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Obamacare and Your 2013 Tax Return

Taxation - Highlighted in the dictionary

Taxation – Highlighted in the dictionary (Photo credit: efile989)

So – you’re considering your income tax return (or maybe you’ve already filed) and you’re wondering if there are things you need to know with regard to Obamacare.  Fortunately, it’s not much (for most folks), for your 2013 return anyhow.  Next year will be a different story.

The IRS recently produced their Health Care Tax Tip HCTT-2014-10 which lists some tips about how the health care law impacts your 2013 tax return.  The actual text of the Tip is below:

What do I need to know about the Health Care Law for my 2013 Tax Return?

For most people, the Affordable Care Act has no effect on their 2013 federal income tax return.  For example, you will not report health care coverage under the individual shared responsibility provision or claim the premium tax credit until you file your 2014 return in 2015.

However, for some people, a few provisions may affect your 2013 tax return, such as increases in the itemized medical deduction threshold, the additional Medicare tax and the net investment income tax.

Here are some additional tips:

Filing Requirement: If you do not have a tax filing requirement, you do not need to file a 2013 federal tax return to establish eligibility or qualify for financial assistance, including advance payments of the premium tax credit to purchase health insurance coverage through a Health Insurance Marketplace. Learn more at www.Healthcare.gov.

W-2 Reporting of Employer Coverage:  The value of health care coverage reported by your employer in box 12 and identified by Code DD on your Form W-2 is not taxable.

Information available about other tax provisions in the health care law:  More information is available on www.IRS.gov regarding the following tax provisions: Premium Rebate for Medical Loss Ratio, Health Flexible Spending Arrangements, and Health Saving Accounts.

More Information

Find out more tax-related provisions of the health care law at www.IRS.gov/aca.

Find out more about the Health Insurance Marketplace at www.Healthcare.gov.

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Avoiding Mistakes on Your Tax Return

"YOU ARE ONE OF 50,000,000 AMERICANS WHO ...

“YOU ARE ONE OF 50,000,000 AMERICANS WHO MUST FILL OUT AN INCOME TAX RETURN BY MARCH 15. DO IT NOW^ AVOID THE RUSH…. – NARA – 516202 (Photo credit: Wikipedia)

When filing your tax return you want to make sure that you don’t make mistakes.  Mistakes can be costly in terms of additional tax and penalties, as well as the extra time and grief they can cause you.  Most of the time using e-filing software can help you to avoid these mistakes, but you should check over the return anyhow to make certain you haven’t fat-fingered something or if something didn’t go wrong with the software.

The IRS recently issued their Tax Tip 2014-46, which lists out 8 common mistakes that folks make on their tax return, and how to avoid them where possible.  The actual text of the Tip follows below:

Eight Common Tax Mistakes to Avoid

We all make mistakes.  But if you make a mistake on your tax return, the IRS may need to contact you to correct it.  That will delay your refund.

You can avoid most tax return errors by using IRS e-file.  People who do their taxes on paper are about 20 times more likely to make an error than e-filers.  IRS e-file is the most accurate way to file your tax return.

Here are eight common tax-filing errors to avoid:

  1. Wrong or missing Social Security numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
  2. Wrong names.  Be sure that you spell the names of everyone on your tax return exactly as they are on the Social Security cards.
  3. Filing status errors.  Some people use the wrong filing status, such as Head of Household instead of Single.  The Interactive Tax Assistant on www.IRS.gov can help you choose the right one.  Tax software helps e-filers choose.
  4. Math mistakes.  Double-check your math.  For example, be careful when you add or subtract or figure items on a form or worksheet.  Tax preparation software does all the math for e-filers.
  5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Credit, Child and Dependent Care Credit, and the standard deduction.  If you’re not e-filing, follow the instructions carefully when figuring credits and deductions.  For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
  6. Wrong bank account numbers.  You should choose to get your refund by direct deposit.  But it’s important that you use the right bank and account numbers on your return.  The fastest and safest way to get a tax refund is to combine e-file with direct deposit.
  7. Forms not signed or dated.  An unsigned tax return is like an unsigned check – it’s not valid.  Remember that both spouses must sign a joint return.
  8. Electronic filing PIN errors.  When you e-file, you sign your return electronically with a Personal Identification Number.  If you know last year’s e-file PIN, you can use that.  If not, you’ll need to enter the Adjusted Gross Income from your originally-filed 2012 federal tax return.  Don’t use the AGI amount from an amended 2012 return or a 2012 return that the IRS corrected.
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Capital Gains and Losses and Your Tax Return

AlistairDarling

AlistairDarling (Photo credit: StCartmail)

When you own certain kinds of assets and you sell them, you may incur a capital gain or loss that is applicable to your income tax preparation.  If the original purchase price plus applicable expenses associated with the asset (known as the basis) is less than the proceeds that you receive from the sale of the asset, you have incurred a capital gain.  On the other hand, if the basis of your asset is greater than the proceeds from the sale, you have incurred a capital loss.

Capital gains are taxable to you, using a separate tax rate – and capital losses can be deducted from your capital gains for the year.  Excess capital losses (above your capital gains for the year) can be used to reduce your income by up to $3,000 per year, carried forward until used up (or for your lifetime).

The IRS recently produced their Tax Tip 2014-27 which lists ten facts about capital gains and losses that you may find useful as you prepare your tax return.  The text of the actual Tip is below:

Ten Facts about Capital Gains and Losses

When you sell a ‘capital asset,’ the sale usually results in a capital gain or loss.  A ‘capital asset’ includes most property you own and use for personal or investment purposes.  Here are 10 facts from the IRS on capital gains and losses:

  1. Capital assets include property such as your home or car.  They also include investment property such as stocks and bonds.
  2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset.  Your basis is usually what you paid for the asset.
  3. You must include all capital gains in your income.  Beginning in 2013, you may be subject to the Net Investment Income Tax.  The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.  For details see www.IRS.gov/aca.
  4. You can deduct capital losses on the sale of investment property.  You can’t deduct losses on the sale of personal-use property.
  5. Capital gains and losses are either long-term or short-term, depending on how long you held the property.  If you held the property for more than one year, your gain or loss is long-term.  If you held it one year or less, the gain or loss is short-term.
  6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain.  If your net long-term capital gain is more than your short-term capital loss, you have a ‘net capital gain’.
  7. The tax rates that apply to net capital gains will usually depend on your income.  For lower-income individuals, the rate may be zero percent on some or all of their net capital gains.  In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent.  A 25 or 28 percent tax rate can also apply to special types of net capital gains.
  8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return.  This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate tax return.
  9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return.  You will treat those losses as if they happened that year.
  10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses.  You also need to file Schedule D, Capital Gains and Losses with your return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses.  They’re both available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Simplified Home-Office Deduction Available

home office

home office (Photo credit: Sean MacEntee)

Beginning with your 2013 tax return you have a new option available for calculating the Home-Office deduction – based solely on the square footage of the dedicated space used for the home office.

Instead of having to maintain records that are directly and indirectly associated with your home office, you can use the simplified method, which applies a flat $5 rate per square foot to the home office space, up to a maximum of $1,500.

The record-keeping and tax preparation simplification is very beneficial: Form 8829 (the usual home-office deduction form) can cause a lot of headaches to prepare, especially if you have more than one home office and you itemize your home mortgage interest and real estate taxes.  For a single home office your tax preparation software will do much of the work for you, but complications like a second home office (not that uncommon in these days of officing-at-home) it can be complex.

Unfortunately, in my experience working with tax returns so far this season, it seems that the simplified method often results in a smaller home-office deduction than the old method.  With the simplified method you get the option to deduct your full real estate taxes and home mortgage interest above and beyond the home office deduction, whereas the old method required you to apportion these expenses between business and personal.  If the new method appeals to you, it is much simpler than gathering all the records and figuring out how to correctly fill out the forms.

The IRS recently issued their a news release, IR-2014-24, which details information about the simplified deduction.

Reminder To Home-Based Businesses: Simplified Option for Claiming Home Office Deduction Now Available; May Deduct up to $1,500; Saves 1.6 Million Hours A Year

Washington – The Internal Revenue Service today reminded people with home-based businesses that this year for the first time they can choose a new simplified option for claiming the deduction for business use of a home.

In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 million.

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

The new options is available starting with the 2013 return taxpayers are filing now.  Normally, home-based businesses are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions.  Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return.  Self-employed individuals claim eht home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32, and eligible employees claim it on Schedule A Line 21.

Though some homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A.  These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.

Long-standing restrictions on the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Further details on the home office deduction and the new option can be found in Publication 587, posted on www.IRS.gov.

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Further Guidance on the One-Rollover-Per-Year Rule for IRAs


As a follow-up to the recent post on this blog The One-Rollover-Per-Year Rule: Revised, the IRS has recently released some additional guidance on the subject, via Announcement 2014-15.

As previously mentioned, the IRS has determined to begin using the one-rollover-per-year rule applied to ALL IRAs that the taxpayer owns, rather than only the affected IRAs that have been involved in a rollover.

According to the Announcement, the IRS fully acknowledges that the previous understanding of the rule was that it applied on an IRA-by-IRA basis.  In fact, there was a Proposed Regulation § 1.408-4(b)(4)(ii) on the books that was to further define the rule as applied only to the involved IRAs.  Ever since the Tax Court decided otherwise in the case Bobrow v. Commissioner (TC Memo 2014-21), the rule has been changed.

According to the recent announcement though, this will not take affect across the board until January 1, 2015.  Prior to that date, presumably, the old interpretation will be used, except, apparently, for Mr. Bobrow’s case (and any further cases that might be tried by the Tax Court).

File and Suspend in the Crosshairs?

Image courtesy of chanpipat at FreeDigitalPhotos.net

Image courtesy of chanpipat at FreeDigitalPhotos.net

Apparently in the President’s recent budget documentation there is a brief mention of a desire to curtail the availability of File and Suspend as an option for Social Security benefit filing.

The reason, it appears, is that the Obama administration views this option as one used only by high income folks to take advantage of the government with this valuable option.

The problem with that viewpoint is that it is used by folks of all income levels, and in fact if it is taken away this could cause some big problems for folks who can least afford to lose benefits. As if anyone can afford to lose benefits, right?

Here’s what happens with File and Suspend: a Social Security benefit recipient has a spouse and/or children that would be eligible for benefits based on his or her record when he or she files for benefits.  If he or she happens to be at or older than Full Retirement Age (FRA, age 66 for folks born before 1955, up to age 67 for folks born in 1960), he or she can file and immediately suspend his or her own benefits, allowing his or her spouse or young children to receive benefits immediately.  By suspending his or her own benefit, he or she will earn delayed retirement credits of 8% per year, which will later provide him or her with an enhanced retirement benefit.

This is exactly the same outcome for the spouse and dependents that would play out if the benefit recipient was to file and *not* suspend benefits – and actuarially the end result should be the same for the primary benefit recipient as well.  Where use of File and Suspend makes a big difference is much later.  In the event of the recipient’s untimely early death, the spouse will receive a much enhanced survivor benefit.  And if the recipient lives a long, healthy life, he or she will enjoy the enhanced benefit as well.

I can’t see where this is an issue of higher income versus lower income, as has been reported.  I believe that the File and Suspend option is being unfairly vilified without complete understanding. The fact that folks with higher incomes have been more likely to choose File and Suspend as an option shouldn’t be cause to eliminate the option for everyone.  As I mentioned, actuarially this should have little or no effect.

The likely reason that higher income folks have been more likely to choose this option is because higher income folks are more likely to seek guidance when filing for Social Security benefits – but again, the word is getting out about this option and more folks are choosing it (once they talk the SSA folks into understanding it!).

As well, often folks with lower incomes and future Social Security benefits may not be in a position to delay receipt of benefits, making File and Suspend a good idea but not viable.

I hope that this gets dropped.  Doing away with File and Suspend will have no beneficial impact on the future viability of the Social Security system, in my opinion.  All this is likely to do is make a lot of software developers rewrite their software to remove this option.  If looking for provisions to remove in order to make the system a bit more cost-effective, perhaps the restricted application should be considered.  This one may actually cost the system a bit extra, but so few people even know about it that it’s unlikely.

The real answer is to either re-do the overall calculations, put in place more effective means testing, and/or change the tax structure, perhaps to include all earned income instead of the capped income as the system works now.  Until we face these factors and make real changes, we’re likely to continue on the path to unsustainability within the Social Security system.

How Does an Early Withdrawal from a Retirement Plan Affect My Taxes?

Image courtesy of adamr at FreeDigitalPhotos.net

Image courtesy of adamr at FreeDigitalPhotos.net

Oftentimes we are faced with difficult situations in life – where we need extra money to pay for a major car repair, a new roof for the house, or just day-to-day living expenses – and our emergency funds are all tapped out.  Now your options become poor: should I go to a payday loan place, put more on my credit card?  My mortgage is upside-down so there’s no home equity loan in my future, and I can’t ask my folks for a loan, I’ve asked them for too much.  Hey, what about my retirement plan?  I’ve got some money socked away in an IRA that’s just sitting there, why don’t I take that money?

It’s really tough to be in a situation like this, but you need to understand the impacts that you’ll face if you decide to go the route of the IRA withdrawal, especially if you’re under age 59½.

Any money that you take out of a retirement plan as a withdrawal will be taxed as ordinary income – just like wages, salaries, and tips.  So if you’re in the 25% marginal tax bracket, every dollar that you withdraw from your IRA or 401(k) plan (if allowed) will cost you 25 cents right off the top.

In addition to the ordinary income tax, if you’re less than 59½ years of age you’ll also be hit with an additional 10% penalty for an early withdrawal (unless your withdrawal meets one of these 19 exceptions). So now every dollar that you withdraw costs an extra 10 cents on top of the ordinary income tax.  If you’re in the 25% bracket, that $10,000 withdrawal from your IRA can cost you as much as $3,500 in extra taxes and penalties.

Bear in mind that you may be able to take a temporary loan from your 401(k) or other qualified retirement plan (QRP) if you’re still employed by that employer.  Naturally you’ll need to repay the loan, but it might be a better option cost-wise than the other choices.  Plus, if you have an outstanding loan from your QRP and you leave the employer you’ll be required to either recognize the balance of the loan as a withdrawal or pay it back to the plan immediately.

Armed with this information makes your decision points much more clear: review all of the available options mentioned above (loans from family and friends, home equity loans, payday loans, and the like) against the cost of the taxes for taking an early withdrawal from your retirement plan.  The best option may be to see about a formal loan from family, paying them a reasonable rate of interest.  But of course, your circumstances are going to dictate the best option for you.  Just go into it with your eyes wide open.

Can You Itemize? Or, Should You Itemize?

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

When you prepare your taxes each year, you’re faced with a decision – itemize deductions or take the standard deduction?  Most of the time it’s not a question of whether you can itemize, but rather should you itemize.

Most Anyone Can Itemize…

This is due to the fact that most anyone can itemize.  If you’ve paid state and/or local income or sales taxes, real estate taxes, or paid mortgage interest, you have deductions to itemize.  Same goes for charitable contributions.  All of these items that you’ve paid out are eligible to be deducted on Schedule A of your tax return, without a lower limit.

If you have medical expenses, these can be deductible if the total of your medical expenses are more than 10% of your Adjusted Gross Income (AGI).  For 2013 tax returns, if you’re 65 years of age or older, your medical expenses that are more than 7.5% of your AGI will be deductible.

In addition, certain job expenses and other miscellaneous expenses, such as tax preparation expenses, safe deposit box rental, and the like, can be deductible to the extent that they exceed 2% of your AGI.

If you’ve paid out any of these expenses during the tax year, you can itemize.  That doesn’t mean that you should itemize, though.

… But Should You Itemize?

So you’ve determined that you have deductible expenses and you can itemize – let’s look at reasons why you should itemize.

The initial answer is really rather simple – if the total of all the deductible items that you’ve found to put on your Schedule A is greater than your applicable Standard Deduction, then you probably should itemize.  The Standard Deduction is based upon your Filing Status (2013 figures):

Filing Status Standard Deduction Over Age 65 or Blind, per Person
Single $6,100 + $1,500
Married Filing Jointly $12,200 + $1,200
Head of Household $8,950 + $1,500
Married Filing Separately* $6,100 + $1,200
Qualifying Widow(er) $12,200 + $1,200

If someone else claims you as a dependent on his or her tax return, your Standard Deduction is the lesser of $1,000 or earned income plus $350, up to the normal Standard Deduction for your filing status.

If your deductions amount to less than the Standard Deduction for your filing status, don’t despair.  It’s not as if being able to itemize your deductions is some sort of bonus – it’s actually the other way around.  You see, if you have more deductions when itemizing than the Standard Deduction, that means you had to pay out that money during the year.  On the other hand, if you had fewer itemized deductions (or no deductions to itemize), you’re getting to reduce your taxable income by the Standard Deduction without having to pay out that money!

Now there is at least one circumstance when you’re required to itemize your deductions, and we’ll cover that next.

Or, Do You Have to Itemize?

*If you and your spouse file separate returns with filing status of Married Filing Separately and your spouse itemizes deductions on Schedule A, you are also required to itemize your deductions on Schedule A, or take a Standard Deduction of $0.

Wrapping it up

You can always choose to itemize your deductions even if they are less than the Standard Deduction for your filing status. You only need to mark the box on Line 30 of Schedule A.  You might want to do this if it would somehow benefit your state income tax, for example.

Lastly – the only way to itemize deductions is by also filing your tax return on Form 1040.  If you choose to use either Form 1040A or Form 1040EZ, you are not eligible to itemize your deductions.  If you use tax return preparation software (or your qualified preparer does) the decision will be made for you, more than likely.

The IRS Releases Their “Dirty Dozen” Tax Scams for 2014

Image courtesy of chanpipat at FreeDigitalPhotos.net

Image courtesy of chanpipat at FreeDigitalPhotos.net

Each year the IRS puts together a list of the tax scams that are most pervasive to taxpayers, which they refer to as the “Dirty Dozen”.  There has only been a couple of changes to the list this year, most specifically the addition of “pervasive telephone scams”, introduced as #2 on the list this year, and combining “false Form 1099 claims” (on both 2012 & 2013’s list) with “falsely claiming zero wages”.  Identity theft, which is a major issue in the tax return world, tops the list again this year after having first appeared on the list in 2013.  I’ve included the rankings for each item for 2012 and 2013 within the 2014 list below, for your reference.

This list is from IRS’ Special Edition Tax Tip 2014-08.

Don’t Fall for the Dirty Dozen Tax Scams

Every year, people fall prey to tax scams.  That’s why the IRS sends a list of its annual “Dirty Dozen”.  We want you to be safe and informed – and not become a victim.

Taxpayers who get involved in illegal tax scams can lose their money, or face stiff penalties, interest and even criminal prosecution.  Remember, if it sounds too good to be true, it probably is.  Be on the lookout for these scams.

  1. Identity theft.  (2013: #1; 2012: not on the list) Tax fraud using identity theft tops this year’s Dirty Dozen list.  In many cases, and identity thief uses a taxpayer’s identity to illegally file a tax return and claim a refund.  For the 2014 filing season, the IRS has expanded efforts to better protect taxpayers and help victims.  Fide more information on the identity protection page on www.IRS.gov.
  2. Pervasive telephone scams.  (2013: not on the list; 2012: not on the list) The IRS has seen an increase in local phone scams across the country.  Callers pretend to be from the IRS in hopes of stealing money or identities from victims.  If you get a call from someone claiming to be from the IRS – and you know you owe taxes or think you might owe taxes, call the IRS at 1-800-829-1040.  If you get a call from someone claiming to be from the IRS and know you don’t owe taxes or have no reason to think that you owe taxes, then call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.
  3. Phishing. (2013: #2; 2012: #2) Phishing scams typically use unsolicited emails or fake websites that appear legitimate.  Scammers lure in victims and prompt them to provide their personal and financial information.  The fact is that the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.
  4. False promises of “free money” from inflated refunds.  (2013: #5; 2012: #5) The bottom line is that you are legally responsible for what’s on your tax return, even if someone else prepares it.  Scam artists often pose as tax preparers during tax time, luring victims in by promising large tax refunds.  Taxpayers who buy into such schemes can end up penalized for filing false claims or receiving fraudulent refunds.  Take care when choosing someone to do your taxes.
  5. Return preparer fraud. (2013: #3; 2012: #3) About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns.  Most return preparers provide honest service to their clients.  But some dishonest preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.  Choose carefully when hiring an individual or a company to do your tax return.  Only use a tax preparer that will sign your return and enter their IRS Preparer Tax Identification Number (PTIN). For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.
  6. Hiding income offshore. (2013: #4; 2012: #4) While there are valid reasons for maintaining financial accounts abroad, there are reporting requirements.  U.S. taxpayers who maintain such accounts and do not comply with these requirements are breaking the law.  They risk large penalties and fines, as well as the possibility of criminal prosecution.  The IRS has collected billions of dollars in back taxes, interest and penalties from people who participated in offshore voluntary disclosure programs since 2009.  It is in the best interest of taxpayers to come forward and pay their fair share of taxes.
  7. Impersonation of charitable organizations. (2013: #6; 2012: #10) Taxpayers need to be sure they donate to recognized charities. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people.  They may even directly contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds.
  8. False income, expenses or exemptions. (2013: #7; 2012: #6) Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. These taxpayers often end up repaying the refund, including penalties and interest for facing criminal prosecution.
  9. Frivolous arguments. (2013: #9; 2012: #8) Frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.  The IRS has a list of frivolous tax arguments that taxpayers should avoid.  While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or ignore their responsibility to pay taxes.
  10. Falsely claiming zero wages or using false Form 1099. (2013: #10 & #8; 2012: #9 & #7) Filing false information with the IRS is an illegal way to try to lower the amount of taxes owed.  Typically, fraudsters use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 as a way to improperly reduce taxable income to zero.  The fraudster may also submit a false statement denying wages and taxes reported by a payer to the IRS.
  11. Abusive tax structures. (2013: #11; 2012: #11) These abusive tax schemes often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes.  The schemes are usually complex and involve multi-layer transactions to conceal the true nature and ownership of the taxable income and assets.  The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.
  12. Misuse of trusts. (2013: #12; 2012: #12) There are reasonable uses of trusts in tax and estate planning.  However, questionable transactions also exist.  They may promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.  These trusts rarely deliver promised tax benefits.  They primarily avoid taxes and hide assets from creditors, including the IRS.

Tax scams can take many forms beyond the “Dirty Dozen”.  The best defense is to remain vigilant.  Get more information on tax scams at www.IRS.gov.

Use Direct Deposit for Your Tax Refund

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

When filing your tax returns this year, consider using direct deposit for your refund.  By doing this, you don’t have to worry about the mail “making the trip”, and also you won’t have to make a visit to the bank to cash or deposit the refund.

On top of that, direct deposit refunds usually are deposited more quickly than a check is delivered by mail, getting you the money faster.  Among the many alternatives for the places you can have the money deposited to are virtually any bank account, as long as you have the routing and account information, as well as transferring your funds to your TreasuryDirect account to purchase US Treasury marketable securities and savings bonds.  You can also split your refund to be deposited in two or three different accounts – the account(s) need to be title in your name, your spouse’s name, or both, not someone else’s account.

Of course, if you owe money to the IRS from past tax returns, your refund will be used to pay your debt first and foremost.  You also have the option to apply any leftover refund toward your tax obligation for the current year as well.

If your refund is less than $1 (which is highly unlikely since tax figures these days are generally rounded to the nearest dollar), you have to specifically request a refund from the IRS in writing.

Setting up direct deposit is a relatively simple activity, whether you’re using tax software or paper filing your return.  You just need to fill out the form with the appropriate bank routing and account information, and the deed is done.  If requesting direct deposit to multiple accounts, you’ll need to use Form 8888.  Form 8888 is also used to purchase paper I-series US Savings Bonds with your refund (limited to $5,000).

So do yourself a favor this year, and set up direct deposit of your tax refund.  It’s flexible, convenient, simple, and secure.

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