In the midst of identity scams and credit card hacking, the IRS has warned against another scam, this time targeted at businesses and employers. There is a growing W-2 email scam threatening sensitive tax information and the IRS wants to alert payroll and human resources officials so they can be on their guard.
A simple email beginning with a casual greeting has quickly become one of the most dangerous phishing attacks. Hundreds of employers fell victim to the scheme last year, which left thousands of employees vulnerable to tax-related identity theft.
Since there have been significant improvements made in curbing stolen identity refund fraud, criminals are now seeking more advanced personal information in order to fraudulently file a return. W-2’s contain a wealth of detailed taxpayer income and withholding information, which is exactly what frauds are searching for and why they are targeting employers to acquire such information.
The scam has only grown larger in recent years, attacking a variety of businesses, from public universities and hospitals to charities and small businesses. The IRS wants to educate employees and employers, particularly payroll and HR associates who are often targeted first, to hopefully limit the number of successful attacks.
The scammer will likely spoof the email of someone high up in the organization or business, sending an email to someone with W-2 access using a subject line similar to “review” or “request.” The “request” will likely be a list of all the employees and their W-2 forms, potentially even specifying the file format. Since the employee believes they are corresponding with an executive of some sort, they may send the information without question, meaning weeks could go by before it is even evident they have been scammed. This gives frauds plenty of time to file numerous fake returns.
Because this scam poses such a major tax threat at both the local and state level, the IRS has set up a specific reporting process to alert the proper individuals, which is outlined briefly below:
Email dataloss@irs.gov to notify the IRS of a W-2 data loss and provide contact information. Type “W2 Data Loss” into the subject line so that the email can be routed properly and do not attach any employee personally identifiable information.
Email the Federation of Tax Administrators at StateAlert@taxadmin.org to get state specific information on reporting victim information.
Businesses or payroll service providers should file a complaint with the FBI’s Internet Crime Complaint Center (IC3.gov). They may be asked to file a report with local law enforcement as well.
Notify employees so they are able to take protective steps against identity theft. The Federal Trade Commission website, www.identitytheft.gov, provides guidance on steps employees should take.
Beyond just educating employees, payroll officials and HR associates about the scam, employers are encouraged to set up policies or practices to avoid being hacked. Suggested policies include requiring verbal communication before sending sensitive information digitally, or requiring two or more individuals to receive and review any sensitive W-2 information before it can be sent out. The IRS is fighting diligently to protect taxpayers and lower the number of tax-related scams, so employers are encouraged to be on the defense as well and safeguard their own tax paying employees.
The latter part of 2017 has been filled with discussions and votes regarding new tax legislation. But, with nothing official in the books yet, taxpayers would be wise to focus their year-end tax planning around the current laws, since the proposed legislation may not become law or may undergo significant changes before being passed. Below are seven key tax strategies that could improve your finances and reduce your tax bill regardless of what Congress decides.
Max out contributions to tax-sheltered savings Whether it’s a 401(k), health savings account (HSA), IRA or Roth IRA, make sure you are contributing the max amount. In 2017, HSA contributions for a single person are limited to $3,400, and $6,750 for families; IRA’s cap out at $5,500 in annual contributions ($6,500 for those 50 or older).You can contribute up to $18,000 in 401(k)’s annually, but only 10% reached that max in 2016 according to data. For all of these accounts, if you’re contributing pre-tax funds, it may feel like less money in your wallet now, but it will mean a lower tax bill come April.
Review your withholding Examining the amounts that are withheld from your paycheck could help you avoid a larger tax bill in the spring. There are several categories of individuals who often find they are not withholding enough: those with a second job, those who owe estimated taxes (and potentially missed a payment), those who started Social Security or pension payments, and those who sold large assets with gains.
The IRS website includes a withholding calculator to assist taxpayers in determining if their withholding amount is correct. If it is incorrect, you still have time to adjust by updating your form W-4 with your employer.
Meet your medical deduction threshold Only around 6% of filers claim the deduction for medical expenses, which may be why it is under threat of repeal if the new tax legislation is passed. Current law allows medical expenses in excess of 10% of your adjusted gross income to be deducted.
Because this saving can be a vital tax benefit, if you’re close to meeting the threshold, find ways to accelerate your medical spending before the year ends. This could include purchasing vital medical equipment or scheduling procedures and appointments before December 31.
Take advantage of taxable losses and gains If your investments took a hit this year, you are able to deduct the losses up to the amount of capital gains, plus $3,000. You are even able to roll over an excess of losses to claims for future years if your losses exceeded the annual limit.
For those currently in the two lowest income tax brackets (10% and 15%), you might be eligible for a zero tax rate on investments with long-term capital gains. One way to achieve this zero-tax capital gain is by selling a low-cost-basis long-term investment. You could then purchase it back at a higher cost basis and potentially lower your future taxes as long as that acquisition does not push you into a higher tax bracket.
Give to charity Increasing your charitable contributions is always a smart, and generous, way to lower your spring tax bill. Rather than simply donating money though, you can also donate highly appreciated stock by simply transferring ownership of your stock to the charity. If you’re eligible for a deduction, it will be based on the market price of the donated stock and you will not owe capital taxes on its appreciation.
Another viable option is placing money or investments in a donor-advised fund, which allows you to spread out donations to charities in future years and allows you to take an itemized deduction for the amount transferred into the account this year. If you’re 70 ½ or older, you may also donate to a charity through your IRA, which would reduce the taxes on your required withdrawals.
Take any required distributions As mentioned, once you reach 70 ½, most qualified accounts (401(k)’s, IRA’s, etc.) have required minimum withdrawals (RMD) and that money is taxed as ordinary income. Although there is a grace period until April 1st of the following year for those taking their first RMD, every other year’s RMD must be taken by December 31st of that year.
If you don’t take the RMD in time, you will still owe the required taxes you would have paid plus a cost penalty, which is half of the amount you were supposed to withdraw. Many financial institutions have RMD calculators to help you determine the amount you should be withdrawing.
Take tax planning deductions One highly beneficial tax deduction is for investment advice and tax planning. This deduction may be modified under the new proposals, but the current law still allows taxpayers to make deductions for items such as the cost of tax software like TurboTax or fees paid to financial planners or accountants, so make sure to take advantage whether you do your own taxes or generally seek help.
Although the 2018 tax code is still uncertain at this point, there are changes you can make in the next few weeks to alter your spring tax bill. This time of year is undoubtedly busy with the holidays and gatherings, but you will be thankful come April of next year that you took the time now and made some beneficial tax moves for your future.
With their first plan shot down in Congress, the GOP has released another, broader tax framework as the Trump Administration attempts to shift the tax code. This new plan has many elements that Congress will need to hash out before anything is signed into law, but taxpayers of all income levels are wondering how this plan may affect them personally. Below are five major developments in the new plan that could affect you come tax season:
Rate Shift Our current code has seven different income tax brackets, but the new plan would drop that number down to three: 12, 25 and 35 percent. Although the plan does not specify which income levels would be taxed at each new rate, the wealthy would likely see the greatest benefit since the current top bracket at 39.6% would drop to 35%. The current lowest bracket (at 10%) would see an increase to join the 12% bracket, but the plan claims to aid families in that bracket through an increase in the standard deduction and a greater child tax credit.
Deduction Increase (for most) For many taxpayers, the new plan would almost double the current standard deduction. Filers who claim multiple children would not see as high of a increase, but could potentially see that offset by a steeper child tax credit. Presently, about 70% of taxpayers take the standard deduction as it is higher than itemizing. However, experts believe that number would increase significantly if the standard deduction is doubled. The GOP’s plan would remove other deductions to offset the increased standard deduction, but the charitable contribution and mortgage interest deductions would be kept.
Some Taxes and Deductions Eliminated Entirely The largest deduction that would meet its end with the new GOP plan is the local and state tax deduction. This deduction is often taken in states where taxes, and average income, is higher, states that are often Democratic. Other taxes that would be eliminated include the alternative minimum tax and the estate tax for those who inherit funds in excess of $5.49 million.
New Tax Rate for “Pass-Through” Businesses S corporations, sole proprietorships and partnerships could see a new tax rate at 25% under the new plan. Currently, those “pass-through” businesses pay at the individual rate of their owners, and those businesses make up about 95% of the nation’s business demographic. Although many business owners currently pay a rate lower than 25%, just under 2% of those business owners pay the top rate of 39.6%, which means they could see a significant drop in rate if they are permitted to incorporate as a “pass-through.”
Change in the Corporate Tax Code The current plan taxes corporations at 35%, but the new plan would drop that rate to 20%. To offset this steep drop in rate, the proposal submits to eliminate certain business deductions and credits. The plan suggests that the deduction for domestic production could be eliminated, while maintaining exceptions for low income housing and research and development, but leaves many of those choices up to Congress.
Congress must still comb through the GOP’s newest plan and make adjustments before a finalized plan is voted upon, so taxpayers should prepare for more adjustments to be made before anything is signed into law. As developments arise, MKR will continue to keep our clients up to date in future newsletters.
Considering joining the “startup” world but unsure how to find funding? Whether you’re simply in the research phase or you’ve developed a full blown business plan and have some capital, below are the most common ways new startups, who aren’t yet ready for venture capital, fund their business.
Personal Savings Personal capital is the most relied on source by entrepreneurs, according to the Small Business Administration. Many entrepreneurs dedicate a good chunk (or occasionally the whole lot) of their personal savings to their new venture, often relying on family or friends for a little help paying the bills or a place to crash if they find themselves in a bind. However, consider speaking with family and friends before you start to ensure they will be there to pick you up if needed, and always leave yourself a small nest egg in case the venture goes awry.
Credit Cards Credit cards are certainly the easiest, but most dangerous, form of funding. They provide easy and quick access to a significant cash flow before founders can give themselves a full salary, but they can also put founders in the hole by losing money to late fees or damaging their personal credit. Be careful about how much you rely on credit cards now, as it could prove to be a major hang-up in your future.
Personal Wages Many entrepreneurs take it slow, or develop their business or product on the side, while continuing to work a day job and receive income. This avenue may be the most exhausting, or time consuming, by essentially working two jobs, but may be the most financially viable and more common than many realize. The founder of YouTube, Steve Chen, was still employed at Facebook when he began his video platform venture.
Crowdfunding The age of the internet has provided entrepreneurs with a wealth of new resources when it comes to funding. Sites like Indiegogo or Kickstarter allow individuals to raise money by “soliciting” online funders for their product, game or other business. Backers take the risk that they may not be repaid in the anticipated time frame, while founders must be aware that not delivering risks ruining their reputation and their chance for future ventures.
Loans Founders can go the traditional route of seeking out a bank or other loan service, or they can consider the newer concept of peer-to-peer online loan platforms like Upstart or LendingClub. Entrepreneurs have many lines of credit or business loans at their disposal, but should take into account the payback of such options, which often include interest.
New business venturers have a bevy of funding possibilities to consider, even if they are not established enough for venture capital funding, but proper planning and multiple financing avenues are always advisable. Talk to family, friends, and trusted financial advisors before jumping into the unknown of owning your own business, and find a funding plan that places you on the path to success.
In March of this year, the IRS released information concerning the tax returns of employers that are required under the Affordable Care Act. The copies of the actual forms have yet to be released, but the article below is meant to answer some frequently asked questions from employers about what to expect. If you have any questions about Forms 1095-B and 1095-C, please contact our office today.
Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).
These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
For businesses: tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
Year-End Tax Planning Moves for Individuals
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.
If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014 if doing so won’t create an alternative minimum tax (AMT) problem.
Take an eligible rollover distribution from a qualified retirement plan before the end of 2014 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn’t viable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax.
Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015—the amount required for 2014 plus the amount required for 2015. Think twice before delaying 2014 distributions to 2015—bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year.
Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Year-End Tax-Planning Moves for Businesses & Business Owners
Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership year.
Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), don’t neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2014.
A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
A corporation should consider deferring income until next year if doing so will preserve the corporation s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.
If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.
To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.
Do not hesitate to call us to set up an appointment before end of the year to make sure you are taking the right steps for year-end tax preparation. You are also always welcome to give us a call with any questions. 317-549-3091 or email us at cpa@cwmcf.com
In March of this year, the IRS released information concerning the tax returns of employers that are required under the Affordable Care Act. The copies of the actual forms have yet to be released, but the article below is meant to answer some frequently asked questions from employers about what to expect. If you have any questions about Forms 1095-B and 1095-C, please contact our office today.