In Volume 2 of our 2014 newsletter, we highlight:
- Identity Theft
- Benefits of 529 Plans
- Paper Social Security Statements
- Medicare Net Investment Income Tax (NIIT)
- Nanny Tax
Identity theft is an exponentially growing problem. The number of identity theft investigations by the Internal Revenue Service (IRS) increased 66% from 2012 to 2013. The first time many people become aware of the problem is when they attempt to file their personal return. From 2011 through November 2013 the IRS stopped 14.6 million suspicious returns or over $50 billion in refunds. The IRS currently has over 3,000 employees working on identity theft issues.
Identity thieves steal information from sources outside the tax system. Detection and prevention are an ongoing process as thieves continue to find new ways of stealing personal information and using it personally.
Ways to minimize your chance of becoming a victim include:
♦ Protect your personal computer with firewalls and anti-virus software
♦ Regularly change your password and PIN numbers
♦ Check your credit report every 12 months
♦ Do not give personal information to anyone unless you initiated the contact
♦ Never carry your social security card or other personal information with you
♦ Never throw confidential information in the trash; always use a crosscut shredder to destroy it
If you receive a notice from the IRS, call the number on the notice. Otherwise, call 800-908-4490 to report any suspicious or fraudulent activity. You also should contact the three credit bureaus (Equifax, Experian, and TransUnion) to report any suspicious activity.
Identity theft is a frustrating process for victims. These are extremely complex cases to resolve, frequently involving multiple issues and multiple years. It is a top priority for the IRS to help victims and reduce the time it takes to resolve cases. While the IRS has made considerable progress in this area, more work remains.
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No one is going to win fame, recognition, or advancement just because he or she thinks it’s deserved. Someone else has to think so too…John Luther
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Benefits Of 529 Plans
With college tuition costs constantly on the rise, taxpayers with dependent children are searching for any and all means they can use to save money for education. One way that Congress and the IRS have established for parents to save money for college is through the 529 Plan. A 529 Plan (also referred to as a qualified tuition program) is an educational savings option operated by a state or educational institution, with tax advantages that make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.
Contributions to a 529 Plan are not deductible from taxpayer’s federal income. However, the earnings from a 529 Plan are not subject to federal tax and are generally also not subject to state tax when used for the qualified education expenses of the beneficiary. Distributions from the 529 Plan may be subject to a penalty if not used for qualified education expenses. Anyone can set up a 529 Plan and name anyone as a beneficiary – a relative, a friend, even oneself. There is no limit as to the number of plans you can establish but some states do have an annual limit on the dollar contributions per child.
Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 Plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, exceed $14,000 to a particular beneficiary during the year. There are no tax consequences if you change the beneficiary to another member of the family.
Qualified education expenses include tuition, fees, books, and room and board for students who attend school at least half-time.
Although the beneficiary is generally not limited to attending schools in the state that sponsors their 529 Plan, be sure to check with the plan before setting up an account. Your state’s 529 Plan may offer incentives to win your business, but the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.
Missouri does allow a deduction in the year of contribution of up to $8,000 for single individuals and $16,000 for married couples filing a combined return. Illinois allows a deduction of up to $10,000 for singles and $20,000 for joint returns.
529 Plans are not for everyone, and they are not the only option available for paying for college. This is an investment decision, which means that both the benefits and drawbacks must be considered, along with alternative ways of accomplishing the same thing. Please call our office for a consultation regarding 529 Plans and educational savings options.
Paper Social Security Statements
Starting in September 2014, the Social Security Administration will resume mailing benefit statements to workers. They had previously suspended mailing these statements out due to budget cuts.
The statements will be mailed out at five-year intervals, age 25, 30, 35, etc., to those who have not signed up to view their statements online. Only about 6% of workers have signed up online.
Medicare Net Investment Income Tax (NIIT)
Now that we have gone through a tax filing season with the new Medicare NIIT, it may be time to take a closer look at the tax. Here is an overview of the new tax and steps you can take to possibly reduce its impact.
The NIIT will apply to you only if your modified adjusted gross income (MAGI) exceeds $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for unmarried taxpayers and heads of household. The amount actually subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold that applies to you.
In general your net investment income includes your interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. Taxable net gain from dispositions of property, other than property held in an active trade or business, is also subject to the tax.
There are many types of income that are exempt from the tax. Any item that is excluded from income for income tax purposes is likewise excluded from the NIIT. This means that tax-exempt interest and the excluded gain from the sale of your principal residence are not subject to the tax.
Distributions from qualified retirement plans, including individual retirement accounts (IRAs), ROTH IRAs, and Social Security benefits, are not subject to the tax. Wages and self-employment income are not subject to it either, though they may be subject to a different Medicare surtax.
The following are a few suggestions to possibly help lower the NIIT:
Investment choices — If your income is high enough to trigger the NIIT regularly, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bond income both lower your MAGI and avoid the new tax.
Dividend-paying stocks will be taxed more heavily as a result of this new Medicare tax. As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gain from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gain will not be subject to the NIIT until the stock is sold and 2) capital gains can be offset by capital losses, which is not the case with dividends.
Qualified plans — Because distributions from qualified retirement plans are exempt from the tax, upper-income taxpayers with some control over their situations (i.e., small business owners) might want to make greater use of qualified plans. For example, creating a traditional defined benefit pension plan will increase tax deductions now and generate future income that may be exempt from the NIIT.
Charitable donations — Consider donating appreciated securities to charity rather than donating cash. This will avoid capital gains tax on the built-in gain of the security and avoid the 3.8% NIIT on that gain, while generating an income tax charitable deduction equal to the fair market value of the security. You could then use the cash you would have otherwise donated and repurchase the security to achieve a step-up in basis.
The NIIT may have a significant effect on your tax picture going forward. Anyone who might be subject to the NIIT should include it in their tax planning.
The “Nanny Tax” is not limited to nannies. It also applies to housekeepers, maids, babysitters, gardeners, or other household employees who are not independent contractors. The tax does not apply to a household employee who is also a farm worker.
If you employ someone who is subject to the “Nanny Tax”, you are not required to withhold federal income taxes from the employee’s pay. You have to withhold only if they ask you to and you agree to withhold. However, you may be required to withhold Social Security and Medicare Tax (FICA). And you may also be required to pay (but not withhold) Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA).
You have to withhold and pay FICA taxes if your household employee earns cash wages of $1,900 or more during calendar year 2014. If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. FUTA taxes must be paid if you paid $1,000 or more in any calendar quarter during the year to all household employees.
Be sure to keep careful employment records for each domestic employee. Keep the tax records for at least four years from the later of the due date of the return, or the date when the tax was paid. Records should include: employee name, address, and Social Security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your employee; dates and amounts of any deposits of FICA, FUTA, or income taxes; and copies of all forms filed.