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Protect Your Tax Return From Criminals

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Photo credited to Fine Art America

Most people are familiar with identity theft. They understand that they have to take various measures to protect their financial information from being accessed and exploited by criminals. Unfortunately, many people are less familiar with tax return identity theft. Numerous taxpayers have found that criminals have pocketed their tax refunds after using false identities. How can you reduce the chances that you could become a victim of tax return identity theft? The following tips should help.

 

File Your Return ASAP

File your tax return as soon as possible, especially if you anticipate a tax refund. By filing early, you limit the time available to criminals to file a fraudulent return in your name.

 

Don’t Fall for “Phishing” Attempts

Criminals typically use email or a phone call to try and get taxpayers to reveal personal information. Very often, they pretend to be IRS officials attempting to verify the accuracy of your Social Security number or some other crucial piece of personal identifying data. This is known as “phishing.” The reality is that the IRS never asks for financial or other personal information online or by email or text and never calls to demand immediate payments of back taxes, interest, or fines — it simply mails a bill to taxpayers.

And remember to keep your computer secure. Use security software that updates automatically and includes a firewall, virus/malware protection, and file encryption for sensitive data.

 

Be Careful With Your Personal Information

Do not carry your Social Security card or any documents that list your Social Security number in a wallet or pocketbook. Keep old tax returns and tax records in a secure location and shred any tax documents before disposing of them. Regularly check your credit report and bank and credit card statements. And don’t share too much personal information on social media that can be used to impersonate you.

 

What to Do If You Are Scammed

If you are a victim of tax-related identity theft, respond immediately to any IRS notice and submit Form 14039, Identity Theft Affidavit. Be sure to file a complaint with the Federal Trade Commission at identitytheft.gov. Follow up and contact one of the three major credit bureaus to have a “fraud alert” placed on your credit records, and contact your financial institutions.

 

For more information on protecting yourself from identity thieves, visit https://www.irs.gov.

 

Will the SECURE Act Affect Your Retirement Planning?

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Photo credited to Prudential-Newsroom
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019. The Act will likely impact large numbers of working Americans as well those already retired. In general, the Act is intended to increase access to tax-advantaged retirement plans and to help prevent older Americans from outliving their assets.
Here are some of the changes that could affect your planning.

 

Delayed Deadline for Taking Required Minimum Distributions

Tax law has generally required individual retirement account (IRA) owners and retirement plan participants to begin taking required minimum distributions (RMDs) from their accounts once they reach age 70½. The new law pushes back the age at which these distributions must begin to age 72 for IRA owners and plan participants born on or after July 1, 1949. This change allows individuals to take advantage of their retirement account’s tax-deferred nature for a longer period.

No Age Limit for Making Traditional IRA Contributions

Beginning with the 2020 tax year, the new law eliminates the 70½ age limit for making annual contributions to traditional IRAs. This is a plus for those people who continue to work past age 70½ and want to keep saving for retirement on a tax-deferred basis.

Penalty-Free Birth and Adoption Distributions

The new law also expands the exceptions to the 10% penalty for early withdrawals from IRAs and other tax-deferred retirement plans by adding an exception for “qualified birth or adoption distributions” up to $5,000. The new law defines a “qualified” birth or adoption distribution as a withdrawal from an IRA or other eligible retirement plan made during the one-year period beginning on the date the IRA owner’s or the plan participant’s child is born or the adoptee’s adoption is finalized. If desired, parents may replenish their retirement savings by repaying the amount distributed.

Restrictions on Stretch IRAs

The new law places severe restrictions on the use of “stretch” IRAs. A stretch IRA generally permitted beneficiaries to take their RMDs from an inherited IRA over their life expectancy. Thus, beneficiaries were able to stretch payments from the inherited IRA over many years and potentially pass on the inherited IRA to their own beneficiaries. The SECURE Act changes the RMD rules for beneficiaries of IRA owners (and plan participants) who pass away in 2020 or later. Under the SECURE Act, the use of stretch IRAs is restricted to a limited group of IRA beneficiaries. The specific details on who is eligible to use stretch IRAs is complex, and IRA owners who base their estate plans on the use of a stretch IRA should consult with a financial professional to see how they might be impacted.

Small Business Retirement Plans

Good news if you own a small business — the SECURE Act provides incentives to make it easier for you to establish a retirement plan. Starting in 2020, eligible employers that establish a 401(k) or SIMPLE IRA plan with automatic enrollment may qualify for a new tax credit of $500 per year for up to three years. In addition, the existing credit for small employer plan startup costs has increased to as much as $5,000 per year for three years. Previously, the annual credit maximum was $500. Employers also have more time to establish a qualified retirement plan. Previously, a qualified plan, such as a profit sharing plan, had to be adopted by the last day of the employer’s tax year to be effective for that year. The SECURE Act allows a qualified plan to be adopted as late as the employer’s tax filing deadline (plus extensions).

 

Your financial and tax professionals can provide more details about these and other important SECURE Act changes and how they may affect your retirement planning.

 

Do You Need To File A Form 1099?

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If you made or received a payment in a calendar year as a small business or self-employed individual, you most likely are required to file an information return to the IRS. Click through to learn what this means.

If you engaged in certain financial transactions during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS. Below are some of the transactions that you have to report.

  • Services performed by independent contractors — those not employed by your business.
  • Prizes and awards, as well as certain other payments — termed other income.
  • Rent.
  • Royalties.
  • Backup withholding or federal income tax withheld.
  • Payments to physicians, physicians’ corporation or other suppliers of health and medical services.
  • Substitute dividends or tax-exempt interest payments, and you are a broker.
  • Crop insurance proceeds.
  • Gross proceeds of $600 or more paid to an attorney.
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual.
  • Dividends and other distributions to a company shareholder.
  • Distribution from a retirement or profit plan, or from an IRA or insurance contract.
  • Payments to merchants or other entities in settlement of reportable payable transactions — any payment card or third-party network transaction.

Being in receipt of a payment may also require you to file an information return. Some examples include:

  • Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals.
  • Sale or exchange of real estate.
  • You are a broker and you sold a covered security belonging to your customer.
  • You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others.
  • You released someone from paying a debt secured by property, or someone abandoned property that was subject to the debt or otherwise forgave their debt to you (1099-C).
  • You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than in a permanent retail establishment.

Keep in mind that information is for businesses. You will not have to file an information return if you are not engaged in a trade or business. You also will not have to file an information return if you are engaged in a trade or business and 1) the payment was made to another business that’s incorporated, but wasn’t for medical or legal services or 2) the sum of all payments made to the person or unincorporated business was less than $600 in one tax year.

This is just an introduction to a complicated topic, and the mechanics of filing such a return are filled with essential details. If you’re running a business, even a small one, be sure to give Watson CPA PLLC a call.Contact Us!

Happy Tax Season Checklist

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This checklist will assist you in gathering your tax papers for this year.

Once you have them all together, please send them to us in one of the following two ways.

  • Email. Please be sure to email us only 1 PDF that is encrypted with all your correspondence merged into that 1 PDF, not larger than 3 MB. This way we only print one file.
  • Click here to upload your documents to the client portal.

 

How To Tell If Your Business Is Profitable?

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Some tools of the trade are specific. Carpenters need hammers. Programmers need computers. Financial statements, however, are critical tools for all businesses. They allow you to monitor profitability, improve financial management, and provide banks and other lenders with vital information.

Primary Tools

There are several financial statements. The two most well-known are the balance sheet and income statement.

A balance sheet shows the assets of your business and the amounts it owes (liabilities) on a particular date. The difference in the two numbers is the amount of owners’ equity.

An income statement is a summary of your business’ revenue and expenses over a certain period of time. It reveals your income (or loss) from core operations and then incorporates other income and costs and any extraordinary items to arrive at a net income figure.

Level of Services

A certified public accountant (CPA) can provide different levels of service when it comes to financial statements. How you plan to use the statements will determine the level of review or verification required.

Compilation. If you want reports mainly for internal use, a CPA will simply compile the figures you provide and prepare the appropriate statements. No assurances are made about whether the statements are presented fairly.

Review. Potential lenders will generally require more than a simple compilation. The CPA will need to provide limited assurance that, based on limited procedures, nothing came to the accountant’s attention that would indicate that material changes to your financial statements are necessary. That requires looking at your accounting policies and practices, how your business operates, the actions of your board of directors, recent changes in your business, and so forth.

Audit. In some instances, you may need to have audited financial statements prepared. This is the highest level of service and requires the CPA to thoroughly examine your books and records and all of your financial policies and procedures. Then, the CPA can provide an opinion about your statements.

Self Employed? Take Advantage of These Tax Breaks

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Tax breaks can be a bonus to the self-employed. If you own your own business — or are thinking about it — here are some tax deductions you may be eligible to claim.

Self-employment (SE) tax. When you’re self-employed, you have to pay SE taxes on your earnings instead of the Social Security and Medicare taxes that employees and employers pay. You’ll be able to deduct a portion of your SE taxes.

Health insurance. If you’re not eligible for coverage under a plan offered by your spouse’s employer, you can deduct the costs of health, dental, and long-term care insurance premiums paid for yourself, your spouse, and your dependent children. (Requirements apply.)

Office at home. You can deduct a percentage (usually based on square footage) of your mortgage or rent, utilities, property taxes, homeowners insurance, and home maintenance costs. Alternatively, you may use the “safe harbor” method, which allows a deduction of $5 per square foot (up to 300 square feet). But be careful — you must use the space regularly and exclusively for business to claim the deduction.

Thinking about retirement. Deductions for contributions to a tax-deferred retirement plan, such as a SEP-IRA, SIMPLE IRA, Keogh plan, or solo 401(k) plan, will reduce your current tax bill.

Talk and surf. You can deduct phone, fax, and Internet expenses directly related to your business.

Vehicle use. The cost of driving a car for business is deductible. You can use either the IRS standard mileage rate or your actual expenses to compute your deduction.

Interest. Interest on business loans and business purchases charged to a credit card are deductible.

Food, fun, and travel. You can generally deduct 50% of the cost of business meals and entertainment if you meet certain tax law requirements. Other business travel expenses, such as lodging, are 100% deductible.

Make sure you keep good records and give Martisha Welch CPA a call today if you have any questions.