim the child’s dependency and associated tax benefits unless the custodial parent releases the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The release can be made for one year or multiple years and can be revoked, with the revocation becoming effective in the tax year after the year the revocation is made.
  
  Most recently, family courts have been awarding joint custody. If the parents cannot agree on who can claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply. This rule specifies that the one with custody the greater part of the year, measured by the number of nights spent in each parent’s home, is entitled to claim the child as a dependent. The parent claiming the dependency is also eligible to take advantage of other tax benefits, such as childcare credits and higher education tuition credits.
• Alimony – See alimony under “separated”.

Recently Married – When a couple marries, their incomes and deductions are combined, and they must file as married individuals.

• Filing Status – If a couple is married on the last day of the year, they can either file a joint return combining their incomes, deductions and credits or file as married separate. Generally, filing jointly will provide the best overall tax outcome. But there may be extenuating circumstances requiring them to file as married separately. As mentioned earlier, married filing separate status is riddled with restrictions to keep married couples from taking undue advantage of the tax laws by filing separate returns. Best look before you leap.
• Combining Income – The tax laws include numerous provisions to restrict or limit tax benefits to higher-income taxpayers. The couple’s combined incomes may well be enough that they’ll encounter some of the higher income restrictions, with unpleasant tax results.
• Affordable Care Act – If one or both spouses acquired their insurance through a government marketplace and were receiving a premium supplement, their combined incomes may exceed the eligibility level to qualify for the supplement, which may have to be repaid.

Widowed – When one spouse of a married couple passes away, a joint return is still allowed for the year of the spouse’s death. Furthermore, the widow or widower continues to use the joint tax rates for up to two additional years, provided the surviving spouse hasn’t remarried and has a dependent child living at home. This provides some relief for the survivor, who would otherwise be straddled with an unexpected tax increase while also facing the potential loss of some income, such as the deceased spouse’s pension and Social Security benefits.

If any of these situations are relevant to you or a family member, please call for additional details that may also apply with respect to your specific set of circumstances.

Don't Be Duped by Clever Scammers

You may think we harp on you a lot about protecting yourself against identity theft and tax scams. You are right… but we do it because having your identity stolen becomes an absolute financial nightmare, sometimes taking years to straighten out. Identity thieves are clever and relentless, and they are always coming up with new schemes to trick you. And all you have to do is slip up just once to compromise your identity, and your nightmare will begin.

Article Highlights:

• Scammers disguise e-mails to look legitimate.
• Legitimate businesses and the IRS never request sensitive personal and financial information by e-mail.
• Don’t become a victim.
• Stop - Think - Delete
• Be alert for phony letters and phone calls

You may think we harp on you a lot about protecting yourself against identity theft and tax scams. You are right… but we do it because having your identity stolen becomes an absolute financial nightmare, sometimes taking years to straighten out. Identity thieves are clever and relentless, and they are always coming up with new schemes to trick you. And all you have to do is slip up just once to compromise your identity, and your nightmare will begin.

What they try to do is trick you into divulging personal information such as your bank account numbers, passwords, credit card numbers, or Social Security number.

One of the most popular methods these unscrupulous people use is requesting your personal information by e-mail. They are pretty good at making their e-mails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank.

You need to be very careful when responding to e-mails asking you to update things such as your account information, personal identification number (PIN), or password. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If one does, the e-mail should be deleted and ignored, just like spam e-mails.

We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate, where they have you enter your secure information. Here are some examples:

• E-mails that appear to be from the IRS indicating you have a refund coming and claiming that additional information is needed to process the refund. The IRS never initiates communication via e-mail! If you receive this type of e-mail, right away, you should know that it is bogus. If you are concerned, please free to call this office.
  
• E-mails from a bank indicating that it is holding a wire transfer and needs your bank routing information and account number. Don’t respond; if in doubt, call your bank.
  
• E-mails saying you have a foreign inheritance and that the sender needs your bank info to wire the funds. The funds that will get wired are yours going the other way. Remember: if it seems too good to be true, it generally is.

We have seen cases where elderly individuals have been duped out of hundreds of thousands of dollars, and sometimes their entire life savings. The scammers primarily rely on individuals’ fear of the IRS, coupled with a phony urgent need to make a payment to avoid arrest, foreclosure, or property seizure.

We could go on and on with examples. The key here is for you to be highly suspect of any e-mail requesting personal or financial information or requesting an immediate tax payment. Scammers will generally request payment be made by gift card, which should be an immediate RED FLAG!

A good rule of thumb is to STOP - THINK - DELETE.

If you receive electronic correspondence from the IRS, your state taxing agency, a credit card company, or a financial institution and feel uncomfortable ignoring it, call this office to check so you won’t need to worry.
Knowing that this is the time of year when the IRS sends correspondence to taxpayers, scammers will send fake letters to trick people into making payments on bogus tax liabilities. As a result, taxpayers need to be very careful to avoid being hoodwinked by these thieves. The best practice is to have a tax professional review of any letter that you receive before you take any action. If the letter is real, then it will require a timely response, but if it is fake, it should be ignored.

Scammers have also been known to call individuals and threaten immediate arrest if a payment related to a phony liability is not immediately made. Just the threat of arrest is enough to know that the call is from a scammer, and you should immediately hang up.

Bottom line: you must be on guard against these scammers at all times. Your life can become a nightmare if your identity is stolen. Identity thieves will even file tax returns under your Social Security number, claiming huge refunds and leaving you with a horrendous mess to clean up with the IRS. Don’t be a victim. Please call this office if you believe your tax ID has been compromised.

Coronavirus and Taxes: Frequently Asked Questions (FAQ)

How is the COVID-19 outbreak affecting this tax season?

In this post, we cover all your most pressing questions.

The COVID-19 outbreak is affecting every facet of our lives – including our taxes. Check here for all your FAQs to see how you may be impacted.
Q: Has the government extended the filing deadline?

A: Yes, the federal government has extended the April 15 filing deadline for 2019 tax returns to July 15, 2020. Please check with your tax preparer about whether or not your state extended the deadline.

Q: Has the government postponed the deadline to pay my taxes?

A: Yes, as a result of extending the filing due and as a result of a previous postponement, the time for taxpayers to pay their 2019 taxes is extended until July 15, 2020. Please check with your tax preparer regarding any postponement available for your state tax. Q: Is April 15 still the last day I can make an IRA contribution for 2019? A: No, the last date to make an IRA contribution is the same as the tax return filing due date so you now have until July 15, 2020 to make the contribution.

Q: Are Corporation taxes affected by the extended filing due date?

A: Yes, the filing due date for calendar year C-corporations has also been extended to July 15, 2020. As a result of extending the filing due date, the payment of taxes and filing of estimated taxes has also been extended.

Q: Are estate and trust income taxes also extended?

A: Yes, the estate and trust income tax return due date been extended to July 15, 2020. Therefore, any tax payments are also extended.

Q: If I can’t file my return by July 15, what can I do?

A: You can file an extension using Form 4868 which gives you until October 15, 2020 to file your return.

Q: What about relief for other types of tax filings?

A: The IRS has not provided a payment extension for the payment or deposit of any other type of federal tax (including payroll taxes and excise taxes) or for the filing of any tax return or information return.

Q: Is there any tax relief for other types of tax filings that are late?

A: Yes, taxpayers may seek relief under certain provisions of the tax code that allow the IRS to waive penalties by reason of casualty, disaster, or other unusual circumstances, the imposition of such addition to tax would be against equity and good conscience.

Q: What should I do if I have an appointment with my tax preparer in the near future?

A: Most are now handling appointments remotely by phone, email and documents exchanged digitally by secure means. You should contact your tax preparer for details.

Beware of Scammers During the COVID-19 Crisis

Tax season is always prime time for scammers to take advantage of unknowing victims. The COVID-19 outbreak makes the risk even higher.

As part of the efforts to contain the COVID-19 outbreak, the elderly, especially those over the age of 80 who are most susceptible to the dangers of the virus, have been asked to self-isolate themselves. At the same time, the public has been asked to assist family, friends, and neighbors who can’t do their own their grocery shopping, pick up medication, or need other assistance.

Unfortunately, there are those among us who would take advantage during this crisis. For instance, someone pretending to be a neighbor may call and offer to provide assistance with grocery shopping. Or the caller might pretend to be from a charitable or government service that provides shopping services for those confined at home.

These crooks are clever, so you have be very cautious. If you don’t know the person, don’t give them your credit card number or any other personal information such as your Social Security number, driver’s license, bank information, passwords or other financial information.

If you are a family member of someone who is confined at home and might not be aware of their risk of being scammed, please take time to call them and caution them about the risks.

This might also be a good time to discuss other means scammers use to steal your identity or separate you from your money. One of the most popular methods these unscrupulous people use is requesting your personal information by e-mail. They are pretty good at making their e-mails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank.

You need to be very careful when responding to e-mails asking you to update things such as your account information, personal identification number (PIN), or password. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If one does, the e-mail should be deleted and ignored, just like spam e-mails.

We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate, where they have you enter your secure information. Here are some examples:

• E-mails that appear to be from the IRS indicating you have a refund coming and claiming that additional information is needed to process the refund. The IRS never initiates communication via e-mail! If you receive this type of e-mail, you should know right away that it is bogus. If you are concerned, please free to call this office.
  
• E-mails from a bank indicating that it is holding a wire transfer and needs your bank routing information and account number. Don’t respond. If in doubt, call your bank.
  
• E-mails saying you have a foreign inheritance and that the sender needs your bank info to wire the funds. The funds that will get wired are yours going the other way. Remember: if it seems too good to be true, it generally is. 

We have seen cases where elderly individuals have been duped out of hundreds of thousands of dollars, and sometimes their entire life savings. The scammers primarily rely on individuals’ fear of the IRS, coupled with a phony urgent need to make a payment to avoid arrest, foreclosure, or property seizure.

We could go on and on with examples. The key here is for you to be highly suspect of any e-mail requesting personal or financial information or requesting an immediate tax payment. Scammers will generally request payment be made by gift card, which should be an immediate RED FLAG!

A good rule of thumb is to STOP—THINK—DELETE.

If you receive electronic correspondence from the IRS, your state taxing agency, a credit card company, or a financial institution and feel uncomfortable ignoring it, call this office to check so you won’t need to worry.

Knowing that this is the time of year when the IRS sends correspondence to taxpayers, scammers will send fake letters to trick people into making payments on bogus tax liabilities. As a result, taxpayers need to be very careful to avoid being hoodwinked by these thieves. The best practice is to have a tax professional review of any letter that you receive before you take any action. If the letter is real, then it will require a timely response, but if it is fake, it should be ignored.

Scammers have also been known to call individuals and threaten immediate arrest if a payment related to a phony liability is not immediately made. Just the threat of arrest is enough to know that the call is from a scammer, and you should immediately hang up.

Bottom line: you must be on guard against these scammers at all times. Don’t be a victim. Please call this office if you have a question or believe your tax ID has been compromised.

Contact our office

The Difference Between an Audit, a Review, and a Compilation

There are key differences between compilations, reviews, and audits – and they’re important to know when it’s time for financial documents to be corroborated.

When it comes time for financial documents to be corroborated, the three options available are a compilation, a review, and an audit. Each of these represents a very different degree of effort and investigation, and therefore each provides differing levels of confidence for investors and lenders. Let’s take a closer look at all three.

The Compilation

A compilation requires the least amount of work from an auditor, and though it is likely to cost the least of the three and take the least amount of time, it also provides the lowest level of assurance about the accuracy of the information presented. This is because in a compilation, the auditor does little more than hand over the original financial statements that were prepared internally by the company’s management, with no due diligence performed even to determine whether the information contained in the documents is accurate or true. It relies entirely on the information originally presented.

The Review

A review demands significantly more work on the part of the auditor, who is expected to determine the accuracy of the information contained in the financial documents presented to them through a series of inquiries and analytical procedures. Because some of the information contained in the financial documents presented by management has been tested, a review provides a moderate degree of assurance that the information is correct and can be trusted.

The Audit

An audit requires a much greater degree of due diligence than either a compilation or a review. It represents a significant amount of time spent making sure that all of the disclosures and ending balances that are contained in the organization’s financial statements are accurate, including time spent testing internal controls, confirming the engagement and statements from third parties, and examining all source documents in order to make sure that they are representative of the true situation at hand. An audit will often include a physical inspection where appropriate, as well as other procedures that are designed to confirm or refute the information that management has presented.

Though an audit will take the most time and be the most expensive procedure, it also provides the highest level of assurance for those considering investing in an organization or lending it money.

Feel free to contact this office with any questions relating to the different options for financial documents to be corroborated or visit our website at www.gallowaytax.com.

Divorced, Separated, Married or Widowed This Year? Unpleasant Surprises May Await You at Tax Time

Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about are the tax ramifications. But the ramifications are real, and the following are some of the major tax complications for each situation.

Article Highlights:

• Separated Taxpayers
• Divorced Taxpayers
• Recently Married Taxpayers
• Widowed Taxpayers
• Filing Status
• Joint and Several Liability
• Who Claims the Children
• Alimony
• Community Property States
• Affordable Care Act

Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about are the tax ramifications. But the ramifications are real, and the following are some of the major tax complications for each situation.

Separated – Separating from a spouse is probably the most complicated life event and is certainly stressful for the family involved. For taxes, a separated couple can file jointly, because they are still married, or file separately.

• Filing Status – If the couple has lived apart from each other for the last 6 months of the year, either or both of them can file as head of household (HH) provided that the spouse(s) claiming HH status paid over half the cost of maintaining a household for a dependent child, stepchild or foster child. A spouse not qualifying for HH status must file as a married person filing separately if the couple chooses not to file a joint return. The married filing separate status is subject to a host of restrictions to keep married couples from filing separately to take unintended advantage of the tax laws.
  
  In most cases, a joint return results in less tax than two returns filed as married separate. However, when married taxpayers file joint returns, both spouses are responsible for the tax on that return (referred to as joint and several liability). What this means is that one spouse may be held liable for all of the tax due on a return, even if the other spouse earned all of the income on that return. This holds true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file.
  
• Children – Who claims the children can be a contentious issue between separated spouses. If they cannot agree, the one with custody for the greater part of the year is entitled to claim the child as a dependent along with all of the associated tax benefits. When determining who had custody for the greater part of the year, the IRS goes by the number of nights the child spent at each parent’s home and ignores the actual hours spent there in a day.
  
• Alimony – Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. Under tax law prior to tax reform, the recipient of the alimony includes it as income, and the payer deducts it as an above-the-line expense, on their respective separate returns. The tax reform rule is that alimony is non-taxable to the recipient if it is received from divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to treat alimony as non-taxable. Therefore, post-2018 agreement alimony cannot be treated by the recipient as earned income for purposes of an IRA contribution and can’t be deducted by the payer.
  
  A payment for the support of children is not alimony. To be treated as alimony by separated spouses, the payments must be designated and required in a written separation agreement. Voluntary payments do not count as alimony.
  
• Community Property – Nine U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – are community property states. Generally, community income must be split 50–50 between spouses according to their resident state’s community property law. This often complicates the allocation of income between spouses, and they generally cannot file based upon just their own income.

Divorced – Once a couple is legally divorced, tax issues become clearer because each former spouse will file based upon their own income and the terms of the divorce decree related to spousal support, custody of children and division of property.

• Filing Status – An individual’s marital status as of the last day of the year is used to determine the filing status for that year. So, if a couple is divorced during the year, they can no longer file together on a joint return for that year or future years. They must, unless remarried, either file as single or head of household (HH). To file as HH, an unmarried individual must have paid over half the cost of maintaining a household for a dependent child or dependent relative who also lived in the home for more than half the year (exception: a dependent parent need not live in their child’s home for the child to qualify for HH status). If both ex-spouses meet the requirements, then both can file as head of household.
  
• Children – Normally, the divorce agreement will specify which parent is the custodial parent. Tax law specifies that the custodial parent is the one entitled to claim the child’s dependency and associated tax benefits unless the custodial parent releases the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The release can be made for one year or multiple years and can be revoked, with the revocation becoming effective in the tax year after the year the revocation is made.
  
  Most recently, family courts have been awarding joint custody. If the parents cannot agree on who can claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply. This rule specifies that the one with custody the greater part of the year, measured by the number of nights spent in each parent’s home, is entitled to claim the child as a dependent. The parent claiming the dependency is also eligible to take advantage of other tax benefits, such as childcare credits and higher education tuition credits.
  
• Alimony – See alimony under “separated”.

Recently Married – When a couple marries, their incomes and deductions are combined, and they must file as married individuals.

• Filing Status – If a couple is married on the last day of the year, they can either file a joint return combining their incomes, deductions and credits or file as married separate. Generally, filing jointly will provide the best overall tax outcome. But there may be extenuating circumstances requiring them to file as married separate. As mentioned earlier, married filing separate status is riddled with restrictions to keep married couples from taking undue advantage of the tax laws by filing separate returns. Best look before you leap.
  
• Combining Income – The tax laws include numerous provisions to restrict or limit tax benefits to higher-income taxpayers. The couple’s combined incomes may well be enough that they’ll encounter some of the higher income restrictions, with unpleasant tax results.
  
• Affordable Care Act – If one or both spouses acquired their insurance through a government marketplace and were receiving a premium supplement, their combined incomes may exceed the eligibility level to qualify for the supplement, which may have to be repaid.

Widowed – When one spouse of a married couple passes away, a joint return is still allowed for the year of the spouse’s death. Furthermore, the widow or widower continues to use the joint tax rates for up to two additional years, provided the surviving spouse hasn’t remarried and has a dependent child living at home. This provides some relief for the survivor, who would otherwise be straddled with an unexpected tax increase while also facing the potential loss of some income, such as the deceased spouse’s pension and Social Security benefits.

If any of these situations are relevant to you or a family member, please call for additional details that may also apply with respect to your specific set of circumstances or visit our website at www.galloway.com.

Congress Allowing Higher Medical Deductions for 2019 and 2020

Medical expenses are deductible as an itemized deduction but only to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). For a long time, the percentage was 7.5%, which was then raised for under-age-65 taxpayers to 10% for 2013 through 2016 and then lowered back to 7.5% for all taxpayers for years 2017 and 2018. It was scheduled to go back up to 10% starting with tax year 2019. However, with the passage of the Appropriations Act of 2020, Congress reduced that percentage back to 7.5% for tax years 2019 and 2020, allowing more taxpayers to qualify for the medical deduction.

Article Highlight:

• Appropriations Act of 2020
• Medical AGI Limitations
• Sometimes Overlooked Deductions
• Deductible Health Insurance
• Above-the-Line Health Insurance Deduction for Self-Employed

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

Medical expenses are deductible as an itemized deduction but only to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). For a long time, the percentage was 7.5%, which was then raised for under-age-65 taxpayers to 10% for 2013 through 2016 and then lowered back to 7.5% for all taxpayers for years 2017 and 2018. It was scheduled to go back up to 10% starting with tax year 2019. However, with the passage of the Appropriations Act of 2020, Congress reduced that percentage back to 7.5% for tax years 2019 and 2020, allowing more taxpayers to qualify for the medical deduction.

However, keep in mind that the total of the itemized deductions must exceed the standard deduction before the itemized deductions will provide a tax break. So even if your medical deductions exceed the 7.5% floor, this doesn’t necessarily mean you will have a tax benefit from them.

To help you maximize your medical deductions, the following are some medical expenses other than those for doctors, dentists, hospitals, and prescriptions that are sometimes overlooked:

• Adult Diapers
• Acupuncture
• Birth Control
• Chiropractor Visits
• Drug-Addiction Treatment
• Fertility Enhancement Therapy
• Gender Identity Disorder Treatments
• Guide Dog Expenses
• Health Insurance Premiums* – Including the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans:
  o Health Care and Hospitalization Insurance
  o Long-Term Care Insurance (but limited based upon age)
  o Medicare B
  o Medicare C (aka Medicare Advantage Plans)
  o Medicare D
  o Dental Insurance
  o Vision Insurance
  o Premiums Paid through a Government Marketplace, Net of the Premium Tax Credit
  *However, premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. If you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars.
• Home Modifications for Disabled Individuals
• Lactation Expenses
• Learning Disability Special Education
• Nursing Home Costs
• Nursing Services (which need not be performed by a nurse)
• Pregnancy Tests
• Smoking-Cessation Programs

This is not an all-inclusive list, so please call with questions related to expenses that you think might qualify as a medical expense.

As a tax tip, if you are self-employed, you may be able to deduct 100% (no 7.5%-of-AGI reduction) of the cost of medical insurance without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in that capacity and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.

No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer's spouse, any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. This rule is separately applied to plans that provide coverage for long-term care services. Thus, an individual who is eligible for employer-subsidized health insurance may still deduct long-term care insurance premiums, as long as he or she isn't eligible for employer-subsidized long-term care insurance. In addition, for the insurance to be treated as subsidized, 50% or more of the premium must be paid by the employer.

This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.

The above-the-line deduction includes the premiums you pay for health coverage for yourself, your dependents, and your spouse, if applicable, for the types of plans listed under “Health Insurance Premiums” above.

If you have any questions related to medical itemized deductions or the self-employed above-the-line deduction for health insurance premiums, please give this office a call or visit our website at www.galloway.com.

Will Independent Contractors Become Extinct?

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, for a worker to be classified as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Article Highlights:

• New California Legislation
• Employee or Independent Contractor
• Dynamex
• ABC Test
• Impact on Employers
• Impact on Workers
• Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, for a worker to be classified as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.

Background: The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the so-called “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test: Several states, including Massachusetts and New Jersey, have also adopted this so-called ABC test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a simpler, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surly enrich California labor attorneys.

Impacts on Employers: Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back: Some larger employers are fighting back and challenging AB-5. Uber and Doordash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome is no doubt months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. Of course, the safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Please give this office a call if you have further questions.

Do I Have to File a Tax Return?

This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to the individuals’ BENEFIT to file a return even if they are not required to file.

Article Highlights:

• When You Are Required to File
• Self-Employed Taxpayers
• Filing Thresholds
• Benefits of Filing Even When Not Required to File
• Refundable Tax Credits

This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to the individuals’ BENEFIT to file a return even if they are not required to file.

When individuals are required to file:

• Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds generally are the same amount as the standard deduction for individual(s).
  
• Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
  
• Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance through a government Marketplace and received a higher advance premium tax credit (APTC) than they were entitled to, are required to repay part of it. Therefore, all individuals who received an APTC must file a return to reconcile the advance payments with the actual credit amount, even if their income is less than the filing threshold amount and even if they don’t need to repay any of the advance credit.
  
• Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.

2019 – Filing Thresholds

Filing Status	Age	Threshold
Single	Under Age 65 Age 65 or Older	$12,200 $13,850
Married Filing Jointly	Both Spouses Under 65      One Spouse 65 or Older    Both Spouses 65 or Older	$24,400 $25,700 $27,000
Married Filing Separate	Any Age	$5
Head of Household	Under 65 65 or Older	$18,350 $20,000
Qualifying Widow(er) with Dependent Child	Under 65 65 or Older	$24,400 $25,700

When it is beneficial for individuals to file:
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:

• Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
  
• Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
  
• Child Tax Credit – This is a $2,000 credit for each qualifying child, a portion of which may be refundable for lower income taxpayers, and phases out for higher income taxpayers.
  
• American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
  
• Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.

DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So, the refund period expires for 2019 returns, which were due in April of 2020, on April 15, 2023.

For more information about filing requirements and your eligibility to receive tax credits, please contact this office or visit our website at www.gallowaytax.com.

Understanding Your Annual Social Security Letter

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Article Highlights:

• Medicare B Premiums
• Medicare D Premiums
• Modified AGI
• 2020 Premiums Table
• Effect of Recreational Gambling
• Appealing the Social Security Administration’s Decision

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Not everyone realizes their Part B and Part D benefits are based upon their modified adjusted gross income (MAGI) from two years prior. This means the premiums for 2020 are actually based on your MAGI for 2018. The MAGI for making the adjustment is the federal AGI plus the following:

• Tax-exempt interest income;
• United States savings bonds interest used to pay higher education tuition and fees, if the interest was excluded from income;
• Excluded foreign earned income and housing costs;
• Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands; and
• Income from sources within Puerto Rico.

2020 MEDICARE PREMIUMS
TAXPAYER FILING STATUS		Medicare Part B Monthly Premiums		Medicare Part D**
Individual*	Married Filing Joint	MAGI Increase	Total	Surcharge
2018 MAGI less than or equal to $87,000	2018 MAGI less than or equal to $174,000	$0.00	$144.60	$0.00
2018 MAGI greater than $87,000 and up to $109,000	2018 MAGI greater than $174,000 and up to $218,000	$57.80	$202.40	$12.20
2018 MAGI greater than $109,000 and up to $136,000	2018 MAGI greater than $218,000 and up to $272,000	$144.60	$289.20	$31.50
2018 MAGI greater than $136,000 and up to $163,000	2018 MAGI greater than $272,000 and up to $326,000	$231.40	$376.00	$50.70
2018 MAGI greater than $163,000 and less than $500,000	2018 MAGI greater than $326,000 and less than $750,000	$318.10	$462.70	$70.00
2018 MAGI greater than or equal to $500,000	2018 MAGI greater than or equal to $7500,000	$347.00	$491.60	$76.40

*The increases for a married taxpayer who lived with his or her spouse at any time during the year and files a separate return are:

• If 2018 MAGI was $87,000 or less: no surcharge for either Part B or Part D
• If 2018 MAGI was $87,001 to $412,999: Part B $462.70 and Part D $70.00
• If 2018 MAGI was $413,000 or above: Part B $491.60 and Part D $76.40

**The monthly Part D surcharge is in addition to the drug plan’s premium.

So, you might discover that even though your monthly Social Security benefits increased because of inflation, the net amount you receive may actually be less per month because of increases in Medicare Part B and D premiums. Such increases are attributable to increased MAGI in 2018, but one might encounter a hidden source of income. This applies to recreational gamblers whose winnings are included in their MAGI but whose losses are an itemized deduction. Thus, even though the overall result may be a loss, the MAGI is increased by the full amount of the gambling winnings, thus possibly causing increases in the Medicare Part B and D premiums.

On the other hand, if 2017 had been a high-income year and your income in 2018 was substantially less, your 2020 Medicare Part B and D premiums may be less than they were in 2019, resulting in a larger net monthly check.

The letter you received from the Social Security Administration does include an appeal process if you disagree with the Social Security Administration’s decision to increase your premiums. However, this appeal must generally be made within 60 days after receipt of the letter. Unfortunately, an increase in your 2018 MAGI that put you into the surcharge range for 2020 and was a result of capital gains due to a one-time sale of real property or stock isn’t a valid reason for an appeal.

If you have questions related to your Social Security benefits and their taxation, please give this office a call. There are often planning strategies that may lessen the tax bite and premium costs.

Understanding Tax Lingo

When discussing taxes, reading tax-related articles or interpreting instructions, one needs to understand the lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms.

Article Highlights

• Filing status
• Adjusted gross income (AGI)
• Taxable income
• Marginal tax rate
• Alternative minimum tax (AMT)
• Tax Credits
• Underpayment of estimated tax penalty

When discussing taxes, reading tax-related articles or interpreting instructions, one needs to understand the lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms.

• Filing Status - Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head of household status. A special status applies for some widows and widowers.
  
  When using the married joint status, the income, deductions, and credits of the spouses are combined for reporting on the tax return. If the spouses file using the married separate status, they each file a separate tax return, and if they reside in a separate property state, each spouse includes just his or her own income and deductions on their individual return. In community property states, generally, the incomes and deductions of the spouses are combined and then split 50%/50% for married separate tax return reporting purposes.
  
  Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:
  
  o pay more than one half of the cost of maintaining as his or her home a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or
  
  o pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
  
  A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.
  
  Surviving spouse (also referred to as qualifying widow or widower) is a rare status used only for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used. In the year the spouse passes away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year.
  
• Adjusted Gross Income (AGI) - AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employed retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by a taxpayer’s AGI.
  
• Modified AGI (MAGI) - Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.
  
• Taxable Income - Taxable income is AGI less deductions (either standard or itemized). For years 2018 through 2025, another item that is subtracted when figuring taxable income is the deduction for qualified business income (generally 20% of qualified income from pass-through businesses such as partnerships, rentals and sole proprietorships). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999.
  
• Marginal Tax Rate (Tax Bracket) - Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below.
  
  Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range.
  
  

  2019 MARGINAL TAX RATES
  TAXABLE INCOME BY FILING STATUS
  Marginal Tax Rate	Single	Head of Household	Joint*	Married Filing Separately
  10%	9,700	13,850	19,400	9,700
  12%	39,475	52,850	78,950	39,475
  22%	84,200	84,200	168,400	84,200
  24%	160,725	160,700	321,450	160,725
  32%	204,100	204,100	408,200	204,100
  35%	510,300	510,300	612,350	306,175
  37%	Over 510,300	Over 510,300	Over 612,350	Over 306,175

  
  
  * Also used by taxpayers filing as surviving spouse
  
  Capital Gains Tax Rates – Lower tax rates apply for gains upon sale of most property, such as stocks and real estate, held for over one year. These rates are 0%, 15% and 20%. Which rate applies depends on the amount of your taxable income.
  
• Taxpayer & Dependent Exemptions - Prior to the changes made by the 2017 tax reform you were allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual qualifying as your dependent. The deductible exemption amount was adjusted for inflation annually; the amount for 2019 is $4,200. However, the tax reform suspended the deduction for exemptions for 2018 through 2025.
  
• Dependents - To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.
  
• Qualified Child - A qualified child is one who meets the following tests:
  
  
  (1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;
  (2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;
  (3) Is younger than the taxpayer;
  (4) Did not provide over half of his or her own support for the tax year;
  (5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and
  (6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).
  
• Deductions -  A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2019.
  
  

  Filing Status	Standard Deduction
  Single	$12,200
  Head of Household	$18,350
  Married Filing Jointly	$24,400
  Married Filing Separately	$12,200

  
  
  The standard deduction is increased by multiples of $1,650 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,300. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction. The standard deduction of a dependent filing his or her own return will oftentimes be less than the single amount shown above.
  
  Itemized deductions generally include:
  
  
  (1) Medical expenses are limited to those that exceed 10% of your AGI for 2019.
  (2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.
  (3) Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses).
  (4) Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances, the limit can be as little as 20% or 30% of AGI.
  (5) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.
  
• Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that has often taken taxpayers by surprise. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes were being affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
  
  
  o The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
  
  o Itemized deductions:
  
  Interest in the form of home equity debt interest that cannot be traced to a deductible use. For years 2018–2025, interest paid on home equity debt is also not allowed for regular tax purposes.
  
  o Nontaxable interest from private activity bonds is tax-free for regular tax purposes, but some are taxable for the AMT.
  
  o Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (the difference between the grant price and the exercise price) is income for AMT purposes in the year the option is exercised.
  
  o Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.
  
  A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.
  
  

  AMT EXEMPTIONS & PHASE OUT - 2019
  Filing Status	Exemption Amount	Income Where Exemption Is Totally Phased Out
  Married Filing Jointly	$111,700	1,467,400
  Married Filing Separate	$55,850	$797,100
  Unmarried	$71,700	$733,700

  
  

  AMT TAX RATES—2019
  AMT Taxable Income	Tax Rate
  0 – $194,800 (1)	26%
  Over $194,800 (1)	28%

  
  (1) $97,400 for married taxpayers filing separately
  
  Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT. Fortunately, due to tax reform that the increased AMT exemption amounts and set higher thresholds before the exemption is phased out, fewer taxpayers are now paying AMT. Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.
  
• Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These and another popular credit are outlined below.
  
  o Child Tax Credit -  Thanks to tax reform the child tax credit has been increased to $2,000 per child (up from $1,000 in 2017). If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold of $2,500, but not more than $1,400, is refundable. The credit begins to phase out at incomes (MAGI) of $400,000 for married joint filers and $200,000 for another filing status. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold.
  
  o Dependent Credit – A nonrefundable credit is available to taxpayers with a dependent who isn’t a qualifying child, and like the increased child tax credit is designed to offset the loss of the exemption deduction as a result of tax reform. The dependent credit is $500. A qualifying child, the taxpayer, and if married, the spouse is not eligible for this credit. A child who isn’t a qualifying child but who qualifies as a dependent under the dependent relative rules would qualify the taxpayer to claim this credit.
  
  o Earned Income Credit - This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,600 (for 2019) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

  2019 EIC PHASE-OUT RANGE
  Number of Children	Joint Return	Others	Maximum Credit
  None	$14,450 – $21,370	$8,650 – $15,570	$529
  1	$24,820 – $46,884	$19,030 – $41,094	$3,526
  2	$24,820 – $52,493	$19,030 – $46,703	$5,828
  3	$24,820 – $55,952	$19,030 – $50,162	$6,557

  
  
  o Residential Energy-Efficient Property Credit - This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2021. The credit rate reduces to 26% in 2020 and 22% in 2021. The credit expires after 2021.
  
• Withholding and Estimated Taxes - Our “pay-as-you-earn” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-earn” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the information shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:
  
  
  1) 90% of the current year’s tax liability; or
  
  2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.

If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Please call if this office can be of assistance with your tax planning needs or visit our website at www.gallowaytax.com