As we gear up for tax season, here is a collection of thoughts and suggestions:
As noted previously, the TCJA expires after 2025, so we encourage planning for all those changes. For some ideas, see our post on turn tax planning on its head for income taxes and see this post on estate planning.
When you work on your IRS form 1040 for 2023, how do you plan to answer the question on digital assets? That question has changed over the years and now reads:
At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?
2023 form 1040
Some tax pros think this question covers items such as a ticket for events like the Super Bowl, as these are non-fungible tokens, or NFTs, being unique and recorded in digital ledgers. Therefore, if you purchased such an NFT, you need to answer “yes.” When in doubt, saying yes may be the best response.
We reported that the SECURE Act 2.0 allows for unused 529 plan contributions to go into a Roth IRAs. Here is a planning suggestion for parents and grandparents: start early with 529 plan contributions so that there is a surplus over college costs that can be converted to a Roth later, within the limits.
There are also some significant cases before the Supreme Court we are watching, including the Moore case on unrealized income.
The IRS continues to deal with a huge backlog of mail to process, including many amended returns. They say that this is due to prioritizing answering calls over processing during the Pandemic.
And the IRS warns again to be wary of phishing attempts by phone, e-mail and text. They have a page on phishing and how to respond.
Many of the expected tax law changes have not materialized, but legislation remains in flux. This means we plan year-end moves while we continue to monitor new legislation. It is safe to bet that income tax rates will rise over the next several years. This may mean putting year-end tax planning on its head, where you increase taxable income for 2021. The goal is to lessen income ultimately taxed in future years. However, you may not want to delay taking deductions until 2022 (so planning not completely on its head?) For the standard approach, see our 2020 year-end post.
Roth Conversion – One way to increase income now, avoiding future income, is to convert part of an IRA to a Roth IRA, converting from taxable to non-taxable distributions in the future. Decide on the amount to convert by projecting the impact of the conversion on your marginal tax rate. Converting to a Roth also saves you from required minimum distributions, RMDs, in future years (but non-spouse beneficiaries still face the 10-year limit from the SECURE Act on IRA distributions).
Back-Door Roth – Along with converting, the “back-door Roth” is still available, at least for 2021, so you can put more retirement funds aside with no tax on future distributions. That is, for those who cannot contribute to a Roth due to income limits, they can contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. If you have other IRAs, that may affect the amount that is taxed, so review this carefully first to see if it still makes sense.
More income – Other ways to increase income for 2021 include billing more for your S Corp., LLC or partnership in 2021, exercising stock options, and selling ESPP shares.
Capital gains – You probably do not want to accelerate capital gains, as those should still be tax at a lower rate in future years.
On to other considerations: first, SALT deductions
The limit on state and local taxes, or SALT, may increase from $10,000 to $80,000. Also, a number of states have created pass-through entity elections so that the S Corp., LLC or partnership pays the tax and deducts against the income of the shareholder/member/partner. This way, their net federal taxable income is reduced, and they get a credit for the payment on their personal tax returns.
The SALT changes may affect your itemized deduction strategy if you are bunching.
Check the details
Declare Crypto – If you had any crypto currency transactions during the year, selling, buying or receiving, be sure to declare on your federal 1040 filing.
Unemployment tax – Remember, unemployment benefits are fully taxable for 2021, so be sure you withheld taxes or paid estimates.
Charities – If you cannot itemize, you still get up to $300 as an above the line charitable deduction, and up to $600 for a married couple.
Child credits – There are changes in the credits for children and dependent care. Let us know if you have questions on the benefits and strategies for maximizing.
Kiddie tax – The so-called kiddie tax has been restored to pre-TCJA terms, so you may want to review filings for the last two years.
Address change – You will want to file form 8822B to indicate the change of address if your corporation, LLC or partnership moves. On that form, you can also change the responsible party so that the IRS knows whom to contact – this is quite important if you sell your business!
IT PIN – If you are concerned about identity theft, consider obtaining an IT PIN as discussed in our post on IRS scams.
Flex and retirement accounts – Check to see if you have any flex account balances that expire; contribute the maximum to your qualified plans; and setup a new qualified plan if you have a new business.
Before you finish, check withholdings and estimates paid
Especially if you increase income in 2021, review your total paid to the IRS and state via withholdings and estimates make sure that you meet the safe harbor rules. If not, you could owe interest for under-withholding.
IRS disaster relief
Have you received a penalty notice from the IRS? The Pandemic was declared a federal disaster. This means it may provide an exemption to the penalties if you can show that you suffered from the Pandemic.
And remember your estate plan review
While you review your taxes, review your estate plan as well. The federal gift and estate tax credit is close to $12 million for 2021, but that may change in 2022. So, if you have excess wealth, you may want to gift while you can, especially if you want to use certain trusts, like a GRAT or QPRT, that may no longer be permitted in future years. For more on estate planning updates, see our estate planning checkup post.
Update: the annual exclusion for gifts rises from $15,000 per person, per year to $16,000 next year.
If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly.
Summary
As you review your 2021-2022 tax planning, consider the impact of future tax rate increases: will bringing future income into 2021 avoid taxes on future income? Then follow through on the details.
Let us know if you have any questions.
Good luck and best wishes for happy and healthy holidays!
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.
Be Vigilant
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.
Conclusion
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.
As Halloween passes, we know that the season of over-buying and over-eating is approaching, so it’s time to prepare. You want to enjoy being with friends and family without having the hangover of overspending, or worse, going into debt to finance all the fun.
Make the gift giving fit
with your cash management
Over-buying does not
make you happier and usually makes the recipient uncomfortable. Also, over-spending is likely to make
achieving your long-term goals more difficult, which can add to the depression
some feel at this time of year.
For gifts, “it’s the
thought that counts” rings true. Most
recipients appreciate being remembered for who they are and what they do. Think back to what you enjoyed most in past
holidays and let that guide you. This
can help you stick to your values as you think through the entire process and
devise your holiday shopping plan. The
time spent together may be far more important and rewarding than unnecessary
giving.
Have a plan
Technology and social
media can make shopping easier, but they also make it easier to overspend and
end up with credit card debt from funding your gift giving.
Part of the reason is that many such purchases are spontaneous. People often regret these unplanned purchases. Over 70% of people in one survey exceeded their budget and over half bought items not on their list. This can make the new year bleak (More than 3 in 4 Americans are stressed about going into debt over the holidays — and technology’s not helping ) Counter this by creating a realistic budget, lookout for sales, review your budget to make sure you are on track.
Budget – If you determine what you can reasonably spend and allocate that to people for whom you want to buy gifts, or give holiday tips, then you have a spending plan that should get you through. When devising your plan, go back to your financial goals to remind yourself why staying on track is so important. Include time for present wrapping to avoid time pressure that encourages splurge buying. Also, you may want to have small gifts on hand for unexpected guests. You can use budget apps, such as NerdWallet, to create a budget. When you do, stick to it!
If the people for whom
you are shopping have wish lists, follow them for ideas. And leave items in your shopping cart
overnight to take a second look and avoid regretting a splurge purchase. Ask “does the person really want or need
this?,” especially if you are shopping for yourself! (It may be wise to avoid, or at least
substantially limit, any buying for yourself.)
Be Wary of Black Friday,
Cyber Monday and other retailer tricks
If you do your
homework, you can determine if waiting in line or buying on line will be best. As stated above, create a budget and stick to
it.
Be on the lookout for
retailer other tricks like flash sales, loyalty cards, incentives to return for
more purchases, misleading refund policies.
Similarly, procrastinating can lead to splurge buying ruled by emotions
such as the need to please everyone and get the shopping done.
Avoid scams
With the pressure of the holidays to address all the gift giving, parties and thank yous, stay vigilant for scams. These can come in the form of bogus IRS and social security calls, credit card offers, computer software deals and fake invoices. There are many phishing sites you can use to check out whether the offers are legit.
Remember, if
you’re unable to tip or give a gift, a thoughtful thank you note will
acknowledge those people who are important to you. You can even make a donation in their
name.
Brace for over-eating
and possibly even depression
This blog is does not
profess to have any expertise in psychology.
Nonetheless, we have all heard how holidays can be disappointing if not
depressing from some. The Hallmark gatherings
promised on TV or social media rarely happen in real life.
If the holidays are depressing, consider volunteering somewhere, such as a soup kitchen, or getting out for some serious exercise. Both can lift your mood as well as either help others or improve your health. Allow time to rest and recover! And try a warm drink, tea not bourbon, or a warm bath.
Take care of yourself –
it’s hard to help anyone else if you are not in good shape yourself. But if you are really experiencing
holiday depression, speaking to people can help, be that family, friends or
professionals.
We wish you all the best for financially sound, and fun, holidays! And let us know if we can help you plan.
Equifax disclosed last week that the personal financial information of up to 143 million users had been exposed in a massive hack last July. This represents roughly two-thirds of all credit card holders, so you may be affected.
The delay in disclosing is troubling, and the hack raises questions about oversight of the credit bureaus and even about the impact on their management. We can see the impact on investors: the Equifax share price has dropped over 20%
While we can discuss these issues and more, the priority is shoring up your personal credit.
Impact
Was your data taken? There are links from Equifax, Norton and others where you can attempt to determine the impact on you personally. However, these sites seem to default to “you may be affected,” even if you put in bogus information.
The good news is that Equifax has responded to consumer pressure to make certain services free.
Act now
You will want to act as soon as possible to keep your financial information safe.
“There are so many entities who need to check your credit: when you’re renting an apartment, getting insurance, a new cell phone, utilities,” Liz Weston, a financial planner and columnist at NerdWallet, told BuzzFeed News. “But at this point the breach is so great” that taking measures to safeguard your identity is worth it. She recommends instituting credit freezes.
Equifax free service – sign up on line for the complimentary service being provided by Equifax, which provides the following:
three-bureau credit file monitoring with alerts,
credit report lock,
scanning of suspicious sites for use of your social security number,
Equifax credit reporting, and
$1 million identity theft insurance covering certain out-of-pocket expenses.
Monitor your cards – review your monthly credit card, bank and loan statements for suspicious activity. You have a right to free credit reports so obtain them and review for unauthorized activity.
Also, watch for unexpected calls or mail, such as debt collectors or people posing as IRS agents, because these may be signs that your information may be in the hands of thieves.
Credit freeze – request a freeze on your credit from all three agencies: Equifax, TransUnion, and Experian. Equifax will not charge you but the others will.
Requesting a credit freeze prevents thieves from using your identity to get loans or credit cards in your name, even if your personal information was compromised by the hack. You essentially pay to bar each of three credit reporting agencies — Equifax, TransUnion, and Experian — from providing a credit report without both your explicit permission and a personal identification number (PIN) that temporarily lifts the freeze. (Freezes do not affect financial institutions or companies you have an existing relationship with, only new ones.)
Make sure to place the freeze with all three bureaus and to keep your PINs for unlocking the freezes in a safe place.
“A credit freeze with only one bureau is incomplete protection,” Mike Litt, the consumer program advocate at the US Public Interest Research Group, a consumer group, said. Consumer experts recommended getting a freeze with all three agencies.
There are companies such as LifeLock that provide bundled services. If cost is not an object, that may be the best course of action. Here is the Lifelock response on Equifax.
Fraud alert – if you are certain that your information has been taken, place alert all three credit bureau websites. You can access the TransUnion site here. Some protection is free, but their premium package costs $9.95
If you are the subject of identity theft, there are many resources now that help you report and recover. The Federal Trade Commission website can help devise a recovery plan to implement.
PINs and passwords – the passwords and PINs you use could be the next issue. You may want to change what you use now and update annually, if not more often.
Updates – Equifax continues to provide updates on the status of the hack and their response.
And news sites continue to report on the hack – see this NY Times article.
Summary
There are many steps to take, and the information taken may not be used for some time. So, you will want to take some if not all the steps outlined above. If you have trouble doing so, or if you have questions, let us know.
