American Opportunity Tax Credit and Lifetime Learning Credit

 

The most generous tax breaks for college costs are the American Opportunity Tax Credit and Lifetime Learning Credit, which offset your tax bill dollar-for-dollar compared to a tax deduction that merely reduces the amount of income subject to tax. You can't claim both credits for the same student in the same year, and income limits restrict who can claim them.

For 2016, you can claim the American Opportunity Tax Credit of up to $2,500 if your student is in his or her first four years of college and your income doesn't exceed $160,000 if you are married filing a joint return ($80,000 for single taxpayers).

Above these income levels, the credit is phased out. The credit is based on 100% of the first $2,000 of qualifying college expenses and 25% of the next $2,000, for a maximum possible credit of $2,500.

The American Opportunity Tax Credit can be claimed for as many eligible students as you have in your family.

For example, if you have three kids who are all in their first four years of college, you can potentially qualify for up to $7,500 of American Opportunity Tax Credits. Up to 40% of the American Opportunity Tax Credit amount is refundable. That means you can collect at least some of any credit amount that is left over after your federal income tax bill has been reduced to zero.

The Lifetime Learning credit—which can be as much as $2,000, based on 20% of up to $10,000 of qualifying higher-education expenses—is available for an unlimited number of years for just about any degree or non-degree course. But you can only claim one Lifetime Learning credit per year, no matter how many students you have in your household. For 2016, the income limit for the Lifetime Learning credit is $110,000 if you are married filing a joint return ($55,000 for single taxpayers). Above these income levels, the credit is phased out.

You cannot claim both the American Opportunity credit and the Lifetime Learning credit for the same student in the same year.

Dependency rules

If your income is too high to claim the American Opportunity or Lifetime Learning credit and your student has  taxable income of his or her own, you can elect to forego the dependency exemption ($4,050 for 2016), and let the student claim the credit  on his or her own tax return. The student does not get to claim the dependency exemption, but the value of the education credit may make it preferable for the parent to forfeit the exemption.

Tuition deduction

Another option is a tax deduction of up to $2,000 or up to $4,000 of qualified tuition and mandatory enrollment fees, depending on your income. The above-the-line tuition deduction allows married couples with incomes of $130,000 or less ($65,000 for individuals) to deduct up to $4,000 in qualifying expenses, and those couples earning $130,000 to $160,000 ($65,000 to $80,000 for single taxpayers) to deduct up to $2,000. You do not have to itemize your deductions to claim the tuition and fees deduction, but you cannot claim the deduction in the same year that you claim the American Opportunity or Lifetime Learning credit for the same student’s expenses.

Tapping tax-free college savings

You can take tax-free distributions for qualified education expenses from your child's 529 College Savings Plan or Coverdell Education Savings Account. You can use tax-free withdrawals from Coverdell ESAs and 529 College Savings Plans in the same year as the American Opportunity or Lifetime Learning credits, as long as you don't use them for the same expenses.

Tax-free Savings Bond interest

Interest earned on Series EE or Series I Savings Bonds issued after 1989 can be tax-free if the bond is redeemed and used to pay for qualified college tuition and fees. For 2016, this tax break begins to phase out at $115,750 of modified adjusted gross income (MAGI) for married joint filers ($77,200 for single taxpayers). The tax-free Savings Bond provision cannot be used for expenses that are used to claim  other educational tax breaks such as the American Opportunity or Lifetime Learning credits.

The IRS, state tax agencies and the tax industry have made significant progress in the past two years against tax-related identity theft aimed at individuals but warned business identity theft is on the upswing.

Some of the increase in business and partnership return identity theft is fueled by cybercriminals’ increasing focus on breaching tax professionals systems and stealing client data. The Security Summit has launched a 10-week awareness campaign called “Don’t Take the Bait,” which encourages tax professionals to step up their security measures.

“The IRS, state tax agencies and the tax community have worked hard to turn the tide against tax-related identity theft. We’re making progress in protecting individuals but we still have more work to do, especially in the business tax area and involving tax professionals. Continued lapses in simple security measures can happen in tax professional offices and other business as well as at home,” said John Koskinen, IRS Commissioner.

So far for 2017, individuals reporting identity theft have declined sharply compared to the same time in 2016 and 2015. In the first five months of 2017, about 107,000 taxpayers reported being victims of identity theft, compared to the same period in 2016, when 204,000 filed victim reports. That’s about 97,000 fewer victims – representing a drop of 47 percent.  For comparison, there were nearly 297,000 identity theft victims during the first five months of 2015.

The decline is part of an ongoing trend that began in 2016 as Security Summit safeguards were put in place.

However, the IRS also saw an increase in identity theft involving business-related tax returns. So far for 2017, the IRS has identified approximately 10,000 business returns as potential identity theft through June 1, compared to about 4,000 for calendar year 2016 and 350 for calendar year 2015. While the number of businesses affected was relatively low, the potential dollar amounts were significant: $137 million for 2017, $268 million for 2016 and $122 million for 2015.

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Don’t Take the Bait, Step 3: Security Summit Safeguards Help Protect Individuals; Renew Focus on Curbing Data Breaches and Business Identity Theft

IRS YouTube Video:

Why Tax Professionals Need a Security Plan -- English

IR-2017-123, July 25, 2017

WASHINGTON – The IRS, state tax agencies and the tax industry have made significant progress in the past two years against tax-related identity theft aimed at individuals but warned business identity theft is on the upswing.

Some of the increase in business and partnership return identity theft is fueled by cybercriminals’ increasing focus on breaching tax professionals systems and stealing client data. The Security Summit has launched a 10-week awareness campaign called “Don’t Take the Bait,” which encourages tax professionals to step up their security measures.

“The IRS, state tax agencies and the tax community have worked hard to turn the tide against tax-related identity theft. We’re making progress in protecting individuals but we still have more work to do, especially in the business tax area and involving tax professionals. Continued lapses in simple security measures can happen in tax professional offices and other business as well as at home,” said John Koskinen, IRS Commissioner.

So far for 2017, individuals reporting identity theft have declined sharply compared to the same time in 2016 and 2015. In the first five months of 2017, about 107,000 taxpayers reported being victims of identity theft, compared to the same period in 2016, when 204,000 filed victim reports. That’s about 97,000 fewer victims – representing a drop of 47 percent.  For comparison, there were nearly 297,000 identity theft victims during the first five months of 2015.

The decline is part of an ongoing trend that began in 2016 as Security Summit safeguards were put in place.

However, the IRS also saw an increase in identity theft involving business-related tax returns. So far for 2017, the IRS has identified approximately 10,000 business returns as potential identity theft through June 1, compared to about 4,000 for calendar year 2016 and 350 for calendar year 2015. While the number of businesses affected was relatively low, the potential dollar amounts were significant: $137 million for 2017, $268 million for 2016 and $122 million for 2015.

The affected returns included corporate returns (Forms 1120 and 1120S) and estate and trust returns (Form 1041). There also was an increase in identity theft related to the Schedule K-1 filings made by partnerships. Tax preparers will see new trusted customer questions on these types of returns. (See Fact Sheet 2017-10, Information about Identity Theft Involving Businesses, Partnerships and Estates and Trusts.)

Cybercriminals are showing increasing savvy and tax expertise as they use stolen data, sometimes from tax practitioners, to file these business, partnership and trust returns for refunds. Or, they post the stolen data for resale on the Dark Net so that other criminals can file fraudulent tax returns.

“It’s especially difficult to identify any tax return as fraudulent when criminals are using information stolen from tax preparers,” Koskinen said. “The stolen data allows criminals to better impersonate the legitimate taxpayers.”

Many tax professionals take appropriate security measures, but problems persist. For the first five months of 2017, there were 177 reported data breaches at tax preparers’ offices. The IRS continues to receive reports of three to five data breaches each week.

“We need help from the tax community to combat cybercriminals and raise security awareness,” Koskinen said. “That’s why we launched a campaign this summer aimed at tax professionals called Don’t Take the Bait. We want all tax professionals to be aware of the threats and to take the necessary security steps to protect their clients’ most sensitive information. A lot of tax professionals think a data breach can’t happen to them. Unfortunately, we see new victims every week.”

Protecting Your Clients and Your Business from Business-related Identity Theft

During the 2017 filing season, the tax software industry began sharing data elements from tax returns with the IRS and states to help identity suspected identity theft business returns. For 2018, the number of elements shared from tax returns will increase to better help identify those suspect returns.

Also for 2018, the IRS will be asking tax professionals to gather more information on their business clients. All of the data being collected assists the IRS in authenticating that the tax return being submitted is the legitimate return filing and not an identity theft return. Some of the new information people may be asked to provide when filing their business, trust or estate client returns include:

  • The name and Social Security number of the company individual authorized to sign the business return. Is the person signing the return authorized to do so?
  • Payment history – Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
  • Parent company information – Is there a parent company? If yes who?
  • Additional information based on deductions claimed.
  • Filing history – Has the business filed Form(s) 940, 941 or other business related tax forms?

Tax professionals also should beware of any potential business clients claiming they do not currently have an Employer Identification Number.

Tax professionals – like the IRS and state tax agencies - must protect their data and systems against sophisticated, well-funded and technologically adept criminal syndicates around the world. The 10-week Don’t Take the Bait campaign will focus on the steps practitioners can take to protect themselves from phishing attacks, ransomware and remote takeovers.

The Security Summit urges all tax professionals to take these simple steps:

  • Educate all employees about the dangers of phishing emails posing as familiar businesses, organizations or colleagues.
  • Use the best security software to guard against malware, phishing sites and viruses; set it to update automatically.
  • Use strong, unique passwords for all accounts and change them frequently; use a password manager if necessary. Better yet, use two-factor authentication whenever possible.
  • Encrypt all sensitive data and routinely back it up to an external disk.
  • Review Publication 4557, Safeguarding Taxpayer Data, to create a security plan.

 

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The IRS, state tax agencies and the tax industry today warned tax professionals that account takeovers by cybercriminals are on the rise and practitioners increasingly are the targets.

Account takeovers occur when a thief manages to steal or guess the username and password of a tax professional, enabling access of their computers or their other online accounts. With these credentials, thieves can, for example, access a tax professional’s IRS e-Services account to steal their Electronic Filing Identification Number (EFINor access tax pro software account to obtain critical taxpayer information.

“We urge tax professionals to be on the lookout for the warning signs of these schemes and many others that can contribute to data loss and identity theft,” said IRS Commissioner John Koskinen. “A few simple steps can protect tax professionals as well as their clients.”

Increasing awareness about account takeovers is part of the “Don’t Take the Bait” campaign aimed at tax professionals. This is the second part of a special 10-week series aimed at increasing security awareness in the tax community. It is part of the Protect Your Clients; Protect Yourself effort. The IRS, state tax agencies and the tax industry, working together as the Security Summit, urge practitioners to learn to protect themselves from account takeovers.

Tax professionals and taxpayers are among a larger set of groups that face increased threats from account takeovers.

Javelin Strategy and Research conducts an annual identity fraud report. In 2017, it reported a surge in account takeover incidents nationwide – generally aimed at financial accounts – after years of decline. There was a 31 percent increase in the number of incidents for 2016 from 2015.

Account takeovers are a common source of data breaches of taxpayer data, leading to fraudulent tax filings for individuals and for businesses. Account takeovers are often the result of spear phishing emails specifically targeting the tax community. See last week’s “Don’t Take the Bait” news releasefor information about spear phishing.

Here’s how account takeovers work: Thieves do their homework; perusing web sites and social media for clues about tax preparer’s email addresses and business activities. Then, they pose as a familiar organization, for example, IRS e-Services or a private-sector tax pro software provider by sending a spear phishing email that appears similar to the IRS or the software provider. They may even pose as another tax professional, a familiar bank or, increasingly, a cloud-based storage provider.

Often, the email seems urgent with descriptions like: “Avoid Account Shutdown” or “Unlock Your Account Now.” The email includes a disguised link that may take users to a page that looks like the login pages for IRS e-Services or a tax preparation software provider.

Alternatively, the email link or attachment may load malware onto computers to capture keystrokes, eventually giving the thieves access to user credentials when users log into their accounts. The thieves may pose as a potential client, emailing an attachment that claims to contain tax information but is really infected with keystroke logging malware. Here’s an example of a fake IRS e-Services email:

example of a fake IRS e-Services email

The email claims to be from “IRS E Services,” slightly off from the official IRS e-Services name. Also, IRS e-Services does not send emails except through the Quick Alerts system. Note the “Account Closure Now!” subject line to instill urgency, as does the “update now” link.

Tax professionals should hover their cursors over a suspicious link to see the destination, which may be a URL like: bit.ly; ow.ly; or tinyurl.com, as opposed to an actual IRS.gov URL. The suspicious link takes the practitioner to a website designed to appear as the actual e-Services login page. Here’s one example of a fake web page:

example of a fake web page

Once a thief obtains a tax pro’s credentials, they immediately can access accounts and steal EFIN, which they can use either to file fraudulent tax returns or sell to other criminals who could file fraudulent tax returns. They may also use a Power of Attorney and Centralized Authorization File (CAF) number, allowing them to access clients’ transcripts. Those who reuse usernames and passwords for multiple online accounts -- as many people do – may find the thief has accessed those accounts as well.

Protecting Clients and Businesses from Account Takeovers

Identity thieves have many schemes to steal login credentials. A common tactic is to use a spear phishing email that targets tax professionals. Here are a few steps to protect clients and business accounts:

  • Educate all employees about the dangers of spear phishing and account takeovers. It only takes one employee to open a link to give cybercriminals access the entire system.
  • Use strong, unique passwords. Better yet, use a phrase instead of a word. Use different passwords for each account. Use a mix of letters, numbers and special characters. Longer is better, but a minimum of eight to 10 characters. Use a password manager if necessary to help remember these unique credentials.
  • Use the strongest encryption software available. Encrypt and password protect all sensitive data, using unique passwords for each document.
  • Use strong malware/phishing software protection. Good software can help detect and stop malware or warn users when they are going to a suspected phishing site. A periodic deep scan also may help uncover embedded malware lurking in systems.
  • Use two-factor authentication whenever possible – This practice helps protect accounts by requiring two steps for access. For example, the IRS Secure Access process requires credentials (username and password) plus a security code that is sent as a text to a mobile phone that is registered with the IRS. Account takeovers are one reason the IRS is moving to protect e-Services with this more rigorous process. Many banks and social media outlets are moving to two-factor authentication, either by using a code sent to an email address or phone. Use the two-factor option whenever possible.
  • Check EFIN counts weekly. Access the application via e-Services and select “Check EFIN Status.” If someone is using the EFIN without your knowledge, a higher number of returns filed under that number will result. Call the Help Desk immediately.
  • Report phishing emails. Fraudulent phishing or malicious email can be sent to This email address is being protected from spambots. You need JavaScript enabled to view it..  For more information, see Report Phishing.
  • Report security incidents. The IRS considers these examples to be security incidents: a user clicked on a phishing link and entered their email credentials; a user clicked on a malicious URL that infected the computer; or someone created a domain like the user’s domain and used that to send phishing emails to other preparers.  Publication 4557, Safeguarding Taxpayer Data, provides guidance to report incidents. If the incident was an IRS-related scam, report it to the Treasury Inspector General for Tax Administration (TIGTA).

 

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The IRS wants taxpayers to know it stands ready to help in the event of a disaster. If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return. If their area receives a federal disaster designation, they may be able to claim the loss sooner.

Ordinarily, a deduction is available only if the loss is major and not covered by insurance or other reimbursement.

Here are 10 tips taxpayers should know about deducting casualty losses:

  1. Casualty loss.  A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
  2. Normal wear and tear.  A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
  3. Covered by insurance.  If a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. Reduce the loss by the amount of the reimbursement received or expected to receive.
  4. When to deduct.  As a general rule, deduct a casualty loss in the year it occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year.

    This means that if a disaster loss occurs in 2017, the taxpayer doesn’t need to wait until the end of the year to claim the loss. They can instead choose to claim it on their 2016 return. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.

  1. Amount of loss.  Figure the amount of loss using the following steps:
    • Determine the adjusted basis in the property before the casualty. For property a taxpayer buys, the basis is usually its cost to them. For property they acquire in some other way, such as inheriting it or getting it as a gift, the basis is determined differently. For more information, see Publication 551, Basis of Assets.
    • Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which a person could sell their property to a willing buyer. The decrease in FMV is the difference between the property's FMV immediately before and immediately after the casualty.
    • Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts.
  1. $100 rule.  After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year. It does not matter how many pieces of property are involved in an event.
  2. 10 percent rule.  Reduce the total of all casualty or theft losses on personal-use property for the year by 10 percent of the taxpayer’s adjusted gross income.
  3. Future income.  Do not consider the loss of future profits or income due to the casualty.                                                
  4. Form 4684.  Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.
  5. Business or income property.  Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.
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The IRS, state tax agencies and the tax industry today warned tax professionals to beware of spear phishing emails, a common tactic used by cybercriminals to target practitioners.

Spear phishing emails, often tailored to individual practitioners, result in stolen taxpayer data and fraudulent tax returns filed in the names of individual and business clients.

Information about spear phishing kicks off a new “Don’t Take the Bait” awareness campaign aimed at tax professionals. This is the first of a special 10-part series that will run each week through mid-September.

“We are seeing repeated instances of cybercriminals targeting tax professionals and obtaining sensitive client information that can be used to file fraudulent tax returns. Spear phishing emails are a common way to target tax professionals,” said IRS Commissioner John Koskinen. “We urge practitioners to review this information and take steps to protect themselves and their clients.”

The IRS, state tax agencies and the tax industry, working together as the Security Summit, urge practitioners to learn to recognize and avoid spear phishing emails. See Protect Your Clients; Protect Yourself for more information.

Phishing emails target a broad group of users in hopes of catching a few victims. Spear phishing emails pose as familiar entities, and the cybercriminals have done extensive research and homework in order to target a specific audience. Tax professionals and taxpayers are among the groups that regularly receive phishing emails.

The security software firm Trend Micro reports that 91 percent of all cyberattacks and resulting data breaches begin with a spear phishing email. The email, disguised as being from a trusted source, may seek to have victims voluntarily disclose sensitive information such as passwords. Or, it may encourage people to open a link or attachment that actually downloads malware onto the computer.

Here’s an example of a spear phishing email that targeted a tax professional during the 2017 filing season. Note the use of “Tax return” in the subject line to bait the tax preparer as the sender impersonates a prospective client:

example of a spear phishing email that targeted a tax professional during the 2017 filing season

Note that the sender has done their research, obtaining the name and email address of the tax pro. And, the email is conversational but ungrammatical and oddly constructed: “hope your (sic) doing good (sic) and actively involved in the tax filing season.” This is potentially a sign that English is a second language. Finally, note the hyperlink using a “tiny” URL is used to mask the true destination – this is another red flag.

There are several other versions of spear phishing emails in which the criminal poses as a potential client. In one version, the prospective “client” directs the tax professional to open an attachment to see the 2016 tax information needed to prepare a return. However, the attachment in reality downloads malware that tracks each keystroke made by the tax professional so that the criminal can steal passwords and sensitive data.

Most spear phishing emails have a “call to action” as part of their tactics, an effort to encourage the receiver into opening a link or attachment. The example above asks the preparer to review their tax information and provide a cost estimate.

Other spear phishing emails impersonate the IRS, such as the IRS e-Services tools for tax professionals, or in some instances a private-sector tax software provider. In those examples, preparers are warned that they must immediately update their account information or suffer some consequence. The link may go to a website that has been disguised by the thieves to look like the login pages for IRS e-Services or a tax software provider.

Cybercriminals are endlessly creative. This year, some identity thieves hacked individuals’ emails accounts. Noticing that the individuals had been in email contact with tax preparers, the criminals used the individual’s email address to send a note to their preparer asking that the direct deposit refund account number be changed. The scam prompted an IRS alert to preparers about last-minute refund changes. See IR-2017-64.

Protecting Your Clients and Your Business from Spear Phishing

There is no one action to protect your clients or your business from spear phishing. It requires a series of defensive steps. Tax professionals should consider these basic steps:

  1. Educate all employees about phishing in general and spear phishing in particular.
  2. Use strong, unique passwords. Better yet, use a phrase instead of a word. Use different passwords for each account. Use a mix of letters, numbers and special characters.
  3. Never take an email from a familiar source at face value; example: an email from “IRS e-Services.” If it asks you to open a link or attachment, or includes a threat to close your account, think twice. Visit the e-Services website for confirmation.
  4. If an email contains a link, hover your cursor over the link to see the web address (URL) destination. If it’s not a URL you recognize or if it’s an abbreviated URL, don’t open it.
  5. Consider a verbal confirmation by phone if you receive an email from a new client sending you tax information or a client requesting last-minute changes to their refund destination.
  6. Use security software to help defend against malware, viruses and known phishing sites and update the software automatically.
  7. Use the security options that come with your tax preparation software.
  8. Send suspicious tax-related phishing emails to This email address is being protected from spambots. You need JavaScript enabled to view it..
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If you’re paying your income taxes on business profits through estimated taxes, you have two more times to get it right for 2017:  September 15, 2017, and January 16, 2018. You don’t want to overpay, which is an interest-free loan to the government (recouped when you file for a refund), or underpay, which can result in costly tax penalties.

Remember that estimated taxes include not only regular income taxes (including the alternative minimum tax), but also:

  • Self-employment tax
  • 0.9% additional Medicare tax on earned income
  • 3.8% additional Medicare tax on net investment income

Grants for women are among the many types of funding available to start or grow a small business. And, unlike loans, business grants for women do not have to be repaid. This is a definite plus for any woman who is a recipient of grant money. However, this type of funding is typically very challenging to obtain. Knowing what to look for and how to apply can greatly improve your chances of getting a grant.

What Exactly is a Business Grant?

Grants are non-repayable funds that are often disbursed by government departments, foundations, trusts, non-profit organizations, educational institutions, or sometimes even individuals. Typically, a grant proposal and an application must be filled out to qualify for a grant. And, the funds given as a grant usually have to be used in specific ways – such as for a designated project or business need.

The Small Business Administration (SBA) provides considerable information about grants for women, as well as for all types of small business owners. The SBA itself doesn’t provide any grants, but there are some grants offered by the Federal government that have been authorized and appropriated through bills passed by Congress and signed by the President. The majority of these are for non-commercial organizations such as non-profits and educational institutions in areas such as medicine, education, and technology development.

Other grants for women can be found through state and local government programs. Many of these require recipients to match funds or combine the grant with other types of financing such as loans.

While not specifically for women, the Small Business Innovation Research Program (SBIR) is one grant program that helps qualified small businesses that are focused on research and development. The program was designed to encourage high tech innovation, and is limited to American-owned and independently operated, for-profit businesses that have the principal researcher on their payroll and less than 500 employees.

Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing -- no matter what a person’s passion, the Internal Revenue Service offers some tips on hobbies.

Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five tax tips to consider:

  1. Is it a Business or a Hobby?  A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Consider nine factorswhen determining whether an activity is a hobby. Make sure to base the determination on all the facts and circumstances. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
  2. Allowable Hobby Deductions.  Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
  3. Limits on Hobby Expenses.  Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
  4. How to Deduct Hobby Expenses.  Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.

Most of us get refund checks at tax time. And most of the time, those refunds are just what we had been eagerly awaiting.

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But occasionally, the amount on an Internal Revenue Service check is not what we expected.
In some cases, it's less than we figured on our 1040s. Every now and then, it's more.

Regardless of whether the refund discrepancy goes against you or favors you, some steps can be taken to resolve the matter. That way, even if you or the tax collector aren't necessarily satisfied with the eventual amount, you'll at least understand the mathematical misinterpretation.

Explanation en Route

First, don't panic. There's usually a logical explanation for why you and the IRS came up with different numbers.

The IRS will send you a written explanation for the unexpected amount. The only problem is that the explanation doesn't always accompany the check. Such coordination of cash and comment is particularly difficult with directly deposited refunds, which are likely to show up unexplained in your account first.

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Why your refund might be an unexpected amount:

* Math errors made in computing your tax bill.
* Incorrect credit or deduction claims were made.
* Estimated tax payments not credited properly.
* Other federal debts, such as a student loan, are collected.

Sometimes the letter comes first,. Sometimes it follows a few days later. If the check comes first, you can always call the IRS.

The main IRS toll-free number is (800) 829-1040 or (800) 829-4059 (TDD) for the hearing impaired. You also can call or visit your local Taxpayer Assistance Center. The IRS website has an interactive locator page to help you find the nearest one.

The best time to call is about an hour before the IRS office is scheduled to close. "Mornings are not a good time to call," she says. And during tax-filing season, you'll probably be in for a wait on hold at any time of the day.

Cash or Hold the Check?

As you're waiting for the explanation letter to clear up the refund issue, you also have to decide what to do with the more, or less, money you received.

"It's usually not a problem to cash it, especially if it's a smaller difference" says Bob D. Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters.

In fact, if the check is less than you expected and it turns out that you were correct, once you and the IRS resolve the matter in your favor, the agency will make up the difference (plus a bit of interest if it takes more than 45 days to correct the error) and send you another check for the balance due.

If, however, the difference is larger or your refund is much more than you believe you should have received, it's generally a good idea to hold off cashing the check until the issue is resolved.
"Recognize that you could be asked to send it back if the amount is more than you expected," says Scharin. That's easier to do if you still have all the IRS' mistakenly refunded money in hand.
Documentation of the difference

Once you get the official word on why your refund is not what you had expected, it's time to figure out what happened.

A typical notice will show you some basic 1040 information: adjusted gross income, taxable income and total tax due. In each of these categories, the IRS will indicate what you entered and what the agency came up with. A major difference in one of these areas will pretty clearly show you where the problem lies.

The document should also note how much tax you paid and any over- or underpayment. Additional charges or credits, such as interest and penalties, also are taken into account.

"Get out your return and try to reconcile it that way," says Scharin. If you used a tax professional to file your return, call that person for help in clearing up the matter.

In many cases, the notice will include a phone number. Scharin says a personal inquiry directly to the IRS could also help.

"You might want to call before sending documentation," he says. "You might find in speaking with a person, any confusion is cleared up, for good or otherwise." At least you'll know exactly what the agency needs from you to resolve the issue.

Common Refund Discrepancy Causes

"Most likely it is an arithmetic error," says Scharin. In these cases, the IRS simply corrects your calculations and sends you the proper refund amount.

Even tax software doesn't make you immune to addition and subtraction issues.

Scharin recalls one individual who "did his taxes on a computer and forgot to press 'recompute.' So even though he entered in everything correctly, he didn't finish the process."

You also might have claimed something that, based on your income, you're not entitled to, says Scharin. "Income phaseouts, based on your adjusted gross income, affect several credits," he says.

But it just as easily could be an IRS error.

"You may have made estimated tax payments, and one was not credited properly," says Scharin. "From your records, you overpaid or paid properly, but the IRS doesn't think so. So send them a copy of the canceled check."

Wiggins also has found estimated tax payments to be a major culprit in divergent refund amounts.
"Usually, the tax due is calculated correctly, but the filer and IRS come up with a difference on the amount of tax paid," Wiggins says. "You made $250 in estimated payments when it was only $225 on the form. We can match those up because they show those payments on the letter of explanation."

Other numbers that cause problems are those nine Social Security digits. When any of those are wrong (such as transposed numbers, or they don't match other records, perhaps involving name changes after marriage or adoption), problems with your tax return -- and refund -- appear.
"If it's just listed on the return as 'Smith,' in these cases the IRS disallows the dependency exemption because of the mismatch."

Other Debts Collected From Refunds

Your tax check also might be a direct path to other money you owe.

The government can go through your federal refund to collect if you owe money to other government agencies. The most common cases involve court-ordered financial payments associated with a former marriage or unpaid student loans.

"If there are any child or spousal support payments, then the county of residence can go and claim their payments from your refund," says Wiggins. "And it's not an issue here in Texas, but in other states, tax officials there can go after your federal refund for state income tax debts."

The IRS will even make sure it gets prior federal tax debts that you didn't clear.

"I also have seen cases where taxpayers have a payment arrangement in place with the IRS, and the agency collects from the filer's current refund," says Wiggins. "The agreement says they can apply any refund you have against what you owe.

"So even if you're making timely payments on your agreement with IRS, they can still apply the refund to that prior debt."

Self-Correcting Your Mistakes

In a worst-case scenario, you might not even get a refund.

"You'll get a letter telling you to refile," says Scharin.

You also should refile your return and refigure your tax bill and any refund if you find a mistake that the IRS overlooked in processing. If the IRS does eventually notice the error, you'll face penalties and interest on the amount you didn't properly pay on time.

In these cases, file an amended return, Form 1040X, and send the original, incorrect refund check back to the agency.

The IRS says to include a letter of explanation with the check. The agency will issue you a refund for the proper amount when it processes your amended return.

On the back of the check where you normally would endorse it, write "void." Send the check and your letter detailing why you're sending back the check. Be sure to include your name, Social Security number, mailing address and a daytime telephone number in case an agent needs to follow up with you.

Send the check back to the issuing center; you'll find that location on the front of the check. Before you drop it in the mail, make a copy of the check and your letter for your files. It's a good idea to send the material with a return receipt for additional verification for your records.

You also can call the IRS' toll-free number and ask to speak to taxpayer accounts. Explain that the original refund check has been returned uncashed so the agency will know why it's issuing you a second refund.

It's no fun to return tax cash, but by making sure you get your payment and refund records straight, you'll know you won't have to worry about unexpectedly hearing from the IRS in the future.

Below are some of the more common questions and answers about Gift Tax issues. 

 

Who pays the gift tax?

The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What is considered a gift?

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

What can be excluded from gifts?

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

May I deduct gifts on my income tax return?

Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 559, Survivors, Executors, and Administrators.

How many annual exclusions are available?

The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, 2016 and 2017 is $14,000.

What if my spouse and I want to give away property that we own together?

You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013 (including 2014, 2015, 2016 and 2017).

What other information do I need to include with the return?

Refer to Form 709 (PDF), 709 Instructions and Publication 559. Among other items listed:

  1. Copies of appraisals.
  2. Copies of relevant documents regarding the transfer.
  3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

What is "Fair Market Value?"

Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.

Whom should I hire to represent me and prepare and file the return?

The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:

  1. How complex is the transfer?
  2. How large is the transfer?
  3. Do I need an attorney, CPA, Enrolled Agent (EA) or other professional(s)?

For most simple, small transfers (less than the annual exclusion amount) you may not need the services of a professional.

However, if the transfer is large or complicated or both, then these actions should be considered; It is a good idea to discuss the matter with several attorneys and CPAs or EAs. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on transfer matters, make sure the lines of communication remain open so that there are no surprises.

Finally, people who make gifts as a part of their overall estate and financial plan often engage the services of both attorneys and CPAs, EAs and other professionals. The attorney usually handles wills, trusts and transfer documents that are involved and reviews the impact of documents on the gift tax return and overall plan. The CPA or EA often handles the actual return preparation and some representation of the donor in matters with the IRS. However, some attorneys handle all of the work. CPAs or EAs may also handle most of the work, but cannot take care of wills, trusts, deeds and other matters where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time

Do I have to talk to the IRS during an examination?

You do not have to be present during an examination unless IRS representatives need to ask specific questions. Although you may represent yourself during an examination, most donors prefer that the professional(s) they have employed handle this phase of the examination. You may delegate authority for this by executing Form 2848 "Power of Attorney."

What if I disagree with the examination proposals?

You have many rights and avenues of appeal if you disagree with any proposals made by the IRS.  See Publications 1 and 5 (PDF) for an explanation of these options.

What if I sell property that has been given to me?

The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate).

Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code §2501 and following, related regulations and other sources)

Can a married same sex donor claim the gift tax marital deduction for a transfer to his or her spouse?

For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married.  Also, the Service will recognize a marriage of individuals of the same sex that was validly created under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages.

However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.

Gifts to your spouse are eligible for the marital deduction.

 

How do I Secure Gift Tax Account Information?

Get Gift Tax Account Information For Unknown Years

When the tax periods for filed Forms 709 are unknown, a written request may be made to the IRS to secure that information, if any. The written request should include language requesting a determination of all gift tax returns filed for the taxpayer between certain years. Keep in mind that data before 2000 is not available online and may take up to 30 days for a response. Using the “Chart for all other transcripts” on Page 2 of Form 4506-T, either mail or fax your written request to the appropriate IRS office. The signature requirements and required documentation are identical to the requirements for Form 4506-T. No fee applies.

  • Once specific years are known, use Form 4506-T to request an account transcript for each tax period, or Form 4506 to request a copy of a specific gift tax return. Follow instructions below.

Get Gift Tax Account Information Using Form 4506-T

Form 4506-T, Request for Transcript of Tax Return, is used to request an account transcript for tax periods where a tax return is known to have been filed.  

  • Complete Form 4506-T paying special attention to Line 6. Check the box at Line 6b of Form 4506-T to request an account transcript of specific years you indicate on Line 9. No other option listed under Line 6 on Form 4506-T is available for gift tax.
  • Using the “Chart for all other transcripts” on Page 2 of Form 4506-T, either mail or fax your completed request to the appropriate IRS office. Prior to submitting your request, please note the requirements for signatures of representatives and documentation necessary to be submitted for deceased taxpayers reflected in the instructions on Page 2 of Form
    4506-T.

Get a Copy of a Filed Form 709 Using Form 4506

Form 4506, Request for Copy of Tax Return, is used to request a copy of a specific previously filed tax return with all attachments. A $50.00 fee per tax return applies.

  • Complete the Form 4506 with the taxpayer’s current information. Please be specific with the years in which copies are requested.
  • Using the “Chart for all other transcripts” on Page 2 of Form 4506, mail your completed request to the appropriate IRS office. Prior to submitting your request, please note the requirements for signatures of representatives and documentation necessary to be submitted for deceased taxpayers reflected in the instructions on Page 2 of Form 4506.
  • Make your  check or money order  payable to the “United States Treasury”. Enter the SSN and "Form 4506 Request" on the check or money order.
  • Allow 75 calendar days for the IRS to process the request for a copy of a tax return

The IRS, state tax agencies and the tax industry today warned tax professionals to beware of phishing emails purporting to be from a tax software education provider and seeking extensive amounts of sensitive preparer data.

The email’s origin is unknown but likely issued by cybercriminals who could be operating from the U.S. or abroad. The email is unusual for the amount of sensitive preparer data that it seeks. This preparer information will enable the thieves to steal client data and file fraudulent tax returns.

The IRS reminds all tax professionals that legitimate businesses and organizations never ask for usernames, passwords or sensitive data via email. Nor should a preparer ever provide such sensitive information via email if asked.

All tax professionals should be aware that their e-Services credentials, the Electronic Filing Information Number (EFIN), the Preparer Tax Identification Number (PTIN) and their Centralized Authorization File (CAF) number are extremely valuable to identity thieves. Anyone handling taxpayer information has a legal obligation to protect that data.

Because the IRS, state tax agencies and the tax industry, acting in partnership as the Security Summit, are making inroads on individual tax-related identity theft, cybercriminals increasingly target tax professionals. Thieves are looking for real client data so they can better impersonate the taxpayer when filing fraudulent returns for refunds.

The fake email uses the name of a real U.S.-based preparer education firm. Here’s the text as it appears in phishing emails being sent to tax professionals:

In our database, there is a failure, we need your information about your account.

In addition, we need a photo of the driver's license, send all the data to the letter. Please do it as soon as possible, this will help us to revive the account.

*Company Name *

*EServices Username *

*EServices Password *

*EServices Pin *

*CAF number*

*Answers to a secret question*

*EIN Number *

*Business Name

*Owner/Principal Name *

*Owner/Principal DOB *

*Owner/Principal SSN *

*Prior Years AGI

Mother's Maiden Name

 

If you received or fell victim to the scam email, forward a copy to This email address is being protected from spambots. You need JavaScript enabled to view it.. If you disclosed any credential information, contact the e-Services Help Desk to reset your password. If you disclosed information and taxpayer data was stolen, contact your local stakeholder liaison

  • Posted in:
  • IRS

The Internal Revenue Service is now accepting renewal applications for the Individual Taxpayer Identification Numbers (ITINs) set to expire at the end of 2017. The agency urges taxpayers affected by changes to the ITIN program to submit their renewal applications as soon as possible to avoid the rush.

In the second year of the renewal program, the IRS has made changes to make the process smoother for taxpayers. The renewal process for 2018 is beginning now, more than three months earlier than last year.

“This is an important program, and the IRS is opening the renewal process several months earlier to help taxpayers and make the process smoother,” said IRS Commissioner John Koskinen. “We encourage taxpayers affected by the ITIN changes to review the program’s details and renew ITINs this summer to avoid delays that could affect their tax filing and refunds next year.”

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2017, and ITINs with middle digits 70, 71, 72 or 80 will also expire at the end of the year. Affected taxpayers who expect to file a tax return in 2018 must submit a renewal application.

As a reminder, ITINs with middle digits of 78 and 79 already expired last year. Taxpayers with these ITIN numbers can renew at any time.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions should visit the ITINinformation page on IRS.gov and take a few minutes to understand the guidelines.

Last year, the IRS launched a wider education effort to share information with ITIN holders. To help taxpayers, the IRS has a variety of informational materials, including flyers and fact sheets, available in several languages on IRS.gov.

The IRS continues to work with partner groups and others in the ITIN community to share information widely about these important changes.

  

Who Should Renew an ITIN

Taxpayers whose ITIN is expiring and who need to file a tax return in 2018 must submit a renewal application. Others do not need to take any action.

  • ITINs with the middle digits 70, 71, 72, or 80 (For example: 9NN-70-NNNN; NNN-71-NNNN; 9NN-72-NNNN; 9NN-80-NNNN) need to be renewed even if the taxpayer has used it in the last three years. The IRS will begin sending the CP-48 Notice, You must renew your Individual Taxpayer Identification Number (ITIN) to file your U.S. tax return, later this summer to affected taxpayers. The notice explains the steps to take to renew the ITIN if it will be included on a U.S. tax return filed in 2018. Taxpayers who receive the notice after taking action to renew their ITIN do not need to take further action unless another family member is affected.
  • Taxpayers can also renew their ITINs with middle digits 78 and 79 that have already expired.

Family Option Remains Available

Taxpayers with an ITIN with middle digits 70, 71, 72 or 80 have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together even if family members have an ITIN with middle digits other than 70, 71, 72 or 80. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to Renew an ITIN

To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information.

The IRS began accepting ITIN renewals today. There are three ways to submit the W-7 application package:

  • Mail the Form W-7, along with original identification documents or copies certified by the agency that issued them, to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.
  • Taxpayers have the option to work with Certified Acceptance Agents (CAAs) authorized by the IRS to help them apply for an ITIN. CAAs can certify all identification documents for primary and secondary taxpayers and certify that an ITIN application is correct before submitting it to the IRS for processing. A CAA can also certify passports and birth certificates for dependents. This saves taxpayers from mailing original documents to the IRS.
  • In advance, taxpayers can call and make an appointment at a designated IRS Taxpayer Assistance Center instead of mailing original identification documents to the IRS.

Avoid Common Errors Now and Prevent Delays Next Year

Federal returns that are submitted in 2018 with an expired ITIN will be processed. However, exemptions and/or certain tax credits will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, any applicable exemptions and credits will be restored and any refunds will be issued.

Additionally, several common errors can slow down and hold some ITIN renewal applications. The mistakes generally center on missing information and/or insufficient supporting documentation. The IRS urges any applicant to check over their form carefully before sending it to the IRS.

As a reminder, the IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

  • U.S. medical records for dependents under age 6,
  • U.S. school records for dependents under age 18, and
  • U.S. school records (if a student), rental statements, bank statements or utility bills listing the applicant’s name and U.S. address, if over age 18

Tax time is closer than you think. Here are 13 things you should know about taxes and your federal retirement.

1) Payroll taxes are not taken out of retirement income; only earned income. Therefore, you will not be paying Social Security tax (6.2%) and Medicare tax (1.45%) from any of your retirement income.

2) Pension contributions are not taken out of retirement income. They are taken out of your federal salary if you are employed in a position covered by CSRS, FERS or one of the other federal retirement systems. FERS pension contributions are 0.8% for most employees and 1.3% for special category employees such as law enforcement officers, firefighters, etc. CSRS pension contributions are 7% for most employees and 7.5% for special category employees. CSRS Offset pension contributions are the same as for FERS employees. FERS employees hired after 01/01/2013 have larger pension contributions, but none of them will be retiring soon, so we will not deal with that here.

3) TSP deductions do not come out of retirement income either as retirees are not allowed to contribute to the Thrift Savings Plan.

4) For federal income tax purposes all of our retirement income (pension, Social Security, TSP, IRAs, etc.) is taxed as ordinary income; that is, the percentage we pay in federal income tax is based on the marginal tax bracket where the income falls.

5) Your CSRS or FERS pension is not fully taxable as you contributed to your pension out of already taxed dollars. You will not be double taxed on your contributions. You will, however, be taxed on the government’s untaxed contributions, as well as on the earnings that accrue on both your contributions and the government’s contributions.

How much does the government contribute towards your pension? For CSRS the government contributes as much as you do (7% or 7.5%). For CSRS Offset and FERS the government contributes at a different rate each year (based on Treasury returns). In 2015, the government contributed 13.2% and in 2016 they will be contributing 13.7% for regular employees; special category employees have a larger share paid by the government.

For tax purposes, you are viewed as recouping your already taxed contributions bit-by-bit over your life expectancy. This means that the vast majority of your pension will be subject to federal income tax. The only thing that could be considered good news about this is that, for most retirees, OPM calculates how much is taxable and how much is viewed as a return of your already taxed contributions, and lists the amounts on the form 1099-R that they mail you each January. IRS Publication 721 contains more than you want to know about the taxation of your federal pension.

The amount of your pension that is taxable is based on the amount of your contributions and upon your age at the time you retire. Here’s an example for an employee receiving $35,000 per year in pension benefits who retired at the age of 57 and had contributed $50,000 towards his/her pension.

6) You elect how much you want to have withheld from your pension by filing form W4-P with your retirement papers. You can change withholding after retirement by requesting a change from OPM. Retirees should avail themselves of OPM’s “Services Online” to make changes to withholding and other items.

7) Up to 85% of Social Security benefits can be taxed. The amount of your Social Security that can be taxed is based on your “provisional income.” To determine your provisional income, you add together one-half of your Social Security, all of your taxable income and certain non-taxable income (e.g., tax-exempt income etc.). Your provisional income is compared with thresholds established for single and joint filers. These thresholds have never been indexed for inflation since they were established in 1983.

Single filing status thresholds:

  • If the total of the above items is less than $25,000, there will be no tax on SS benefits;
  • If the total is between $25,000 and $34,000, up to 50% of SS will be taxable;
  • If the total is over $34,000, up to 85% of SS will be taxable.

Joint filing status thresholds:

  • If the total of the above items is less than $32,000, there will be no tax on SS benefits;
  • If the total is between $32,000 and $44,000, up to 50% of SS will be taxable;
  • If the total is over $44,000, up to 85% of SS will be taxable.

I tell participants in the pre-retirement seminars that I conduct for my firm, Federal Career Experts, that most federal employees can count on having 85% of their Social Security benefits subject to federal income tax. Agency Human Resources or Training staff can contact Federal Career Experts to find out more about our seminars.

8) Federal income taxes are not automatically withheld from your Social Security. If you want federal income taxes withheld from your Social Security, you have to request it. It is a good idea to have taxes withheld, as it helps you avoid a nasty surprise at tax time.

9) Withdrawals from a traditional TSP balance are fully taxable.

10) In most circumstances, you will pay no tax on withdrawals from your Roth TSP balance. You will never be taxed on the part of your Roth withdrawal that represents your contributions, as you contributed to the Roth out of already taxed dollars.  You will not be taxed on the portion of your Roth withdrawal that represents earnings if your withdrawals are qualified. In order for a withdrawal to be considered qualified, you must be at least 59 ½ at the time of the withdrawal and you must have had a Roth balance in your TSP for at least five years. This means that a withdrawal from your Roth balance will not be considered qualified until at least 01/01/2017, and then only if you are over the age of 59 ½.

This gets problematic for those who plan on retiring and withdrawing money from their TSP before they reach the age of 59 ½ as you are not allowed to separate withdrawals between your traditional and Roth TSP balances. Per IRS regulations, withdrawals within a defined contribution account must be taken proportionately from before and after tax money. The TSP could fix this by allowing us to have separate Traditional and Roth accounts, rather than having separate balances within one account.

11) As the TSP is a tax deferred employer retirement plan, there are penalties for taking money out too early, or too late.

The 10% early withdrawal penalty will not apply to withdrawals from your Traditional TSP if you retire from your federal job in the year in which you turn 55, or later (50 for Law Enforcement Officers, Firefighters, Customs and Border Protection Officers and Air Traffic Controllers). It will also not apply to withdrawals taken by an individual who is totally and permanently disabled. Individuals who retire from their federal job before the year in which they turn 55 (50 for Law Enforcement Officers, Firefighters, Customs and Border Protection Officers and Air Traffic Controllers) can avoid the penalty if:

  • They elect monthly payments based on the IRS life expectancy table and continue those payments for five years, or until they turn age 59 ½ whichever is longer; or
  • They purchase a TSP annuity.

Though most defined contribution plans like the TSP have a 50% penalty for failing to take required minimum distributions beginning at the age of 70 ½, the TSP has provisions in place that shield almost all participants from the penalty. The penalty is 50% of the amount of money you should have taken out, but didn’t.

  • If you are still working at your federal job at 70 ½, you are not required to take a minimum distribution.
  • If you are taking substantially equal monthly payments at 70 ½ (the most popular withdrawal choice of those who do not roll their TSP account into an IRA or other instrument) and fail to take out enough to meet the minimum required distribution, the TSP will send you an additional payment of the required amount before the end of the year.
  • If you are not working and haven’t begun withdrawals by 70 ½:
    • The TSP will notify you at the beginning of the year after the year in which you turned 70 1/2 that you must begin taking out your money by April 1;
    • If you do not begin withdrawing the money by April 1, the TSP will transfer all your money into the G fund;
    • If you do not begin withdrawing your money within nine months, you forfeit your account. But don’t panic, once you begin taking required minimum distributions and pay the penalties, the TSP “un-forfeits” your account.

12) Take care in setting up your TSP withholding. The default withholding amount depends on your withdrawal choice. A tax notice is updated annually and can be found in the “forms and publications” section of the TSP’s website. The notice has a detailed table that describes how each type of withdrawal is treated for tax purposes (e.g., periodic payment, eligible rollover distribution, etc.) and what the default withholding rate is. The default withholding rate for most monthly payments is very low and will result in retirees who do not change it to owe taxes (and perhaps penalties) at tax time.

13) Most states have income taxes. Some states with income taxes do not tax any retirement income. Some states with income taxes give retirement income preferential treatment.

 

What tax break has been around for more than four decades and could be worth more than $6,000 for qualified, modest-income workers?

If you said the Earned Income Tax Credit (EITC), pat yourself on the back. As many as one in five individuals eligible for this credit don't know about it and fail to claim it, leaving billions of dollars on the table every year, according to the IRS.

"The EITC can supplement your earned income and can help you pay the bills," such as rent and household expenses, said Eliot Ullman, a CPA with Miller Ward & Co.

The maximum credit for tax year 2016 is $6,269, though the actual amount an EITC-eligible taxpayer may receive depends on a number of factors, including your income, marital status, and number of qualifying children.

Last year, some 26 million people received the EITC, with an average credit received of about $2,400.

 Individual health care coverage through the Affordable Care Act’s insurance exchanges could see premiums rise next year — or even double in some cases.

That’s according to proposed 2018 rates sought by the last two remaining providers that offer coverage on the exchanges, which were created by former President Barack Obama’s signature health care law. The proposed rates, which could change and have not yet been approved, were released Thursday by the Department of Insurance (IDOI).

Health insurers Anthem and MDwise both announced recently that they are withdrawing from the ACA’s marketplace next year. That leaves CareSource Inc. and Celtic Insurance Co. as the only companies that remain.

Some CareSource customers could see their rates drop by 9 percent if the change is approved. But others may see as much as a 12 percent increase, according to IDOI figures. The average monthly premium would be $423.

Celtic, a subsidiary of St. Louis-based Centene Corp., is asking for a minimum increase of 24 percent, with a maximum increase of 117 percent, state officials said. Their average premium would be $452.

Two health insurance providers in Indiana announced Wednesday they will no longer offer options for people on the state health care exchange next year.

Those companies are Anthem and MDwise.

Estimates show nearly 80,000 Hoosiers will be left picking new insurance providers and there are a couple important points experts want you to know Wednesday night.

First, there are still two health care insurance providers in Indiana for the open market. Second, this takes effect in 2018, so there’s a lot of time for people to make these important decisions

“I would tell them to just shop around for those plans that best meet their family needs and their financial needs,” said Pamela Humes, the program director for Covering Kids and Families of Indiana, which helps sign up thousands of Hoosiers for health insurance on the state exchange.

The two providers to pick from now will be CareSource and Managed Health Services.

“We have two. Some states only have one,” said Humes.

She added when a state only has one insurance provider, it creates a monopoly on the market and could cause prices to jump.

But some Hoosiers are wondering if prices could go north in Indiana anyway. So we asked.

“It’s a real possibility,” she said, and then added that every insurance plan is different from one another so it would depend.

Humes said you may have to change doctors depending on whether they accept your new insurance.

“A lot of people don’t want to change up — they’ve been going to this doctor forever — but sometimes in these situations that does happen and we just try to help the person get to the best possible situation,” said Humes.

But we’re very early in the process. Prices for next year haven’t been released, and any changes in federal law could cause a seismic shift in Indiana health care.

“If we go through some training today it could change tomorrow,” she said.

Humes said the changes make it that much more important to talk to a certified navigator if you have any questions because they have gone through more than 60 hours of training to help pick the healthcare plan best for you.

Open enrollment for next year starts in November.

It’s important to note that this change for Anthem and MDwise will only affect the marketplace exchange. Medicaid, Medicare and Healthy Indiana Plan (HIP) 2.0 customers will not see any change.

Actual Expenses

What counts as a car or truck expense? Here's a list of what can be deducted:

  • Parking fees and tolls
  • Interest on a loan
  • Vehicle registration fees
  • Personal property tax
  • Lease and rental expense
  • Insurance
  • Fuel and gasoline
  • Repairs, including oil changes, tires, and other routine maintenance
  • Depreciation

What's not deductible? Fines and tickets, including parking tickets, are not deductible. Also, expenses related to personal use or commuting are not deductible.

Different car expenses are deductible depending on the purpose of the drive. For the charity and medical expense deductions, you cannot claim interest, depreciation, insurance, or repairs.

Standard Mileage Rates

Instead of tallying up all your actual car expenses, you can use a standard mileage rate to figure your deduction. Using the standard mileage rate (see the table below), the taxpayer multiplies the rate by the number of miles driven to determine the dollar amount that can be deducted for car expenses.

For 2016 the standard mileage rate was

  • Business 54 cents per mile
  • Medical or Moving 19 cents per mile
  • Charitable Service 14 cents per mile

Taxpayers can also deduct parking fees and tolls in addition to the standard mileage rate. In Publication 463, chapter 4, the IRS writes, "In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)"

Which is Better: Actual Expenses or the Standard Mileage Rate?

You should use whichever method will result in a larger deduction. It varies from person to person depending on how many miles you drive, the amount of depreciation you are claiming, and all the other expense variables.

So crunch the numbers and figure out which will be best for your tax situation.

Generally speaking, claiming the standard mileage rate works results in less paperwork and is best suited for situations in which you drive your car sometimes for work, charity or medical appointments, and you don't want to have to dig up all your car-related expenses.

Just be aware that in order to claim the standard mileage rate, you will need to choose that method in the first year that you use your car for business purposes. If you begin by claiming actual expenses, you'll need to stick with the actual expense method for the as long as the vehicle is used for business purposes. The IRS explains it this way, "If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses." There's additional records you will need

 

The IRS, working with the Department of Justice, is still considering how to proceed, but will make PTINs available while deciding how to address the court order. The IRS is resuming the issuance of PTINs, without charge, on June 21, 2017.

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  • IRS
 

You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. The business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checking account is the main source for entries in the business books.

Some businesses choose to use electronic accounting software programs or some other type of electronic system to capture and organize their records. The electronic accounting software program or electronic system you choose should meet the same basic recordkeeping principles mentioned above.  All requirements that apply to hard copy books and records also apply to electronic records. 

Supporting Business Documents

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

The following are some of the types of records you should keep:

  • Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
    • Cash register tapes
    • Deposit information (cash and credit sales)
    • Receipt books
    • Invoices
    • Forms 1099-MISC
  • Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
    • Cash register tape receipts
    • Credit card receipts and statements
    • Invoices
  • Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
    • Cash register tapes
    • Account statements
    • Credit card receipts and statements
    • Invoices
    • Petty cash slips for small cash payments
  • Travel, Transportation, Entertainment, and Gift Expenses
    If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  

  • Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:
    • When and how you acquired the assets
    • Purchase price
    • Cost of any improvements
    • Section 179 deduction taken
    • Deductions taken for depreciation
    • Deductions taken for casualty losses, such as losses resulting from fires or storms
    • How you used the asset
    • When and how you disposed of the asset
    • Selling price
    • Expenses of sale

    The following documents may show this information.

    • Purchase and sales invoices
    • Real estate closing statements
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
  • Employment taxes
    There are specific employment tax records you must keep.  Keep all records of employment for at least four years. 

The Internal Revenue Service announced today the addition of several new features to the online account tool first introduced late last year as part of the IRS’s commitment to improve and expand taxpayer services.

The online account allows individual taxpayers to access the latest information available about their federal tax account through a secure and convenient tool on IRS.gov. When it first launched in December 2016, the tool assisted taxpayers with basic account inquiries such as information about their balance due and access to the various IRS payment options. Since then, the IRS has added new features allowing taxpayers to:

  • View up to 18 months of tax payment history
  • View payoff amounts and tax balance due for each tax year
  • Obtain online transcripts of various Form 1040-series through Get Transcript
  • Give feedback on their experience with their online account and make suggestions for improvements
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  • IRS


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