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Tax Scams: How Not to Be a Victim

By Jo Madonna, E.A. | January 3, 2020

Thousands of people lose personal data and millions of dollars to tax scams each year, despite the IRS publishing its ‘Dirty Dozen’ list of top scams year after year. The IRS encourages Americans to remain ever vigilant and to become aware of the scams and tactics used in order to protect personal information. While scammers are active year-round, certain activities peak around tax-filing season.

How Scammers Initiate Contact

  • Scammers use regular mail, telephone, email, or social media.
  • While tax scams take many shapes and forms, many IRS impersonators use threats to intimidate and bully people into paying a fabricated tax bill. They may even threaten to arrest or deport their would-be victim if the victim doesn’t comply.
  • For a list of recent tax scams, you can visit https://www.irs.gov/newsroom/tax-scams-consumer-alerts.

How the IRS Will Never Initiate Contact

Unlike scammers, the IRS doesn’t initiate contact with taxpayers by email, text messages, or social media channels to request personal or financial information.

The IRS will never:

  • Call to demand immediate payment through a specific payment method. (Scammers often propose using a prepaid debit card, gift card, or wire transfer.)
  • Demand payment of taxes without allowing you to question or appeal the amount they claim you owe.
  • Threaten to have you arrested by local police, immigration officers, or other law-enforcement for non-payment of taxes. Nor can they revoke your driver’s license, business licenses, or immigration status.

These are all tactics used by scammers to intimidate you into falling for one of their  tax scams.

How the IRS May Contact You

The IRS uses the U.S. Postal Service as its primary means of contacting you. Before any other contact, the IRS will have mailed a bill to anyone who legitimately owes taxes.

Under certain circumstances, the IRS may call or come to your home or place of business. However, they will never demand payment. If they call, they will provide you with an official IRS number where you can call them back. If a caller refuses to give you a contact phone number, that is a good indication that you are dealing with a scammer.

If you do receive a visit from an IRS representative, you have every right to request to see official identification. A legitimate agent will provide you with two forms of ID.

The first will be a pocket commission. This is a red leather folder with the IRS seal embossed in gold on the outside, and the words “United States Treasury Department, Internal Revenue Service.” Two inserts are attached inside and include the representative’s printed legal name and job title, plus issuing information and the representative’s photo and signature.

The other ID will be an HSPD-12 card, which is a government-issued smart card that verifies the identity of Federal employees.  You can ask the representative for the IRS phone number used to verify the information on the HSPD-12 card and confirm the representative’s identity.

If you are comfortable after examining both forms of ID, you can speak with them about your case. Again, though, remember they cannot demand payment immediately.

How to Make Payments to the IRS

If you do owe taxes, the IRS instructs taxpayers to make out payments to the “United States Treasury.” Specific guidelines on how to make tax payments can be found at irs.gov/payments.

Third-Party Collections

The IRS has contracted with four private collection agencies to collect on the tax debt. They are CBE, ConServe, Performant, and Pioneer. First, the IRS will write to you to let you know your overdue tax account was assigned to such an agency. The letter will provide the name and contact information of the agency assigned to your account. Then the private agency will write to you giving details on how to resolve your tax issue.

Both letters provide a Taxpayer Authentication Number linked to your identity. You can also use this number to check that any caller is legitimate, as a scammer will not have it.

Know Who to Contact

If you have any trepidation that someone is trying to scam you, make sure that you do not give any personal information. You can always contact someone directly at the IRS to confirm any questions that you may have. Your tax professional should also be able to determine the legitimacy of the notice or call.

Here are some Federal Government agencies you can contact to report different types of scams:

  • Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report phone scams to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
  • Report an unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, to the IRS at phishing@irs.gov.

Lastly, should you have monetary losses related to an IRS incident, report it to the Treasury Inspector General Administration (TIGTA). Also, file a complaint with the Federal Trade Commission (FTC) using their Complaint Assistant, so your information becomes available to investigators.

Understanding the Cap on SALT Deductions

By Jo Madonna, E.A. | November 8, 2019

Understanding the Cap on SALT Deductions

Your first thought might be: “Does this apply to me?” Well, the easiest way to know is to look for a Schedule A (the schedule used for itemized deductions) on your most recent tax return. If you have a Schedule A, then the cap on SALT Deductions will apply to you.

On the other hand, if you do not have a Schedule A, you will notice that your 1040 tax return will include a standard deduction amount. The standard deduction amount in the newest tax law, Tax Cuts and Jobs Act (TCJA), is almost double what it was previously, so many people who itemized before might now claim the standard deduction instead.

So, let’s discuss the new State-and-Local-Tax limitation or SALT. There has been much debate over the SALT provision in the new TCJA, which only allows taxpayers to deduct up to $10,000 of their state and local taxes on their federal returns if they itemize. Before the SALT cap in TCJA, taxpayers were allowed to deduct 100% of their state and local property taxes, which was a massive benefit for those who pay high state income taxes or high property taxes.

Is this Fair?

Many people believe that the SALT cap is flawed and unfair, which is why it SALT Cahas caused so much discussion. They feel this limitation is targeting high-income earners and those who live in higher-tax states like California and New Jersey.

In fact, a recent study done by the Institute on Taxation and Economic Policy (Institute on Taxation and Economic Policy, 2018) found that 63% of the effect of the SALT cap falls on the wealthiest 1% of taxpayers. And those who utilize the SALT deduction the most would undoubtedly be those in higher-taxed states or jurisdictions. The more money you earn – and the more state and local taxes you have to pay – the more the populations of those higher-taxed states would be directly affected.

But remember that the TCJA did dramatically reduce the number of filers that used itemized deductions. Because the standard deduction rate nearly doubled, many filers who would have otherwise benefited from itemizing would now utilize that deduction. So, as a result, a more significant number of those who do still itemize would be in higher-income households.

Total Itemizers in 2019
Share of Each Income Group Itemizing Share of Total Itemizers
pre-TCJA TCJA pre-TCJA TCJA
Poorest 20% 2% 1% 1% 1%
Second 20% 9% 3% 6% 4%
Middle 20% 23% 8% 15% 11%
Fourth 20% 43% 17% 28% 24%
Next 15% 72% 33% 35% 36%
Next 4% 90% 57% 12% 16%
Richest 1% 95% 85% 3% 6%
ALL 30% 13% 100% 100%
Source: Institute on Taxation and Economic Policy

The Upside

For high-income taxpayers, this cap did increase federal taxable income and, in turn, increased their federal tax liability. However, the TCJA offers an upside in other areas, such as lower statutory tax rates, a much larger Alternative Minimum Tax exemption, and reduced corporate income tax rates.

Even with the new cap on SALT deductions, many other factors ultimately allowed taxpayers to have a lower tax liability overall.  According to the Tax Policy Center (Frank Sammartino, 2018),  65% of taxpayers were estimated to pay less in taxes in 2018 than they would have under the previous law. Only 6.3% would have a higher tax liability. So, even with the SALT cap, many taxpayers can find benefits from other areas of the TCJA.

Why is the SALT Important for the Federal Government?

Federal income taxes are revenues that our government uses to provide programs, goods, and services that benefit the American people. The importance for the federal government is how much money it will lose or gain as an impact from the capped SALT deduction.

While being developed, the TCJA was scrutinized for benefiting the wealthy and possibly decreasing federal revenues. By reducing tax rates and manipulating other provisions, policymakers were worried that the federal revenues would suffer and that the most wealthy would benefit. The SALT provision, however, was an area that policymakers suggested would keep the tax code more progressive.

The nonpartisan Joint Committee on Taxation (Eastman, 2019) estimated that the new $10,000 limitation would raise $668 billion from 2018 to 2027. If the cap were eliminated, the revenue would be lost – a major concern for those who are worried about revenue-generation within the TCJA policy.

Traditional and Roth IRA Taxation

By Jo Madonna, E.A. | September 13, 2019

The Role of Traditional and Roth IRA Taxation

Ask anyone who is putting money aside for retirement what the first thing was that they invested in, and they’ll probably say, “An IRA.” It is, in fact, one of the easiest ways to save for retirement. It lets IRA owners make ongoing contributions and invest them in a portfolio of stocks, bonds, mutual funds or other instruments. Easy or not, the IRA taxation deserves a closer look.

Congress created the IRA (Individual Retirement Account) in 1974 for two purposes:

  • To provide individuals not covered by a retirement plan at work with a tax-advantaged savings plan; and
  • To act as a supportive piece to employer-sponsored retirement accounts that needed to be rolled over when individuals experienced a job change or moved into retirement.

In 1997, Congress added the Roth IRA, which offered a very different set of retirement opportunities.

Since their creation, IRAs have been a fast-growing component of the U.S. retirement market. The two most popular accounts are:

  • Traditional IRA
  • Roth IRA

For both traditional and Roth IRAs, contribution limits may change from year to year to reflect increases in the cost of living. Changes are usually made in $500 increments. In 2019, IRA contribution limits for both are:

  • Under age 50: $6,000
  • Age 50 or older: $7,000 (considered a catch-up contribution)

The tax implications of each type of IRA will determine which will offer an individual taxpayer the most significant advantage. If and when your funds and earnings get taxed may affect which you choose, and your decision could depend on whether you think your tax bracket will be higher now or later in life.

Traditional IRA Taxation

A taxpayer may contribute to a traditional IRA up to the dollar value listed above and may take a deduction, or above-the-line adjustment, when filing taxes. However, the ability to contribute may be reduced or eliminated if the taxpayer – or spouse – has a retirement plan at his or her workplace. If neither is covered at work by a plan, then the deductions are allowed. Keep in mind, though, that the deduction could be limited or phased out depending on income levels as well.

While contributing to a traditional IRA allows taxpayers to lower their tax burden a bit, it is not without tax consequences. The IRS will want to collect the taxes on the income at some point. Payment will occur when the funds (and earnings) are withdrawn from the IRA. The tax rate will depend on the taxpayer’s income level that year.

Some rules are associated with traditional IRAs:

  • You can only contribute to a traditional IRA up to age 70½.
  • You will pay a penalty of 10% above the taxes due if you withdraw funds from a traditional IRA before you turn 59½.
  • Starting at age 70½, the IRS will require you to take “required minimum distributions,” or RMDs, to finally capture its taxes.
  • The beneficiary of an IRA will eventually have to pay the taxes on the proceeds of the IRA, but depending on beneficiary status, could enjoy some flexibility in the timing of payments. 

Roth IRA Taxation

The second type of IRA, called the Roth IRA, offers some unique tax advantages. However, an immediate tax deduction is not one of them, since they cannot deduct the contribution from their taxable income. Many of the advantages stem from the fact that the taxpayer is contributing to a Roth IRA with ‘after-tax’ dollars.

Roth IRAs have contribution phase-out rules based on income thresholds. In the case of married couples filing jointly, the phase-out range in 2019 is $103,000 to $123,000 if the spouse making the IRA contribution has a retirement plan at work. The deduction is phased out if the couple’s income is between $193,000 and $203,000 when the IRA contributor has no retirement plan at work but is married to a covered individual.

The Tax Cuts and Jobs Act of 2017 has made contributions to a Roth IRA more appealing. That act lowered the tax brackets and expanded them, so those taxpayers who are eligible to contribute can take advantage of the lower tax brackets while they last. (The ‘TCJA’ is set to sunset in 2025.)

The rules associated with Roth IRAs are:

  • You can contribute to a Roth IRA regardless of your age. However, your contributions must come from earned income.
  • The earnings generated in a Roth IRA can be held ‘tax-deferred’ within the account.
  • Taxpayers are never required to take distributions, so they can continue enjoying the tax-deferred growth of assets within the account.
  • Taxpayers can take tax-free withdrawals of both contributions and earnings after age 59½.
  • Beneficiaries may inherit a Roth IRA tax-free, so a Roth IRA provides a way to leave money to heirs free of taxes.

The Impact on Retirement Planning

Your IRA investment strategy can play a vital role in providing essential retirement income. Yet, many people contribute without thinking about IRA taxation and how to put those dollars to work to greatest effect. We would welcome the opportunity to create or review your tax strategy.

A Closer Look at Social Security Taxation

By Jo Madonna, E.A. | August 16, 2019

A Closer Look at Social Security Taxation: The Importance of the Combined Income Calculation

If you’re concerned about whether – or how – your Social Security benefits will be taxed, you’re either already over 62 and living with monthly Social Security deposits into your bank account, or working on your retirement planning for when they do start arriving.

Even though we know Social Security alone is insufficient to support us in retirement, for many it still forms a consequential part of their spending plan as they move from active to passive income generation. If Social Security benefits are going to be taxed, it’s important to know so in advance.

Many assume that Social Security benefits are free of taxes, but they are wrong. Although IRS rules do provide some protection when taxing Social Security benefits, the more additional sources of taxable income you have, the more your Social Security benefits will be taxed. That income could come from wages, self-employment efforts, dividends, required distributions and any other income that you will have to report to the IRS.

Each January, the IRS will send you a Form SSA-1099, or Social Security Benefit Statement, that shows how much you received in benefits in the prior year. If you don’t receive a Form SSA-1099, a replacement is available online through your My Social Security account.

This is the information you will use, along with your other income information, to determine if you have to pay tax on your Social Security benefits or not.

Using the Combined Income Calculation

social security taxation

 

 

 

 

 

 

 

The first step to knowing if any of your Social Security benefit is taxable is to use a special IRS calculation called the “Combined Income Calculation.” That calculation is: adjusted gross income + nontaxable interest + ½ of your Social Security benefits.

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income”

For example, if you have $30,000 in wages, $5,000 in tax-free interest from bonds and $22,000 in Social Security benefits, $46,000 is the Combined Income number that you will use to determine if any of your Social Security benefits will be taxable.

Base Limits for Taxes Owed

You will never pay tax on more than 85 percent of your Social Security benefits. If and how much you pay depends on your filing status and two specific Combined Income ranges. The amount will be calculated on a sliding scale that is based on your income.

  • The base limits that put single filing taxpayers into taxation calculation are:
    • $25,000-$34,000, which will put up to 50% of Social Security into taxation.
    • Above $34,000, which will put up to 85% of Social Security into taxation.
  • The base limits that put married filing joint taxpayers into taxation calculation are:
    • $32,000-$44,000, which will put up to 50% of Social Security into taxation.
    • Above $44,000, which will put up to 85% of Social Security into taxation. 

Calculating the Impact on Taxable Income

If your Combined Income puts you in one of the ranges where up to 50 percent of your Social Security benefits are taxable, the exact amount you enter as taxable income (on your Form 1040) will be the lower of either (a) half of your annual Social Security benefits, or (b) half of the difference between your Combined Income and the ‘IRS base amount’ ($25,000 or $32,000, depending on how you are filing).

For example, as a single filer who received $19,000 in Social Security benefits last year, half of that would be $9,500. If your Combined Income was $33,000, the relevant ‘IRS base amount’ would be $25,000. The difference between your Combined Income ($33,000) and the ‘IRS base amount’ ($25,000) would be $8,000. You would enter $8,000 as the taxable amount on your Form 1040 because it is lower than half of your Social Security benefits last year ($9,500).

Our earlier example gave us a Combined Income figure of $46,000. Whether filing as a single taxpayer or married filing joint taxpayer, that figure put up to 85 percent of the Social Security benefits into taxation. Here calculations become far more complicated, and the IRS offers further explanations and a worksheet to help: worksheet to calculate Social Security tax liability.

What About State Taxes on Benefits?

So far we have only looked at Federal income taxes. Are Social Security benefits taxed at the state level as well? If we are calculating the net cash available for spending or for our retirement planning, we would need to know.

Thirteen states tax Social Security benefits as income. Check for details if you live in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont or West Virginia.

The Impact on Retirement Planning

Smart Social Security strategies are only one element of your retirement planning, but one worth developing since it becomes part of the guaranteed lifetime income you will want available for the rest of your days. As experts in Social Security and Tax Planning, we would welcome the opportunity to help you plan yours.

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