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Identity Theft and Your Taxes

11/21/2014

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I’m sure you are aware of the serious problem of identity theft in our country today.  We hear stories of it every day.  We are rightly concerned about the theft of our important data stored by vendors, banks and government agencies.

But many of you may not be aware of the problem from the perspective of filing your taxes.

Identity theft is the biggest complaint received by the FTC (Federal Trade Commission).  In 2010 about 15% of complaints dealt with tax returns.  Now that number is 43%.

At a recent educational event I attended, the presenter talked about this growing problem.  Our presenter was a former official in the IRS and is now in private practice.  He suggested that identity theft is the biggest fear of the IRS.  He said that this problem is costing us billions of dollars.

It is vital that you protect your identity when filing your tax returns.  If your identity is stolen and a fraudulent return is filed, you will probably wait at least 180 days before you see your refund money.

This problem was brought home to me last filing season. A client discovered that his daughter’s tax returned was rejected because it had already been fraudulently filed.  The matter was eventually resolved (she did receive her refund) but only after many weeks of calls and letters.

What is causing this?

There are many factors but the two largest are 1) Electronic filing of tax returns, and 2) Refundable tax credits.

I was at the birth (1991 in Indiana) of the electronic filing movement.  I immediately saw the increased productivity available with this new internet based means by which to file tax returns.  However, many times blessings are accompanied by curses.  The problems of Internet theft extend even to the IRS. 

The second factor is the motivating factor.  Quite frankly, if the government was not trying to give away so much of your money to so many people, there would be very little reward for fraudulent tax filing. 

I remember just a few years ago when the government wanted to credit thousands of dollars for the purchase of a new home.  In the first year of this program, NO documentation was required!!!  No closing statement.  No deed.  No Nothing!  Would it surprise you to learn that billions of dollars were wasted on giving thousands of dollars to people who actually did NOT buy homes?  And, many were not even the real people filing the tax return?

All refundable credits-child credit, earned income credit, tuition credit-are incentives for people to steal.  These credits may be politically/economically the right thing to do, but clearly, some other means of receiving these credits needs to be created to thwart the growing problem of fraudulent tax return filing.

Protect yourself.  Protect your identity.  If you do experience identity theft in the filing of your tax returns, call us.  We can help retrieve your money.


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Obamacare: Lies, Deception, and Your taxes

11/15/2014

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The man pictured to the right, Jonathan Gruber, has been featured all over the internet and on some news organizations as one of the (highly paid) architects of the “Affordable Care Act”.  He has revealed just how deceptive the process was in passing this monstrosity of a bill (which no one read except those who wrote it).

It would be nice if we could void legislation passed in this manner, just like we can void a fraudulent contract.  Alas, laws cannot be voided even if fraud and lies were told to push the legislation through the Congress.  The best we could hope for is that those who testified before Congress, under oath, would be held accountable for their perjury.

Even though this law, in my opinion, should be completely reversed, it is highly unlikely that will happen anytime soon.  So, we are left with calculating the taxes/penalties that are assessed under this law.

Shared Responsibility
This is the name of the tax you pay IF you have not purchased health insurance this year.  Most of my clients will not pay this tax because they already have health insurance coverage through their employers.  Some have health insurance as individuals because they are self-employed or their employers do not provide coverage.

For the few clients out there who DO NOT have coverage, they are going to pay this “shared responsibility” tax.  What is that tax? 

The GREATER of:

1.     $95 for an individual or $285 per family OR,

2.     1% of your household income that is GREATER THAN your income tax filing threshold (approximately $10,000 per individual, $20,000 for a family).

For example, if you are married and make $50,000 (the median income in the United States) your tax will be $300 ($50,000-$20,000 X 1%). 

Sounds simple-right?  Wrong!  There are about 16 exemptions from this tax which many of my clients may be eligible for. 

So….this is the year you want to get professional help on your tax return.  We will be prepared to help you navigate this complicated process.  If you are falling into this “shared responsibility” trap, please call for an appointment so that we can help you with a possible exception to this new tax.


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Rollover versus Distribution

11/8/2014

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Perhaps the most frustrating experience I have as a tax professional is calculating the tax from an early distribution of an IRA or other pension account.

These situations usually occur when you are leaving an employer who sponsors a 401K or other pension plan. This situation almost always creates a balance due.  Clients believe they are covered because taxes were withheld.  But, the taxes withheld seem to NEVER be enough to cover the amount owed.

There are 3 taxes on these early distributions.  First, there is a 10% penalty on the gross amount of the distribution.  Second, there is a federal income tax at the highest marginal bracket you are now in because of the extra income you are now recognizing.  Third, there are state and local income taxes that are owed (for which there never seems to be withholdings).

The taxes on these distributions are easily avoidable.
  • First, do not take the distribution in cash.  Roll the distribution into a personal IRA.  It is easy to set up your own IRA.  Do it at the bank.  Call you insurance agent.  Call your broker.  Call someone.  Just don’t take that money!  Roll it over into your own personal IRA! 
  • Second, find out if you qualify for a penalty exception.  Even though you will owe federal and state income taxes on anything you distribute, you might avoid the 10% penalty.  There are twelve exceptions.  The most common involve health or education expenses.  

Here is where we can be helpful.  Call us before you take the money.  Do just a little bit of planning.  There have been many situations where I have saved clients thousands of dollars in taxes from distributions that they really did not need.  There was NO emergency.

And even if there is an emergency, a little bit of planning in the way you take the money-or the time that you take the money, can save several hundred, if not thousands of dollars in taxes.

Don’t give your hard earned pension money away to the IRS!  Call us to find out how to take the money you have saved with the lowest possible tax liability.

Ralph Eldridge

November 8, 2014



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    Ralph Eldridge, CPA

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