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.
Taxation news blog
Tuesday, February 18, 2020
Monday, February 17, 2020
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 – 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.
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.
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
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.
- 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”.
- 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.
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.
Friday, February 14, 2020
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:
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:
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.
Article Highlight:
- Appropriations Act of 2020
- Medical AGI Limitations
- Sometimes Overlooked Deductions
- Deductible Health Insurance
- Above-the-Line Health Insurance Deduction for Self-Employed
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*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.
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 - 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
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.
Thursday, February 13, 2020
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:
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.
Article Highlights:
- New California Legislation
- Employee or Independent Contractor
- Dynamex
- ABC Test
- Impact on Employers
- Impact on Workers
- Safe Harbor
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.
Wednesday, February 12, 2020
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 individuals are required to file:
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:
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.
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
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.
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.
Tuesday, February 11, 2020
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:
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:
*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:
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.
Article Highlights:
- Medicare B Premiums
- Medicare D Premiums
- Modified AGI
- 2020 Premiums Table
- Effect of Recreational Gambling
- Appealing the Social Security Administration’s Decision
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
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.
Monday, February 10, 2020
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
Please call if this office can be of assistance with your tax planning needs or visit our website at www.gallowaytax.com
Article Highlights
- Filing status
- Adjusted gross income (AGI)
- Taxable income
- Marginal tax rate
- Alternative minimum tax (AMT)
- Tax Credits
- Underpayment of estimated tax penalty
- 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 RATESTAXABLE INCOME BY FILING STATUSMarginal 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 - 2019Filing 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—2019AMT 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 RANGENumber 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.
Please call if this office can be of assistance with your tax planning needs or visit our website at www.gallowaytax.com
Friday, February 7, 2020
How Can I Prove Financial Hardship to the IRS If I Can't Pay My Taxes?
Unable to pay your tax bill? Don’t panic. Here are the steps you need to take as well as "soft" and "hard" options for declaring your taxes uncollectible.
As tax season is here, you may be concerned that you won't be able to pay your tax bill. If you're simply broke after holiday credit card bills, you have until April 15th to pay your tax bill in full once you learn how much you owe. If your financial situation is more dire than that, you have some time to explore your options and come up with the funds or a plan.
However, if your tax problems or finances are so severe that you don't think you'll be able to pay the bill ever, you may need to file for a genuine hardship plea and be declared uncollectible.
If you can't pay your taxes, don't panic. Here's what you need to do if you anticipate being unable to pay your tax bill.
First, File Your Tax Return
It sounds counterintuitive, but it’s necessary that you file your current tax return. Failing to file on time can result in additional penalties plus interest on the unpaid taxes, which will only compound your financial stress. At the very least, file your tax return on time if you can. If you don't think you'll be able to, file for an extension — but bear in mind that the extension only gives you extra time to file your tax return without penalty, it doesn't give you extra time to pay.
If you can, include partial payment with your tax return so you will pay less interest over time.
Having your latest tax return on file also helps the IRS properly determine what you owe. If you go too long without filing, they will file substitute returns on your behalf based on the information in their system, and substitute returns never claim any benefits beyond the bare minimum for the last filing status you used. This could overstate your tax bill, thus making your tax problems even worse. Explore Payment Plans and Alternatives
After you've filed your tax return, it's time to assess the following:
You can also file an offer in compromise (OIC), which is an option to settle your back taxes if there is no hope of collecting what you owe or you don't think you were correctly taxed in the first place.
Temporarily Uncollectible (Status 53) vs. Filing for Hardship
If you have a long-term reason for being unable to pay your taxes, such as poverty or disability, there are the "soft" and "hard" options for declaring your taxes uncollectible.
"Status 53," the soft option, refers to the internal account status at the IRS. You can make your account temporarily uncollectible for 30 days by speaking to an IRS representative and telling them about your situation. If you have been medically unable to work, fled domestic violence, or have faced other extenuating circumstances, your account gets flipped to status 53 so the collection efforts will temporarily halt.
Filing for hardship is more formal and requires more legwork on your end. The IRS defines financial hardship as “unable to pay his or her reasonable basic living expenses.” If you owe more than $10,000, you will need to fill out a form detailing your assets, debts, income, and living expenses. If you are sick or disabled, you will need proof from healthcare providers or caseworkers. Employment length and sources of income are examined, so long-term unemployment or underemployment is likely to go in your favor.
As for what is considered "reasonable living expenses," this accounts for your rent or mortgage, utilities, food, transportation, and medical expenses. Debt repayment is not factored in, nor is anything that would denote a luxurious standard of living such as entertainment or health club dues. You will need to provide three months' worth of monthly bills and proof of expenses, so take extra caution to save receipts if you do not have this information easily backed up on a bank or credit card statement.
Filing for hardship is difficult, but not impossible with adequate record-keeping and knowledge of the rules. If you want to discuss your options further, contact our office for more information.
As tax season is here, you may be concerned that you won't be able to pay your tax bill. If you're simply broke after holiday credit card bills, you have until April 15th to pay your tax bill in full once you learn how much you owe. If your financial situation is more dire than that, you have some time to explore your options and come up with the funds or a plan.
However, if your tax problems or finances are so severe that you don't think you'll be able to pay the bill ever, you may need to file for a genuine hardship plea and be declared uncollectible.
If you can't pay your taxes, don't panic. Here's what you need to do if you anticipate being unable to pay your tax bill.
First, File Your Tax Return
It sounds counterintuitive, but it’s necessary that you file your current tax return. Failing to file on time can result in additional penalties plus interest on the unpaid taxes, which will only compound your financial stress. At the very least, file your tax return on time if you can. If you don't think you'll be able to, file for an extension — but bear in mind that the extension only gives you extra time to file your tax return without penalty, it doesn't give you extra time to pay.
If you can, include partial payment with your tax return so you will pay less interest over time.
Having your latest tax return on file also helps the IRS properly determine what you owe. If you go too long without filing, they will file substitute returns on your behalf based on the information in their system, and substitute returns never claim any benefits beyond the bare minimum for the last filing status you used. This could overstate your tax bill, thus making your tax problems even worse. Explore Payment Plans and Alternatives
After you've filed your tax return, it's time to assess the following:
- How much you owe
- How much you can reasonably pay now
- How much time you would need to pay the entire bill
- The options available to you
You can also file an offer in compromise (OIC), which is an option to settle your back taxes if there is no hope of collecting what you owe or you don't think you were correctly taxed in the first place.
Temporarily Uncollectible (Status 53) vs. Filing for Hardship
If you have a long-term reason for being unable to pay your taxes, such as poverty or disability, there are the "soft" and "hard" options for declaring your taxes uncollectible.
"Status 53," the soft option, refers to the internal account status at the IRS. You can make your account temporarily uncollectible for 30 days by speaking to an IRS representative and telling them about your situation. If you have been medically unable to work, fled domestic violence, or have faced other extenuating circumstances, your account gets flipped to status 53 so the collection efforts will temporarily halt.
Filing for hardship is more formal and requires more legwork on your end. The IRS defines financial hardship as “unable to pay his or her reasonable basic living expenses.” If you owe more than $10,000, you will need to fill out a form detailing your assets, debts, income, and living expenses. If you are sick or disabled, you will need proof from healthcare providers or caseworkers. Employment length and sources of income are examined, so long-term unemployment or underemployment is likely to go in your favor.
As for what is considered "reasonable living expenses," this accounts for your rent or mortgage, utilities, food, transportation, and medical expenses. Debt repayment is not factored in, nor is anything that would denote a luxurious standard of living such as entertainment or health club dues. You will need to provide three months' worth of monthly bills and proof of expenses, so take extra caution to save receipts if you do not have this information easily backed up on a bank or credit card statement.
Filing for hardship is difficult, but not impossible with adequate record-keeping and knowledge of the rules. If you want to discuss your options further, contact our office for more information.
Thursday, February 6, 2020
Did You Just Get an IRS Notice of Deficiency? Here's What to Do Next
A Notice of Deficiency from the IRS could be a positive or a negative – but either way, it indicates a discrepancy you need to resolve.
Nobody likes getting mail from the IRS — especially when it's something you weren't expecting.
One minute, you're minding your own business and aren't even thinking about that return you filed months ago. The next minute you open your mailbox and see something called a "Notice of Deficiency" — and your anxiety immediately goes through the roof.
At this point, the most important thing you can do is to relax and take a deep breath. Getting a Notice of Deficiency from the IRS in the mail doesn't automatically mean you're about to be audited, and in fact, it may not mean anything bad at all. It does, however, require you to keep a few key things in mind to make sure that you respond in the right way.
What Is an IRS Notice of Deficiency?
Formally known as the CP3219A notice, a Notice of Deficiency is exactly what it sounds like — an indication that the IRS has recently received information that is different from what you originally reported when you filed your tax return for the year in question.
To put it another way, something that you put on your return doesn't match with a piece of information that a third party provided to the IRS. The discrepancy could be as simple as a difference between your self-reported income and income reported on a Form 1099.
Now, despite the scary-sounding name, this isn't necessarily a bad thing. Depending on the situation, it could just as easily result in a decrease in the amount of tax that you owe as it could result in an increase.
The note itself will explain exactly how the amount was calculated, so the first thing you're going to want to do is read it to make sure that you understand — but also that you agree.
Moving Beyond the Notice of Deficiency
If you agree with the changes as outlined by the Notice of Deficiency, then that’s terrific — this process is almost over. All you have to do is sign the enclosed form (which should be Form 5564) and mail it to the address that is printed on the notice itself. This is called the Notice of Deficiency Waiver, and it just means that you agree to either pay the new amount that you owe or, in a perfect world, agree that you would like the IRS to send you some money that you didn't know you had coming.
If you don't agree with the changes, however, note that you do have the right to challenge them by filing a petition with the United States Tax Court — but you have to do so by absolutely no later than the date shown on the notice itself. The court will not consider your petition if you file beyond this deadline.
If you don't agree with the changes and you have additional information that can help clear up any confusion, mail all of the supplementary documentation along with the aforementioned Form 5564 to the address on the notice. But keep in mind that doing this does not extend the amount of time you have to file your petition.
You should also be aware that if the mistake is something that happened because of identity theft that you suffered, there are additional options available to you. The most immediate involves filling out Form 14039, otherwise known as the Identity Theft Affidavit. You should then call the IRS, speak to a representative, explain your situation and get advice about what they want you to do next.
You could also contact the third party that gave the IRS the information that triggered the discrepancy in the first place. If the mistake is theirs, you can ask them to correct it — or at least provide you with more information to help you make your case.
If the mistake was a legitimate one on your end, you'll also probably want to go over any other returns that you filed to make sure they don't have the same issue — thus causing even more tax problems down the road. At the very least, you'll want to file an amended tax return to include any additional information that you received (like more 1099s) after you filed your original one earlier in the year.
If you owe additional taxes and can't afford to pay right now, don't worry — it happens. You could always set up a payment plan or make other arrangements with the IRS. Depending on the situation, you could also make an Offer in Compromise and settle your bill for far less than you originally owed.
Resolving a Notice of Deficiency can be very overwhelming, and if not handled properly, you could end up with an even larger problem than you started with. For more assistance and to get help with your CP3219A notice, contact our office today.
Nobody likes getting mail from the IRS — especially when it's something you weren't expecting.
One minute, you're minding your own business and aren't even thinking about that return you filed months ago. The next minute you open your mailbox and see something called a "Notice of Deficiency" — and your anxiety immediately goes through the roof.
At this point, the most important thing you can do is to relax and take a deep breath. Getting a Notice of Deficiency from the IRS in the mail doesn't automatically mean you're about to be audited, and in fact, it may not mean anything bad at all. It does, however, require you to keep a few key things in mind to make sure that you respond in the right way.
What Is an IRS Notice of Deficiency?
Formally known as the CP3219A notice, a Notice of Deficiency is exactly what it sounds like — an indication that the IRS has recently received information that is different from what you originally reported when you filed your tax return for the year in question.
To put it another way, something that you put on your return doesn't match with a piece of information that a third party provided to the IRS. The discrepancy could be as simple as a difference between your self-reported income and income reported on a Form 1099.
Now, despite the scary-sounding name, this isn't necessarily a bad thing. Depending on the situation, it could just as easily result in a decrease in the amount of tax that you owe as it could result in an increase.
The note itself will explain exactly how the amount was calculated, so the first thing you're going to want to do is read it to make sure that you understand — but also that you agree.
Moving Beyond the Notice of Deficiency
If you agree with the changes as outlined by the Notice of Deficiency, then that’s terrific — this process is almost over. All you have to do is sign the enclosed form (which should be Form 5564) and mail it to the address that is printed on the notice itself. This is called the Notice of Deficiency Waiver, and it just means that you agree to either pay the new amount that you owe or, in a perfect world, agree that you would like the IRS to send you some money that you didn't know you had coming.
If you don't agree with the changes, however, note that you do have the right to challenge them by filing a petition with the United States Tax Court — but you have to do so by absolutely no later than the date shown on the notice itself. The court will not consider your petition if you file beyond this deadline.
If you don't agree with the changes and you have additional information that can help clear up any confusion, mail all of the supplementary documentation along with the aforementioned Form 5564 to the address on the notice. But keep in mind that doing this does not extend the amount of time you have to file your petition.
You should also be aware that if the mistake is something that happened because of identity theft that you suffered, there are additional options available to you. The most immediate involves filling out Form 14039, otherwise known as the Identity Theft Affidavit. You should then call the IRS, speak to a representative, explain your situation and get advice about what they want you to do next.
You could also contact the third party that gave the IRS the information that triggered the discrepancy in the first place. If the mistake is theirs, you can ask them to correct it — or at least provide you with more information to help you make your case.
If the mistake was a legitimate one on your end, you'll also probably want to go over any other returns that you filed to make sure they don't have the same issue — thus causing even more tax problems down the road. At the very least, you'll want to file an amended tax return to include any additional information that you received (like more 1099s) after you filed your original one earlier in the year.
If you owe additional taxes and can't afford to pay right now, don't worry — it happens. You could always set up a payment plan or make other arrangements with the IRS. Depending on the situation, you could also make an Offer in Compromise and settle your bill for far less than you originally owed.
Resolving a Notice of Deficiency can be very overwhelming, and if not handled properly, you could end up with an even larger problem than you started with. For more assistance and to get help with your CP3219A notice, contact our office today.
Wednesday, February 5, 2020
Tax Benefits for People with Disabilities
Individuals with disabilities as well as parents of disabled children are eligible for a number of income tax benefits. This article explains some of these tax breaks.
Article Highlights:
ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The 2017 tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some additional features to the ABLE accounts.
The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contract with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $15,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.
Beginning in 2018 and through 2025, a TCJA provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:
The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.
Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,200 or more (2019) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals.
Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 10% of his or her adjusted gross income. Eligible expenses include:
Article Highlights:
- ABLE Accounts
- Disabled Spouse or Dependent Care Credit
- Medical Deductions
- Home Modifications
- Special Schooling
- Nursing Services
ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The 2017 tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some additional features to the ABLE accounts.
The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contract with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $15,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.
Beginning in 2018 and through 2025, a TCJA provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:
- The beneficiary’s taxable compensation for the year, or
- The prior year’s poverty level ($12,140 for 2019) for a one-person household.
The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.
Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,200 or more (2019) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals.
Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 10% of his or her adjusted gross income. Eligible expenses include:
- Prostheses
- Vision Aids – Contact lenses and eyeglasses
- Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
- Wheelchair – Costs and maintenance
- Service Dog – Costs and care of a guide dog or service animal
- Transportation – Modifications or special equipment added to vehicles to accommodate a disability
- Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense. If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
- Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring recommended by a doctor from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included.
- Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap in order to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school as well as the costs of meals and lodging supplied by the school are also included as medical expenses.
- Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
Tuesday, February 4, 2020
Take Tax Advantage of a Low-Income Year
People generally assume that tax planning only applies to individuals with the big bucks. But think again, as some tax moves benefit lower-income taxpayers and those who are having a lower-than-normal income year. So, if 2019 is not producing a lot of income for you, or your income will be substantially lower this year than it usually is, you may be surprised to know that you actually might be able to take advantage of some tax-planning opportunities. Implementing some of these ideas will require action on your part before the close of the year. Here are some possibilities.
Article Highlights:
Exercise Stock Options – If you are an employee of a corporation, the company may offer you the option to purchase shares of it at a fixed price at some future date, so that you can benefit from your commitment to the company’s success by sharing in the company’s growth through the increase in stock value. If those options are non-qualified, then you have to report the difference between your preferential option price and the stock’s value when you exercise the option as income. In a low-income year, this may give you the chance to exercise some or all of your options without any or with minimal income tax liability.
Convert a Traditional IRA to a Roth IRA – Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is why so many taxpayers are converting their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. Many taxpayers overlook some great opportunities to make conversions, such as in years when their income is unusually low or a year when their income might even be negative due to abnormal deductions or business losses. Even the tax reform’s higher standard deduction may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax. If you are in any of these circumstances this year, you should consider converting some or all of your traditional IRA to a Roth IRA before the end of the year.
Maximize IRA Distributions – If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. With the increased standard deduction and a lower-than-normal income, it may be tax-effective to actually withdraw more than the minimum required by law. In fact, you may even be able to take a distribution from your IRA with no tax liability. Presented with this situation, you would certainly want to take advantage of it before year’s end, even if you do not need the funds, which you could bank for the future.
Sell Appreciated Stock – Income tax rates increase as a taxpayer’s taxable income increases. The regular tax rates start at 10% and then increase in step amounts as one’s taxable income increases, reaching a maximum rate of 37%. However, long-term capital gains are given special treatment and only have three tax rates: 0%, 15%, and 20%. The 0% tax rate applies for taxpayers with taxable incomes up to the following amounts for 2019:
This provides a unique opportunity to sell investments that will produce long-term capital gains (investments held for at least a year and a day) and benefit from the 0% long-term capital gain rates. Thus, if you have stocks that have appreciated in value, you may be able to sell them before the end of the year and pay no tax on the gain. The tops of the 0% ranges are adjusted each year for inflation and are expected to increase by about 1.6% for each filing status for 2020.
Delay Business Expenditures – If you are self-employed, you may find it beneficial to delay business-related purchases until next year to avoid reducing your current yearly income any further and save the deduction until next year, when the items are purchased.
Release Dependency – If you are the custodial parent of a child and receive no benefit from the nonrefundable child tax credit, you may want to consider releasing the dependency of the child to the non-custodial parent for the current year, allowing the non-custodial parent to claim the $2,000 child tax credit. Doing so will not affect your ability to claim the childcare credit or the refundable earned income tax credit. However, if the child is attending college, then any tuition credit will go to the one claiming the child. The dependency is released on IRS Form 8332, but care should be taken when completing the form to avoid unintentionally releasing the dependency for more than one year.
Delay Personal Deductible Expenditures – If you itemize your deductions and the deductions will provide no or minimal tax benefit this year, you might consider delaying paying that medical expense, real property tax bill, or state estimated tax payment, or making a charitable contribution, until after the first of the year. Many taxpayers find it beneficial to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and then contributing nothing and taking the standard deduction the next year, the combined tax for the two years may be less than if a contribution was made in each year. However, before postponing payments until 2020, make sure that no penalties will be associated with delaying your tax-obligation payments.
If you have questions about employing any of these strategies or wish to make a tax-planning appointment, please give this office a call.
Article Highlights:
- Exercise Stock Options
- Convert a Traditional IRA to a Roth IRA
- Maximize IRA Distributions
- Sell Appreciated Stock
- Delay Business Expenditures
- Release Dependency
- Delay Personal Deductible Expenditures
Exercise Stock Options – If you are an employee of a corporation, the company may offer you the option to purchase shares of it at a fixed price at some future date, so that you can benefit from your commitment to the company’s success by sharing in the company’s growth through the increase in stock value. If those options are non-qualified, then you have to report the difference between your preferential option price and the stock’s value when you exercise the option as income. In a low-income year, this may give you the chance to exercise some or all of your options without any or with minimal income tax liability.
Convert a Traditional IRA to a Roth IRA – Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is why so many taxpayers are converting their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. Many taxpayers overlook some great opportunities to make conversions, such as in years when their income is unusually low or a year when their income might even be negative due to abnormal deductions or business losses. Even the tax reform’s higher standard deduction may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax. If you are in any of these circumstances this year, you should consider converting some or all of your traditional IRA to a Roth IRA before the end of the year.
Maximize IRA Distributions – If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. With the increased standard deduction and a lower-than-normal income, it may be tax-effective to actually withdraw more than the minimum required by law. In fact, you may even be able to take a distribution from your IRA with no tax liability. Presented with this situation, you would certainly want to take advantage of it before year’s end, even if you do not need the funds, which you could bank for the future.
Sell Appreciated Stock – Income tax rates increase as a taxpayer’s taxable income increases. The regular tax rates start at 10% and then increase in step amounts as one’s taxable income increases, reaching a maximum rate of 37%. However, long-term capital gains are given special treatment and only have three tax rates: 0%, 15%, and 20%. The 0% tax rate applies for taxpayers with taxable incomes up to the following amounts for 2019:
TAXABLE INCOME RANGE FOR THE 0% LONG-TERM CAPITAL GAIN RATE (2019)
| ||||
Filing Status
|
Single
|
Head of Household
|
Married Filing Joint
|
Married Filing Separate
|
Taxable Income
|
$0–$39,375
|
$0–$52,750
|
$0–$78,750
|
$0–$39,375
|
This provides a unique opportunity to sell investments that will produce long-term capital gains (investments held for at least a year and a day) and benefit from the 0% long-term capital gain rates. Thus, if you have stocks that have appreciated in value, you may be able to sell them before the end of the year and pay no tax on the gain. The tops of the 0% ranges are adjusted each year for inflation and are expected to increase by about 1.6% for each filing status for 2020.
Delay Business Expenditures – If you are self-employed, you may find it beneficial to delay business-related purchases until next year to avoid reducing your current yearly income any further and save the deduction until next year, when the items are purchased.
Release Dependency – If you are the custodial parent of a child and receive no benefit from the nonrefundable child tax credit, you may want to consider releasing the dependency of the child to the non-custodial parent for the current year, allowing the non-custodial parent to claim the $2,000 child tax credit. Doing so will not affect your ability to claim the childcare credit or the refundable earned income tax credit. However, if the child is attending college, then any tuition credit will go to the one claiming the child. The dependency is released on IRS Form 8332, but care should be taken when completing the form to avoid unintentionally releasing the dependency for more than one year.
Delay Personal Deductible Expenditures – If you itemize your deductions and the deductions will provide no or minimal tax benefit this year, you might consider delaying paying that medical expense, real property tax bill, or state estimated tax payment, or making a charitable contribution, until after the first of the year. Many taxpayers find it beneficial to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and then contributing nothing and taking the standard deduction the next year, the combined tax for the two years may be less than if a contribution was made in each year. However, before postponing payments until 2020, make sure that no penalties will be associated with delaying your tax-obligation payments.
If you have questions about employing any of these strategies or wish to make a tax-planning appointment, please give this office a call.
Monday, February 3, 2020
Should You Have an Identity Protection PIN?
With the passage of the Taxpayer First Act in mid-2019, the Treasury Department (i.e., the IRS) is required to establish a program to issue an identity protection pin (IP PIN) to any U.S. resident who requests one. For each calendar year beginning after the date of enactment, the IRS must also expand the issuance of IP PINs to individuals residing in such states as the IRS deems appropriate, provided that the total number of states served by the program continues to increase.
Article Highlights:
Often, identity theft and refund fraud victims may be unaware that their identity has been used fraudulently, or when they are aware, they may not be fully informed of the outcome of their case. The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: there has been any suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; if an investigation has been initiated and its status; whether the investigation substantiated any unauthorized use of the taxpayer’s identity; and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators.
An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns.
The IP PIN was originally established several years ago to aid taxpayers whose SSNs had been used to file a fraudulent return or if a taxpayer’s SSN had been compromised and there was concern it could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers.
In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who
To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require lots of verification information so the IRS can make sure you are not a scammer trying to obtain an IP PIN for someone whose identity has already been stolen. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that is sent to your cell phone. Once you have jumped through all those hoops, you can retrieve your IP PIN.
So, is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. So, you have to weigh the trouble and inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future or if you feel it may have been compromised. The decision is up to you.
Of course, if the IRS has already sent you a CP01A Notice - the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it—you are already in the system.
Please give this office a call if you have questions about IP PINs.
Article Highlights:
- Taxpayer First Act
- Taxpayer Notification when a SSN is Fraudulently Used
- Purpose of an IP PIN
- Obtaining an IP PIN
- Is an IP PIN Right for You?
Often, identity theft and refund fraud victims may be unaware that their identity has been used fraudulently, or when they are aware, they may not be fully informed of the outcome of their case. The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: there has been any suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; if an investigation has been initiated and its status; whether the investigation substantiated any unauthorized use of the taxpayer’s identity; and whether any action has been taken (such as a referral for prosecution). Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators.
An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns.
The IP PIN was originally established several years ago to aid taxpayers whose SSNs had been used to file a fraudulent return or if a taxpayer’s SSN had been compromised and there was concern it could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers.
In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who
- filed their federal tax return last year as a resident of Florida, Georgia, the District of Columbia, Michigan, California, Maryland, Nevada, Delaware, Illinois, or Rhode Island or
- received an IRS letter inviting them to “opt-in” to get an IP PIN.
To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require lots of verification information so the IRS can make sure you are not a scammer trying to obtain an IP PIN for someone whose identity has already been stolen. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that is sent to your cell phone. Once you have jumped through all those hoops, you can retrieve your IP PIN.
So, is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. So, you have to weigh the trouble and inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future or if you feel it may have been compromised. The decision is up to you.
Of course, if the IRS has already sent you a CP01A Notice - the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it—you are already in the system.
Please give this office a call if you have questions about IP PINs.
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