Truncated Tax ID Numbers

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image via ssa.gov

Many people wait with some anxiety for their income tax refund check around this time of year.  If you get a big refund then you, in essence, have given the government an interest free loan all year.  Still, many taxpayers overpay throughout the year because they have grown accustomed to receiving a refund check, which they see as a form of tax relief.

So what if that check never came?  It happens sometimes, and all too often it is the result of identity theft.  The IRS has taken numerous steps to prevent identity theft, but it still pays out billions of dollars in erroneous refunds.  One of the newest proposals in the fight against identity theft is the Truncated Taxpayer Identification Number, or TTIN.

The TTIN is basically the last four digits of a Social Security Number (SSN) and looks something like this: xxx-xx-4777 or this ***-**-4777.  The IRS has issued proposed regulations that would allow certain information return filers to use a TTIN instead of a SSN on their tax documents.  The IRS has run a successful TTIN pilot program in the past and it is believed that this will help curb identity theft.  Even if the regulations are approved, a full 9-digit SSN will still be required for 1040 income tax returns.  The proposed regulation has to do with information returns such as forms 1099, 1098, and 5498.

Fiscal Cliff Highlights

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Payroll taxes increased for wage earners

There’s no tax relief for anybody in the fiscal cliff tax deal. For wage earners, your Social Security (FICA) tax withholdings will be deducted at 6.2 percent for the first $113,700 of earnings. This is a 2 percent increase from the 4.2 percent deduction that has been the withholding rate for the past two years. Unlike some of the other changes that won’t be felt until the 2013 tax season, this change will have an immediate impact on your next paycheck.

Income taxes increased only for the wealthy

Income tax rates will remain the same for individuals with annual income of less than $400,000, or $450,000 for those filing married joint returns. The income tax rate for those wealthy taxpayers will increase from 35 percent to 39.6 percent.

Investment taxes increased only for the wealthy

Capital gains and dividend tax rates will remain the same for those individuals earning less than $400,000, or $450,000 for married joint filers. The capital gains and dividend tax rates for the wealthy will increase from 15 percent to 20 percent.

Income tax deductions and exemptions limited for the wealthy

Individuals with annual income of at least $250,000, and those married filing jointly earning at least $300,000, will be limited on the personal exemptions and itemized deductions they can claim. Taxpayers with incomes above $422,500 will not qualify for a personal exemption. This is a throw-back to the limits on deductions and credits for the wealthy that were in force prior to the Bush era tax cuts, and that were eliminated in 2010.

Important tax credits extended

Tax credits created by American Recovery and Reinvestment Act of 2009 are extended for five years. These include the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.

Debt Forgiveness Extended

Homeowners that weren’t able to complete their debt negotiations or procedures before December 31, 2012, were granted a reprieve. Forgiven mortgage debt will continue to not be treated as taxable income for an additional year.

The National Debt Ceiling: The "Other Cliff"

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By now you probably know that the dreaded fiscal cliff has been averted, at least for a month or two.

The term fiscal cliff refers to the potential for a deeper recession that would have been triggered by the terms of the Budget Control Act of 2011 which was scheduled to go into effect on January 1, 2013. It was thought that if the Bush-era tax cuts were allowed to expire, thereby raising taxes for virtually everybody, at the same time that mandatory governmental spending cuts were scheduled to be implemented, there would be a devastating impact on the U.S. economy such that the economy would be in a free-fall … over the cliff.

The government narrowly avoided the fiscal cliff by passing the American Taxpayer Relief Act in these first days of 2013. The compromise that was reached focused primarily on tax relief and not spending cuts. The main impact will be on those taxpayers who are considered wealthy. However, if you were paying attention during the presidential campaigns, you will notice that the income threshold for those who are considered “wealthy” increased significantly from the time of campaigning to the thresholds established through this deal.

The next political hurdles are the negotiations on the spending cuts and the debt ceiling. Very simply, the debt ceiling is the maximum amount that the federal government can borrow at any given time and in-turn, pay its obligations that have already been incurred. If a compromise cannot be reached, the economy may go off the fiscal cliff despite the recent deal. Congress has about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations. If a deal is not made, a federal government shutdown is possible. This may include suspension of the payment of federal benefits and payroll, in addition to the shutdown of government departments such as the Internal Revenue Service, during the height of tax season… of course.

IRS to Announce Official Start Date of Tax Season

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image via imisioluwa.blogspot.com

So, what is the official start date of the 2013 tax filing season? In other words, what is the first day that the IRS will begin accepting 2012 tax returns? This is still an open question.

Without congressional action, the IRS had said that they would not be able to accept a majority of tax returns until March. But Congress has acted and now it is just up to the IRS to make a decision about the “start date.” Once the IRS has finished reviewing the new legislation, they will announce the official start date of the 2013 tax season. The IRS will also have information about paycheck withholding based on the new tax rates.

Until then, there are typically plenty of things to do in preparation for filing your tax return, especially for the self employed. Now is the time to organize your records and identify a qualified tax preparer. If you anticipate tax problems this year — if you are going to owe the IRS more than you can pay — then it will also behoove you to identify an experienced tax attorney who can represent your interests before the IRS.

A New Year Resolution

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photo via fitdeck.com

Here we are again at the dawn of another tax season.  It will begin gradually with the early filers accumulating their income documents in January in hopes of filing and obtaining a refund check sometime during the first half of February.  It will end in a flurry with millions of tax return procrastinators who will file just minutes before midnight on April 15th.

Those who wait are typically those who know they are going to owe.  And some inevitably wait too long.  Once April 15th passes, the rationale is “what’s another day?” — and many taxpayers find themselves letting months slip by and they just never get around to filing.  Of course, this rationale is faulty because penalties and interest accumulate with each passing day, so each day really does matter.

Some have let multiple tax seasons pass them by, and the more delinquencies that pile up, the more difficult it becomes to get back on track with the IRS.  But there is a way back, even if you have no way of paying your full tax debt.  There is a way to get back in the good graces of the government and move on with your life.  Resolve to clean things up this year.  Contact Montgomery & Wetenkamp, tax relief attorneys, for a free consultation.  Call (800) 454-7043.

Obamacare and the Individual Mandate

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The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014.  So what will it mean for individuals? There are penalties and “carrots” associated with the looming health care changes.

Starting in 2014 if your employer doesn’t offer insurance, you will be able to buy it directly from an affordable insurance exchange. An “exchange” is a supposedly transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. Exchanges will offer a choice of health plans that meet certain benefit and cost standards.

As an individual who needs health care, in addition to the incentives offered by your employer if you are employed, there are incentives for you to obtain adequate health insurance.  Beginning in January 2014, insurance companies will be prohibited from refusing to sell coverage or renew policies based pre-existing conditions or from charging higher rates based on gender or health status. Additionally, depending on your income, advanceable tax credits will be available on qualified insurance coverage. The advanceable tax credit will lower your monthly premium payments so that you will not have to wait for the tax season to arrive to realize the benefit. This is the carrot.

Here’s the penalty: unless you meet the criteria for an exemption, you’re going to pay Uncle Sam if you don’t have health insurance. This is the “individual mandate.” The imposed fee is intended to help offset the costs of caring for uninsured Americans. Exemptions from the individual mandate for obtaining health insurance include religious reasons or where the least expensive health insurance policy available exceeds 8% of income. Unpaid fees may result in IRS tax problems since the IRS will be charged with collection.

If you don’t meet the criteria for an exemption, and you choose to not obtain health insurance, you will pay Uncle Sam nonetheless. The amount is tiered year to year beginning in tax year 2014. For year 2014, if you don’t have qualified health coverage, the minimum fee will be the greater of 1% of your annual income or a flat amount of $95. In tax year 2016, this penalty will increase to the greater of 2.5% of your annual income or a flat amount ranging from $695 to $2,085, depending on your household size. After year 2016, the penalty will be increased annually by the cost-of-living adjustment.

Tax Incentives for Small Businesses under Obamacare

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The health care coverage mandates under the Affordable Care Act are scheduled for January 1, 2014.  So what will it mean for business owners?

The small business health care tax credit is the carrot for small business owners to contribute to their employee’s health care. Beginning in 2014, Uncle Sam’s carrot for small businesses that pay at least half of their employee premiums for qualified health insurance coverage, and employ 25 or fewer workers with an average income of $50,000 or less, is a tax subsidy on the health insurance premiums they pay.

The maximum qualified subsidy is 50% and is available to small businesses with an average payroll for full-time equivalent employees of $25,000 and ten or less full time employees. The subsidy is presently scheduled to be reduced by 3.35% per additional employee and 2% per additional $1,000 of average income.

Therefore, the savvy small business owner, who is doing good by contributing to their employee’s health insurance will be able reduce their expenses by paying careful attention to their workforce and wages paid. It may be necessary to consult with an experienced CPA or tax attorney for a more individualized understanding of these tax incentives.

Memphis Woman Gets 22 Years for Tax Fraud

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A Memphis woman has recently been sentenced to 22 years in prison and ordered to pay nearly $700,000 in restitution after her tax fraud scheme was shut down by IRS Criminal Investigation.

Aundria Bryant-Branch, 38, was providing stolen social security numbers and other sensitive data to third party tax return filers.  The information was obtained from the Memphis Police Department. The news stories do not identify Bryant-Branch as a former employee of the Memphis Police Department, but it seem clear that she was either an employee or a contractor/vendor who would have had access to the confidential info.

The other parties involved in this scheme were responsible for filing the false tax returns and bilking the federal government out of thousands of dollars during the period 2006-2008.

For information about legal tax relief programs, call Montgomery & Wetenkamp for a free attorney consultation.

End of Year Tax Tips – Part 3

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Capital gain tax rates are likely to increase in 2013.  Accepting your taxable gains now, instead of after January 1, 2013, may mean more profit and less taxes.

Capital Gain Tax Rates:

Depending on your tax bracket, some households may be able to seize the opportunity to earn capital gains tax free! However, the question of whether you should liquidate your investments now, instead of in the next year or two, in order to capitalize on lower tax rates, really depends on your short-term needs versus your long-term goals. In regards to investments, taxes should be a secondary consideration, not a primary consideration for investment strategies.

Paying attention to Washington D.C. will be important in these final days of 2012 to ensure that you have the right strategy in place for tax year 2013. These tax tips are very broad and you should consult with a tax attorney, certified public accountant, or other qualified tax professional that is familiar with your individual circumstances before making any tax planning decisions.

End of Year Tax Tips – Part 2

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If you itemize your medical deductions, your qualified medical expenses in tax year 2012 are more valuable and deductible than those incurred in tax year 2013. Medical deductions will be more difficult to claim as itemized medical deductions in tax year 2013.

Specifically, for medical expenses to be claimed for tax year 2012, your qualified medical expenses must exceed 7.5% of your adjusted gross income before they can be claimed as an itemized deduction. In tax year 2013, your qualified medical expenses must be more than 10% of your adjusted gross income. Therefore, accelerating your out of pocket qualified medical expenses before December 31, 2012, may ensure that you meet the criteria for this year’s itemized deduction that you may otherwise be ineligible for in tax year 2013.

You want all the deductions you can get because that translates in to lower taxes and helps you to avoid tax problems.  If you’ve done all you can to minimize your tax bill and you still can’t pay it, call Montgomery & Wetenkamp at (800) 454-7043 to get help from an experienced tax attorney.