Category Archives: Taxes

Be wary of these scams – IRS and investments

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It seems that we hear of a new internet or phone scam on a weekly basis. These scam artists are getting bolder and more sophisticated with each new endeavor. So, we wanted to alert you to a few new ones where the scammers are pretending to be IRS agents and financial planners.

**Taxpayer Scams**
This past year, the IRS issued a strong warning to consumers against an aggressive telephone scam. The scammers call taxpayers to inform them they owe outstanding taxes and demand payment over the phone. To lend to their credibility, the scammers will have the last four digits of the taxpayer’s social security number. If the taxpayer refuses to make a payment, the caller threatens the taxpayer with jail time, loss of driver’s license and, in some cases, deportation. When the taxpayer refuses to provide this information, the scammers call back pretending to be a local police officer.
If you receive one of these calls, the IRS requests that you take these steps:
• “If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
• If you know you do not owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.”
The IRS wants you to know that they never initiate contact with taxpayers via email to request personal or financial information. They also never ask for PINs, passwords or similar confidential access information for credit cards, banks for other accounts. If you receive an email claiming to be from the IRS, you should forward it to phishing@irs.gov.

**Investor Scams**
The Financial Industry Regulatory Authority (“FINRA”) recently published a warning to registered representatives about three different scams where registered representatives may be subject to “Firm Identity Theft”.
The first scheme involves scammers fraudulently using the identity of legitimate registered representatives and brokerage firms to con investors out of their money by building websites that mirror legitimate websites of broker-dealers and registered representatives. The scammers claim they are registered with FINRA and SIPC. Victims who fall for this tactic are tricked into making payments or investments through the site. The scam artists collect the money and then disappear.
The second one puts a new twist on an old tactic by perusing international investors with and “advance fee scheme” or “mirror fraud.” Again, scammers use the identity of a legitimate broker-dealer and contact investors with an attractive offer. Examples of these offers include lifting a stock restriction or purchasing investors’ shares for an amount significantly above their market value. In return, the investor is asked to pay certain fees and expenses in advance. Once the investor has paid the fees, the fake broker-dealer steals the money and disappears.
The last scheme involves fraudulent checks. The scammer, using the stolen identity of a registered broker-dealer, contacts a customer is an attractive offer, like offering to overpay for an item on Craigslist. When the scammer sends the check, it’s for a much larger amount than the agreed-upon price. The scammer then requests the seller to mail the difference back to the scammer. In an effort to convince the customer of the stolen identity, the fraudster will use the broker-dealer’s true address as the return address on the mail sent to the customer. Believing they are dealing with a real broker-dealer, the customer is persuaded to send money. But, when the seller cashes the original check, it bounces.

Protecting yourself from these scams requires vigilance. If someone contacts you with and offer that’s too good to be true, it likely is!

Update on the impact of the 3.8% Medicare surtax

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Experimented with some returns on our tax software, here is an example of the impact of the surcharge, from forms 8959 and 8960, on the taxes due.

For a client with high W-2 income, as well as interest and dividend income, shifting $100,000 of income from dividends to W-2 income decreased the surcharge by $3,630 (the taxes remained unchanged).

In contrast, shifting $100,000 of salary to dividends increases the surcharge by $3,601 as does shifting $100,000 of salary to capital gains.

The message so far is: when there is substantial earned income, minimizing investment income is worth over 3% for the amount you move. That means that, all other factors being equal, an investment that had no interest, dividend or capital gains distributions will have a better after-tax return than one that does.

Some interesting statistics on risk of an IRS audit, from The Kiplinger Tax Letter, 1-17-14

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“IRS is struggling on the enforcement front. 2013’s individual audit rate fell to 0.96%… one out of every 104 filed returns. It’s the first time in seven years that this key statistic dipped below 1%. And we expect this figure to sink even lower for 2014 as the agency’s resources continue to shrink. The number of enforcement personnel has decreased to its lowest level in years, partly due to budget cuts and reassigning agents to work identity theft cases.”

The Tax Letter breaks down to .88% for below $200,000 of income, 2.7% for above that level but below $1 million, and 10.85% for over $1 million of income (down from 12.14%)

The Tax Letter indicates certain red flags (some text omitted)
“Claiming 100% business use of a vehicle. They know that it’s extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.
“Deducting business meals, travel and entertainment on Schedule C.
Big deductions here are always ripe for audit. A large write-off will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation requirements.
“Writing off a hobby loss. Chances of losing the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the activity sounds like a hobby…dog breeding, car racing and such…IRS’ antennas go up higher.
“Failing to report a foreign bank account. The agency is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success in getting foreign banks to disclose account owner information. This is a top IRS priority. Keeping mum about the accounts can lead to harsh fines.
“Taking higher-than-average deductions. IRS may pull a return for review if the deductions shown are disproportionately large compared with reported income. But folks who have proper documentation shouldn’t be afraid to claim the write-offs.”

The last phrase is the key: if you have a proper reporting position with full documentation, then the risk of any adverse determination is drastically reduced (but you have the time lost responding if the IRS does raise a question).

Let me know if this raises questions for you.

Massachusetts enacts the Massachusetts Uniform Probate Code (“MUPC”) Many other states have or will do the same

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(While the following applies to Massachusetts, there are many other states that have recently made the same changes)
Massachusetts adopted the “MUPC” on March 31, 2012. It affects almost every aspect of the law of wills and the administration of estates including changes outlined below:
• Personal Representative: The law does away with classifications of executors, temporary executors, administrators, special administrators and the like by adopting the one-size-fits-all title of “personal representative.” The personal representative acts for people with a will (“testate”) or people without (“intestate”).
• Descendants: Any portion of the estate which passes to the decedent’s descendants will pass under a new system of distribution called “per capita at each generation.” Under this rule, living children inherit equally. If a child pre-deceases the parents, and has living children, the shares of all deceased children are combined and divided equally among all the surviving children.
• Effect of Divorce on the Estate Plan: The impact of divorce is broadened from partially revoking wills and unfunded revocable trusts to expressly apply to non-probate transfers, such as life insurance policies and trusts, whether funded or unfunded, in the case where an individual has the sole power to make certain changes to at the time of the divorce or annulment. The new law also operates to revoke bequests to relatives of the ex-spouse, as well as appointments of such relatives of executor or trustee under certain situations.
• Effect of Marriage on Will: Where marriage used to automatically revokes a prior will, the MUPC does not provide for such automatic revocation. Instead, the will survives, and any legacy to descendants of the decedent (who are not descendants of the new spouse) is preserved. If any part of the estate is left to persons other than such descendants, the new spouse would receive his or her intestate share under law, to be satisfied from the assets left to such other persons (and from any bequests made to the surviving spouse, if any, in the premarital will). The testator’s choice of personal representative and guardian of minor children is also preserved. Note that this rule can be avoided by updating the will after marriage.
Because of these changes to the MUPC, it is important that your estate planning documents are up to date. If you have not updated your estate plan recently, be sure to do so as soon as possible.

Tax Law Changes Coming, including raised capital gains and dividend tax rates

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This month, President Obama released his proposed FY 2014 budget which contains new taxes, limits on deductions, and other changes intended to meet the goal of raising more than $580 billion in revenue.
The most significant of these is the termination of capital gains breaks and qualified dividend treatment, causing them both to be taxed as ordinary income. The Kiplinger Tax Letter suggests taking capital gains before 2015 to lock in the lower rate. However, as always, do not let a tax strategy override a good investment plan.
Here is a summary of other changes that may affect you:
The 28% Limitation:
• Affects married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000.
• Limits the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%.
• Applies to all itemized deduction including charitable contributions, mortgage interest, employer provided health insurance, interest income on state and local bonds, foreign excluded income, tax-exempt interest, retirement contributions and certain above-the-line deductions.
The “Buffet Rule”
• Households with income over $1 million pay at least 30% of their income (after charitable donations) in tax.
• Implements a “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million.
Estate, gift, and generation-skipping transfer (GST) Tax
• Reintroduce rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained.
• This change would take effect in 2018.
• Top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
The Kiplinger Tax Letter anticipates the changes being acted on as early as 2014. On April 23, 2013, Max Baucus (D-MT), the head of the Senate Finance Committee, announced he would retire from the U.S. Senate at the end of his term in 2015. In The Kiplinger Tax Latter, Vol. 88, No. 9, Kiplinger predicts that “he’ll push to make revamping the tax code his legacy.”
You may feel as though you are done with taxes and do not need address them for another year. Resist that urge and schedule a meeting with us so we can review the potential impact of proposed tax changes on your portfolio and investments. We can also discuss the best strategies for saving money on your 2013 and 2014 tax returns.