Run Away Tax Fraud

Wherever we turn - national or local news, neighbor or co-worker - we hear about those who have been the target of state and federal tax fraud.  

The number of fraudulent tax returns is on the rise as criminals use stolen names and Social Security Numbers to forge W-2 information on electronically filed tax returns.  Most people do not realize that they have been a victim of identity theft until they try to file their tax return and discover that a criminal beat them to their refund.

The federal tax return fraud rate ranges between of 1% to 2%. States report an increase in fraudulent tax returns this year of 50% to 3,700%.

If you are a victim of tax fraud, follow the steps recommended by the Federal Trade Commission: 

1.      File a report with your local police and with the FTC.

2.      Report fraud to IRS, Identity Protection Specialized Unit: 1-800-908-4490

3.      File a theft claim with the FTC: Send a copy of your police report or an IRS ID Theft Affidavit Form, along with proof of your identity, to the IRS: 

4.      Put a fraud alert on your credit reports: 

5.      Order and monitor your credit report

Check out the FTC article on a comprehensive identity theft action document with step-by-step instructions on recovering from this crime. 

Sign Up for Health Care Coverage or Pay Penalty

The Affordable Care Act(ACA) – also known as Obamacare – is a law enacted to ensure that all Americans have access to affordable health insurance. It supports discounts (known as tax credits) on government-sponsored health insurance plans, and expanded the Medicaid assistance program to include more people. The law requires most Americans to have insurance by Feb 15 or pay a fine at tax time. The Obama administration extended the deadline to April 30, which is the end of the tax season, so to allow people who discover they would owe a fine, to still sign up for coverage. 

The Wall Street Journal reported that many uninsured are choosing the penalty over the opportunity to enroll in a healthcare insurance plan. Choosing to go without health insurance puts your assets at risk. If you consider yourself healthy, you can select a plan with low premiums. You will have higher out-of-pocket costs at the time of care than with more expensive plans, but you will still have protection against an acute episode of costly care, which if unprotected, can drive you to bankruptcy.

If you do not have health care insurance through your employer, and you are not covered by Medicare or Medicaid, then you can buy a healthcare plan on www.healthcare.gov if your state participates in the federal program or else from your state’s health care website. For access to an up-to-date information on each state’s health insurance marketplace profile, check out http://kff.org/state-health-marketplace-profiles/.

Don’t Get Scammed

It’s tax time. It is also peak time for tax fraud. Each year, the Internal Revenue Service (IRS) posts a list of current reported tax scams. Tax fraud through the use of identity theft tops this year’s list of scams. Through email phishing, the thief acquires your taxpayer’s identity so to fraudulently file a tax return and claim the refund.  The IRS has a special section dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide.

On IRS.gov, you can confirm your tax return status. If you have not already filed, there should be no record of the return. If you find that not to be the case, send an Identify Theft Affidavit to the IRS immediately.

If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 800-908-4490 so they can take action to secure your tax account.

Remember: The IRS never initiates contact with taxpayers by email or text messages to request personal or financial information.  

IRS Blues

Yes, we had two extra days this year before your tax bill was due. Even with two extra days, it is still painful. Make sure it is postmarked by April 17 at midnight. Need a playlist to help numb off the sting? If you are working late on your taxes, here is some music to keep you motivated:

-Taxman by the Beatles
-Money by Pink Floyd
-It’s Money that I Love by Randy Newman
-Take the Money and Run by the Steve Miller Band
-Tax Free by Jimi Hendrix
-Who Will Buy My Memories by Willie Nelson
-Taxman, Mr. Thief by Cheap Trick
-I Want to be a Billionaire by the cast of Glee
-Mo Money Mo Problems by the Notorious B.i.G. ft. Mase & Puff Daddy
-Sweetest Girl by Wycliff Jean
-If I had a Million Dollars by Bear Naked Ladies
-Take this Job and Shove It by David Allen Coe

15% for All

We filed our taxes this week. The picture on the wall of our tax preparer’s office included the quote: “When the first 1% income tax rate was being debated in 1913, a U.S. Senator opposed to it stated, "If they get away with 1% today, some day it may be raised to as high as 5%!" How lovely would it be today to be capped at 5%? We would even be excited to cap at a certain ex-governor’s 15% if fairly distributed to all tax payers, whether their earnings were by way of nursing a patient bedside or from long-term capital gains.

We know that paying taxes is our legal obligation. And we believe it is a social responsibility to pay taxes to support the common good – our roads, street lights, schools, libraries, fire fighters, and so on. But it is a bit painful to see all in one lump sum the amount of our ‘giving’ to the government for the past year.

In the words of Scottish whisky distiller Lord Thomas R. Dewar (1864–1930) “The only thing that hurts more than paying an income tax is not having to pay an income tax.” Even though the unemployment rate is moving in the right direction, there are still too many unemployed and underemployed and we know we should be grateful that we have income for which to tax. But darn, how fun would it be if the tax rate would be capped at 15% for all?

Underground Economies

On a recent trip to visit our son in the Army stationed in Italy, I started to think about the "underground economy," Greece and their debt problems, and taxes. As we were purchasing items, most if not all places prefers cash (Euros) then take a credit card. Some places even charged you 10% more if you used your credit card. Now I'm sure some of this is to offset the credit card fee but I wonder how many sales do not get reported for tax purposes.

Greece is, in part, in trouble because of an underground economy that deals in cash and where income is not reported to the government. As they implement their austerity measures and cutbacks, have they increased their tax collections and increased reported income? Would they need to cut back as much if everyone, and I mean everyone, reported their income? This may be against their culture and custom, but the Greek government needs every Euro it can get to provide services and pay down its debt.

The same is true in the United States, we all need to pay our taxes so the government can pay for services we use every day. We may think that we "won" by not reporting all of our income, or by claiming more in deductions then we actually earned, but when you do that, we as a country lose. We lose support of our streets, our education system, our libraries, and our national defense.

As April 17th approaches (tax day) lets not lose as a country. Take every legal tax deduction you can, but be honest and report all of your income and don't exaggerate your deductions. It takes us all to do our fair share to keep this country great.

Tax Time – Withholdings on Target?

From Guest Contributor Ila Zimmerman

For the last 10 years I have prepared tax returns on weekends for a couple hundred clients. No matter how much income individuals make, they always welcome a tax refund and scorn paying more taxes. The tax refund is like a gift from the government even though it is your money.

If you want to make every frugal penny count, calculate what your tax liability is going to be and make sure you are withholding just enough each paycheck to cover your tax liability. The government provides the W-4 form and instructions to help you project your withholdings for the year. Withholding more than your liability is simply letting the government use your money for free instead of you earning interest on it. When I don’t see the money in my paycheck, it’s much easier not to spend it. To get a chunk of money all at once seems to have lots of possibilities. With your tax refund, you might be able to invest in an IRA and save yourself a little more. Or maybe you can pay off debt, pay cash for a trip or an electronic gadget instead of putting it on a credit card.

On the other hand, it can be very stressful if you do not have enough taxes withheld and have to pay the government more money when you file, especially if you do not have the money and/or if you have to pay a penalty. Generally, if you have at least 90% of what you owe in taxes withheld or 100% of what you paid last year (110% for higher incomes) then you will not be assessed a penalty. The penalty is an interest charge on the portion of taxes you did not have withheld throughout the year and is based on your federal tax rate. If you don’t pay the money you owe by the return due date or if you don’t file a return and owe money, then the interest charge can climb to 25% or greater. Bottom-line: Pay your taxes on time.

Finally, if you have a refund and do not file your return for three years, you will not get the refund. But if you owe, the balance due will not go away. Specific questions about taxes? Go to ilazimmerman.com. I would be happy to help you determine a comfortable withholding amount, help reduce your tax stress and help make your tax time a pleasure.

4 Days ‘til Christmas; 10 Days ‘til End of Year

As we rush around getting last minute gifts, we should also be mindful of the end of the year for tax reasons. Here are a few items to check off your list before 2012 rolls around.

- Last Minute Charitable Contributions: Time to get in the last minute charitable contributions for the 2011 tax year. Is it time to clean out your closet and make a donation to Good Will? Can you afford to give a little extra to a charitable cause? It has been a rough few years for a lot of people and your donation may be just what your favorite charity needs to help those in need.

- Unreimbursed Medical and Dependent Care Accounts: These are your "use it or lose it" accounts. You have to use the money by the end of the year or you forfeit your balance. If you have money in these accounts, maybe it is time to get your eyes checked or a new pair of glasses. Make sure you have paid all of your dependent care expense and that your balance is zero. 

- 529 or Educational Savings Deposits: In some states, your contribution into an educational savings account or 529 plan is a deduction on your state taxes. Do you need to add a little more for next semester's U-bill? Consider adding a little more to receiving the deduction?

- Taxes: Do you have any tax bills due in December or January? These bills might be deductible on your taxes. You might consider paying your January taxes in December to take advantage of the deduction.

- Medical and Dental Expenses: Did you have a lot of medical expenses this year or are you going to have medical procedures next year? You may be able to deduct medical expenses on your taxes if the amount is greater than 7.5% of your adjusted gross income (AGI) and you itemize your taxes. A little tax planning can save you a lot of money.

- IRA Contributions and Future Tax Planning: You have until April 15, 2012 to maximize your IRA contributions. However, an IRA or 529 contribution to someone else might be a great last minute Christmas gift.

We wish you and your family a great and save safe holiday season. As always, check with your tax professional to see what strategies work best for your individual situation.

Credit, Deficit Super Committee, and You

Do you know what would have happen if we followed a federal balanced budget amendment?  We would all be speaking German.  Deficit spending allowed the federal government to finance World War II by selling “war bonds.”  Our nation’s monetary policy allows the government to borrow (by selling bonds) to finance necessities and to smooth out the ups and downs of natural business cycles.

The deficit Super Committee deadline is Monday, November 21^st, 2011. As the committee meets, I hope they are listening to some of those in the 1% who say they would not mind paying their fair share in taxes. I hope they listen to the 99% who want to see fairness in the tax system. I hope they listen to the majority of economist who say we should be borrowing and investing in infrastructure.

Let’s think about it for a minute. We borrow money to fix our roads, bridges, schools, and dare I say, Internet, so all would have access to the World Wide Web via high speed connection.  We bridge the digital divide and make a path for easier access to education for everyone. We put people to work.  It’s a simple equation; the more people who are employed, the more tax revenue the government receives and the less that is spent in social programs.  The more people unemployed, the more the government spends on social programs and the less tax revenue it has coming in.

Interest rates are at an all-time low, which makes borrowing for the government (and for you) very inexpensive.  It is okay, and maybe even a good idea to borrow money if it is for an investment that will have lasting returns.  Borrowing for a college education, a home, and even for the government to put people to work and get our economy going are good ideas.  It is important to look at the long-term vision and payback when considering taking on credit.  Does the Super Committee have the vision and the guts to make the right decisions?  For the health of our country, I hope so.

Tax Time – The Psychology of Taxes

Okay, so I have my MBA in finance and I know that we should have our tax withholdings set from each paycheck so that come April 15, we still owe $1,000 or more on taxes. My propblem is that I really like getting a tax refund. Financially I know that if we get a tax refund, we have just given the government an interest-free loan. We could have invested the money or paid off debt instead of having a “forced savings of 0%” by overpaying taxes.

If we owe money come tax time, I REALLY dread doing my taxes, put it off until the last minute, get moody and am generally no fun to be around. I feel that the government is taking way too much of my salary for taxes and look for every possible deduction that I can find.

 When I know that I’m getting money back on my taxes, I look forward to getting them done to see how much I get back. I’m in a much better mood and feel good that I’ve done my civic duty of paying taxes. I then put the money towards debt reduction, investing, savings or vacation. It is “guilt free” money that I feel good about spending.

Are a few dollars in interest (or more) worth the reduced stress come tax time? Financially and psychologically, I have two different answers. In this case, my mental soundness wins over my financials.

Hope you are, as well, on your way to a pain-free April 15th tax day.

Tax Savings at Home

The holidays are here and it’s a time of gathering family and friends. Do you feel that itch for a bigger homestead? Tax incentives make the jump even more enticing. On 11/6/2009, the homebuyer credit was expanded. Under the new law, you may be eligible for up to an $8,000 credit if you purchase a home in 2009 or enter into a binding contract to buy a principal residence before May 1 of 2010 and close by June 30, 2010. For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 or 2010 tax return.

The new law opened up the credit to long-time homeowners buying a replacement principal residence as well as raised the income limitations. The full tax credit is available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit.

For more detail on eligibility and how to take advantage of this tax credit, click on the title of this entry to link to the IRS description of this credit.

Vehicle Tax Savings

Do holiday trips and gas prices get you thinking about a new ride? There are a few tax advantages you may want to consider under the American Recovery and Reinvestment Act of 2009 when looking at your new vehicle options:

1. Plug-in Electric Drive Vehicle. Purchasing a plug-in, 4 or more wheeled electric drive vehicle after 12/31/2009 can earn a tax credit between $2,500 and $7,500, depending on the battery capacity of the vehicle.

2. Low Speed Plug-Ins. Certain low-speed electric vehicles and two- or three-wheeled vehicles can earn a credit of 10% of the cost of the vehicle (up to $2,500) for purchases made between 2/18/2009-12/31/2011.

3. Conversion Kits. You can earn a tax credit of 10% of the conversion cost (up to $4,000) for converting a vehicle to a qualified plug-in electric drive motor vehicle between 2/18/2009-12/31/2011. A taxpayer may claim this credit even if the taxpayer claimed a hybrid vehicle credit for the same vehicle in an earlier year.

4. Lowering Alternative Minimum Tax (AMT). Starting in 2009 the Alternative Motor Vehicle Credit (including the tax credit for purchasing hybrid vehicles) can be applied against the Alternative Minimum Tax.

5. New Vehicle Sales Tax Deduction. Taxpayers who buy new vehicles in 2009 can deduct the state and local sales taxes they paid or other taxes and fees they paid in states with no sales tax.