These days, nearly all of us get calls, e-mails and text messages trying to gain access to our finances. You have probably seen or heard of the call “from Amazon” about a new iPhone order, the call “from Social Security” indicating that your number has been suspended, which requires your immediate action with someone on the phone, the e-mail with a “voicemail message” attached for you to click on to hear, and the e-mail with an “invoice” for you to approve. There are many more forms and styles, and more keep coming.
This post focuses on the calls purporting to be from the IRS, and the purpose of this post is to help make you more wary so you do not fall victim to any of these scams.
The IRS recently posted its dirty dozen for 2021, a list of scams that focuses on Pandemic-related scams, like unemployment claims, but also fake charities, urgently seeking donations, and offer in compromise scams, claiming to have ways to reduce your taxes owed. There are other scams that target elderly or people for whom English is a second language. And some scams offer to file conservation easements and improper business credit claims for you.
Calls “from the IRS”
The call insisting that you owe the IRS and need to pay is a scan that has been around for some time. The IRS website, and the recorded message when you are on hold contacting the IRS, says:
The IRS won’t initiate contact by phone, email, text or social media asking for Social Security numbers or other personal or financial information.
The IRS generally first contacts people by mail – not by phone – about unpaid taxes.
The IRS may attempt to reach individuals by telephone but will not insist on payment using an iTunes card, gift card, prepaid debit card, money order or wire transfer.
The IRS will never request personal or financial information by e-mail, text or social media.
Furthermore, the IRS will ask you to confirm your identity before discussing any tax matters with you.
Protect your tax filings
To help insure that no one can file under your social security number, the IRS suggests obtaining an ID PIN for filing your tax returns. The PIN is now available to all taxpayers; you include it when you file your tax returns so that the IRS can verify that it is you filing. This prevents others from filing bogus refund claims under your social security number.
You can also include your driver’s license when filing, so the IRS and state revenue departments can verify that it is you filing, not an imposter.
To protect your finances, you need to be vigilant. Before you answer the phone, what does the caller ID say? Is it a legit company or “unknown”? Before you respond to an e-mail, does the address look like a real customer service company site or something random? Is the grammar or content in the call or message off? If it seems off, it probably is.
Usually, you can find safe and easy ways to confirm the information in question by placing your own call or logging onto the related website online, rather than responding directly.
The IRS recommends setting up multi-factor identification to access your financial information. The IRS suggests more steps here:
Using anti-virus software and set it for automatic updates. Anti-virus software scans existing files and drives on computers – and mobile phones – to protect from malware.
Using a firewall to shield digital devices from external attacks.
Using backup software/services to protect data. Making a copy of files can be crucial, especially if the user becomes a victim of a ransomware attack.
Using drive encryption to secure computer locations where sensitive files are stored. Encryption makes data on the files unreadable to unauthorized users.
Creating and securing Virtual Private Networks. A VPN provides a secure, encrypted tunnel to transmit data between a remote user via the Internet and the company network. Search for “Best VPNs” to find a legitimate vendor; major technology sites often provide lists of top services.
If something smells “phishy,” it probably is. So be cautious, even suspicious of interaction asking for personal and financial information. Set up two-factor verification and an IRS PIN. And let me know if you have questions or concerns. I will try to help.
We face a challenging time for planning: The election resulted in a new President while the rate of Covid-19 infections (and deaths) continues to rise. This has affected the economy, resulted in some tax law changes and may yield more stimulus to restore the economy. Also, there may be more changes in 2021. This post is intended to help you make the best tax-efficient moves before 2021 begins.
2020 year-end tax planning – update on using the tax laws to save you money
In 2018, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. This update replaces the third part from December 2018, as updated December in 2019 – it is our guide for year-end moves to reduce total taxes between 2020 and 2021. But, before getting to the planning steps, we address the uncertainty caused by possible tax changes in 2021 and review some recent changes from earlier this year.
Possible Tax Law Changes under Biden
President-Elect Biden campaigned on raising taxes for corporations and for individuals making over $400,000 of income. However, even if the Senate seats in Georgia go to Democrats in January, the lack of a “Blue Wave,” a sweeping Democratic mandate, means that the tax hikes are unlikely to pass. Furthermore, the President-Elect has made clear that controlling Covid-19 and economic recovery are the top priorities of his new administration.
What did President-Elect Biden propose? He would restore the 39.6% bracket for couples making $622,050 or more ($518,400 for singles), add a 12.4% social security tax for income over $400,000, place a 28% limit on itemized deductions for high income taxpayers, restore the 20% long-term capital gains rate for high income returns (and even apply ordinary rates on gains of taxpayers over $1 million), and limit the Qualified Business Income Deduction and opportunity zone credits. For estate taxes, he would reduce the current $11.58 million exemption to a lower amount, perhaps $5 million or even $3.5 million, and eliminate the step-up in basis at death.
While none of these changes are likely, there may be narrow tax hikes to fund infrastructure building and small tax breaks for lower earners (child/dependent care and elderly long-term care credits). There may also be more stimulus action, such as more Paycheck Protection Program loans and business tax breaks for worker safety measures, as well as retirement savings incentives, tax extenders for items expiring this year, and tax breaks to encourage US manufacturing. We will monitor activity on these matters for comment in future posts.
Changes from the SECURE and CARES Acts for 2020
We wrote about the CARES act earlier this year, which waived the 10% penalty for coronavirus-related distributions from qualified plans of up to $100,000, with three years to pay the taxes due or redeposit as a roll-over, and suspension of required minimum distributions (“RMDs”). The act also allows larger plan loans.
The Secure Act delayed RMDs to age 72 and allowed individuals to contribute to IRAs after age 70 ½ if still working. But the Act also limited the distribution of IRAs to a 10-year maximum for beneficiaries other than spouses and certain others, thus eliminating the “stretch IRA.”
The Families First Act created credits for people unable to work due to Covid-19 illness and due to caring for others. If you are affected, check to see if you are eligible for any of these tax credits.
A reminder on the mortgage interest deductions
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary and secondary residences. Interest on home equity loans is not deductible, except when the home equity indebtedness is used to purchase or improve your primary or secondary residence.
Check taxes already paid
Make sure your total paid to the IRS and state via withholdings and estimates meets the safe harbor rules. If not, you could owe interest for under-withholding.
Now to the planning: Can you act at all?
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the $24,800 standard deduction for married couples (more for over 65 taxpayers, and $12,400 for single taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction). And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (but you can also stop collecting receipts for those deductions).
There is one exception from the CARES Act, which provides a $300 above the line charitable deduction for cash contributions. You get this regardless of itemizing.
Some possible deduction strategies
One technique for getting around the limit on deductions is to bunch certain deductions from two or more years into one year. However, the only deduction that you can easily move is for charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full amount in one year, you can still use this bunching strategy to donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.
The tax planning steps
What can you move? If you are able to itemize, determine what income and deductions you can move from 2020 to 2021 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and a review Roth conversion. Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great – see more at Roth or not to Roth? With the waiver of the 10% penalty for early withdrawals, a Roth conversion may be more attractive. Business owners will want to review our post on planning under 199A for QBID.
What is the effect of moving? Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
The AMT – Finally, watch for the Alternative Minimum Tax (“AMT”). The AMT affects fewer people, but it is still wise to review so you avoid it.
If you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year. The contributions reduce your tax able income while adding to savings. But check out our post on paying debts vs. investing.
If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed. The provision was great when you had an RMD to satisfy, but that was suspended for 2020. That should not stop you if you still have the charitable intent.
The deduction of unreimbursed business expenses was terminated by the new tax law. That hurts many who are working from home this year, as they cannot deduct associated costs.
We wrote about forming an LLC or S Corp. to report business expenses or taking expenses on Schedule C in our 2018 Part III post, but that applies to expenses for that business and we stressed that you will need a valid business purpose to form the LLC or S Corp. or use Schedule C for self-employment and take expenses. Be sure to consult with an attorney before trying any of these ideas.
Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2020, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your portfolio while not counting against the wash sale rule). N.B. – when buying mutual funds late in the year, check for distribution dates so you do not purchase just before dividend and capital gains distributions, as you will owe taxes on those distributions.
If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation. That is very effective tax leverage!
Estate plan review
While you review your taxes, review your estate plan as well. The federal exemption is over $11 million in 2020, so fewer people will owe any federal estate tax. However, that may change in 2021; also, many states still impose estate taxes on smaller estates.
The individual gift and estate tax exemption is due to return to $5 million, adjusted for inflation, in 2026 and could be lowered sooner, as noted above. That tax rate could also go up.
If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education cost – expanded to provide for more than just college – or an ABLE account for disabled dependents. Note, however, that holding appreciated assets for the step up in basis at death may be better than gifting, but this could be eliminated as noted above.
If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2020 and 2021.
Good luck and best wishes for happy and healthy holidays!
As promised, I wanted to let you know the outcome of the 2017 Pan Mass Challenge ride that took place last weekend. Team THANKS rode for the second year and had a 2017 goal of raising $40,000. Thanks to you all, we’re on track for hitting our stretch goal of $50,000 – every cent of which will be on its way to Dana Farber to help spark innovation in cancer treatment, save lives, and actually do something about cancer.
This year, my nephew and two daughters took a year off but we added two new team members Kathy Carlson and Nancy Serpa. We met Kathy on the ride last year through the PMC Pedal Partner program. Her daughter Maddie was battling Ewing’s Sarcoma and is now cancer free. We encouraged Kathy to join our team this year and she did! Nancy has been a long time sponsor of our team, and lost her sister to cancer last year. We also encouraged Nancy to ride with us to do something about cancer and she joined in for the Sunday leg from Bourne to Provincetown. I crashed while training and had to sit this one out with a broken collar bone, but Jonathan Lilienfeld returned to ride with Kathy from Wellesley to P’town, while Steven Branson and Kevin Lewis rode from Sturbridge. The five of them met up in Bourne at the end of Day One to continue on to P’town Day Two.
Here’s Kathy with daughter Maddie – our Pedal Partner – at the Lakeville stop on Day 1 with Kevin, Jonathan, and Paul Kennedy of Team PwC.
Here’s Kathy posing with Maddie’s sign at the Pedal Partner stop – what an amazing turn of events to see Maddie beat cancer, graduate from high school, and be getting ready for college in September – all with the help of Dana Farber, her family and friends, and generous people like you.
In Bourne, riders get a chance to share the many personal reasons they ride – Nancy’s post for her sister Sue is below the “D” near the bottom:
Next morning started before dawn, Nancy was ready to ride her first PMC…
But she hit a road grate in the dark that gave her a flat, and the team had to take over the rescue.
Here’s Steven working on the tire:
With that small bump in the road behind them, team THANKS took on the 20 mph winds of Wellfleet and finished strong at P’town!
This victory picture has become a tradition for every PMC ride.
Though I didn’t have a bike to hoist, I was able to join them all – together we did the hard part – raising nearly $50,000 (so far).
Celebrations followed at our favorite P’town beach bar…
Jonathan, Kathy, Kevin, and Steven were treated to a hero’s welcome on their way back into Boston Harbor on the slow ferry.
Thanks again for joining us – we couldn’t have done it without you.
For Team THANKS with much appreciation,
We’re fighting cancer with Dana Farber by supporting the Pan Mass Challenge
My post-tax season training for the Pan-Mass Challenge, or PMC, did not start off as planned. However, I think I made up for that:
On June 10th, I rode the B2VT from Bedford, MA, to Okemo Ski Resort, Vermont. The 133-mile ride covers 20% more distance than day one of the PMC and has more than double the elevation change (please see my team salute photo above).
I continue to train and promise to be prepared for the PMC weekend in August.
On that weekend, more than 6,000 riders and 3,000 volunteers show our commitment to raising money to battle cancer; 100% what we raise goes to Dana Farber for on-going cancer care, treatment and research.
Please support my ride so we can help make cancer a bad memory; read “why I ride” and donate.