https://www.taxgirl.com Mon, 07 Oct 2019 15:07:00 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.4 https://www.taxgirl.com/wp-content/uploads/2019/05/taxgirl-logo-round-150x150.jpg https://www.taxgirl.com 32 32 Scammers Target Genetic Testing As Medical & Tax Benefits Expand https://www.taxgirl.com/2019/09/04/scammers-target-genetic-testing-as-medical-tax-benefits-expand/ https://www.taxgirl.com/2019/09/04/scammers-target-genetic-testing-as-medical-tax-benefits-expand/#respond Wed, 04 Sep 2019 15:03:54 +0000 https://www.taxgirl.com/?p=39169 Genetic testing kits are all the rage these days—and recent tax news may make it even more affordable. Taxpayers may now get a tax break for some testing, piquing interest for some taxpayers. Unfortunately, the increased popularity also makes genetic testing kits ripe for scammers. 

The U.S. Department of Health and Human Services (DHHS) Office of Inspector General recently issued an alert about a fraud scheme involving genetic testing. The scheme, which tends to target seniors, offers Medicare beneficiaries “free” screenings or cheek swabs for genetic testing in return for Medicare information. Those who agree to the testing or verify Medicare information may be given a cheek swab, an in-person screening or receive a testing kit in the mail, even if it is not ordered by a physician or considered medically necessary. 

As part of the scam, even though the testing isn’t ordered by a physician or considered medically necessary, Medicare is billed for the test. If Medicare denies the claim, the testing or ordering company still wants to get paid. As a result, the Medicare beneficiary—that might be you—could be on the hook for the entire cost of the test. In some cases, that could be thousands of dollars.

(You can read more about the scheme here.)

The best way to protect yourself? Your doctor—not a company or a salesperson—should order genetic testing. A good rule of thumb? If anyone other than your physician’s office requests your Medicare information, do not provide it.

If the term “medically necessary” sounds familiar, it’s similar to the standard that the Internal Revenue Service (IRS) uses for medical expenses deductions and inclusion under a Flexible Spending Account (FSA) or Health Savings Account (HSA). For federal income tax purposes, medical expenses that qualify as deductible include as a treatment for a diagnosed disease or condition and must be specifically ordered by your doctor (in other words, prescribed). Medical expenses include visits for routine medical, dental and vision care, as well as specialist care, and also include treatments, including medications and follow-up visits. Medical expenses may also include associated out-of-pocket costs, like mileage (for mileage costs in 2019, click here). Medical expenses that would qualify for the medical and dental expenses deduction are typically the same as those which qualify for FSA and HSA purposes.

(You can read more about medical expenses here. For more on HSAs and preventative care, click here.)

That standard means that genetic and ancestry tests to find out if you’re related to the Queen—or if you actually come from Italy—are not tax-deductible. However, a recent Private Letter Ruling (PLR) issued by the IRS suggests that you may deduct the cost of genetic testing that relates directly to health services like diagnostics and genetic markers for cancer. 

(You can read the PLR, which downloads as a PDF, here. A quick reminder: PLRs are issued to an individual taxpayer in response to a particular set of facts. You can’t rely on a PLR as precedent, but it does give you a good sense of the IRS’ position on a particular matter.)

This year, the company, 23andMe, which is regulated by the Federal Drug Administration (FDA), got approval to offer risk analysis for nearly a dozen genetically linked diseases. One of their testing plans, the Health + Ancestry plan, now includes testing for genetic health risks and carrier status. If you opt for a combined plan like that one—with medical and non-medical markers—only the cost of genetic testing may be considered a qualified medical expense. You’ll have to allocate the price of the medical care portion as a portion fo the total paid for the kit. 23andMe has embraced the latest PLR, and has even posted a calculator on its website to help taxpayers determine the portion that might be appropriate for FSA and HSA coverage.

A quick word of caution: Not all companies are created equal. While some companies may offer genetic testing kits for legitimate purposes, it’s clear from the DHHS alert that scammers are trying to take advantage. Do your homework and use caution before providing your information. If you have questions about whether a specific test might qualify for HSA, FSA, federal income tax or Medicare purposes, check with your tax or benefits professional.

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Got Damage? Claiming A Casualty Loss After A Hurricane Is Trickier After Tax Reform https://www.taxgirl.com/2019/09/02/got-damage-claiming-a-casualty-loss-after-a-hurricane-is-trickier-after-tax-reform/ https://www.taxgirl.com/2019/09/02/got-damage-claiming-a-casualty-loss-after-a-hurricane-is-trickier-after-tax-reform/#respond Mon, 02 Sep 2019 15:00:18 +0000 https://www.taxgirl.com/?p=39167 Hurricane Dorian made landfall in the Bahamas over the weekend. The category 5 storm has been called the strongest storm to ever threaten the east coast with maximum sustained winds of over 185 mph. According to the National Hurricane Center, “Although gradual weakening is forecast, Dorian is expected to remain a powerful hurricane during the next couple of days.” This means that strong winds, heavy rains, and storm surges are expected to impact parts of the southeastern United States from Florida to New Jersey as the slow-moving storm moves north, putting lives and property at risk. 

In years past, taxpayers who suffered an economic loss due to a natural disaster like a hurricane could claim a deduction on their federal income tax return. That changed in 2018. Under the Tax Cuts and Jobs Act (TCJA), losses for individuals are now only deductible to the extent they are attributable to a federally declared disaster (federal casualty loss). Additionally, since you can no longer claim any miscellaneous itemized deductions (more on those here and here), business casualty losses of property used in performing services as an employee cannot be deducted or used to offset gains.

federal casualty loss involves casualty or theft loss of personal-use property that is attributable to a federally declared disaster. The casualty loss must occur in a state receiving a federal disaster declaration. If the loss isn’t attributable to a federally declared disaster, it isn’t a federal casualty loss, and you may not claim a casualty loss deduction unless an exception applies. 

For a list of federally declared disaster areas, check out the Federal Emergency Management Agency (FEMA) website. You’ll find the list specifically attributable to Hurricane Dorian here.

(There is an exception to the rule. If you have personal casualty gains reported on line of your form 4684 – more on that in a bit – you may deduct personal casualty losses that aren’t attributable to a federally declared disaster to the extent they don’t exceed your personal casualty gains.)

Typically, a casualty loss is defined as the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event. That includes a hurricane, flood, tornado, fire, earthquake, or even volcanic eruption. A casualty loss does not include normal wear and tear or damage that happens over time, like termite damage.

To claim a casualty loss on your federal income tax return, you must itemize your deductions using Schedule A, Itemized Deductions (downloads as a PDF). Schedule A looks a bit smaller these days, so now you’ll report the loss on line 15 of that form. You’ll find it just below the section where you’d report charitable gifts:

IRS Schedule A casualty losses
KPE

The number that goes on Schedule A, line 15, is figured using federal form 4684, Casualties and Thefts (downloads as a PDF). Right off the bat, you’ll notice that the form looks different than before. Specifically must indicate that your casualty loss is attributable to a federally declared disaster by ticking a box and entering the FEMA disaster declaration number:

Form 4684 IRS
KPE

On Page 1, at Section A of that form, you’ll report any damage or loss of personal-use property like your home or car. On Page 2, at Section B of that form, you’ll report any damage or loss of business or income-producing property.

If your property is personal-use property or is not entirely destroyed, the amount of your loss is the lesser of your adjusted basis or the decrease in the fair market value of your property because of the damage. For this purpose, your basis is typically what you paid for the item plus any long term improvements (like an addition).

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis. For this purpose, your basis is typically what you paid for the item plus any long term improvements less any depreciation that you might have previously claimed for your business property.

To the extent that you could salvage your property or if you were reimbursed by insurance, you must report those adjustments. If you expect to be reimbursed by insurance but haven’t yet received any money, you have to report that, too. Don’t worry: you can always amend your return (or otherwise report the adjustment on next year’s return) if it turns out that you received more or less than expected.

Some property may not be covered by insurance. In fact, most homeowners and renters insurance does not typically cover flood damage. According to the National Flood Insurance Program, more than 20 percent of flood claims come from properties outside the high-risk flood zone and flood insurance can pay regardless of whether or not there is a presidential disaster declaration.

For damage not covered or reimbursed by any insurance, subtract $100 for each event (meaning storm or disaster). Next, subtract 10% of your adjusted gross income (AGI) from that amount to calculate your allowable loss.

Here’s a quick example:

Your AGI is $50,000. You suffered damage to your home during a hurricane, and your home is located in an area attributable to a federally declared disaster.

The value of your home decreased by $15,000. You received $2,000 in insurance money. Your initial loss is $15,000 less $2,000 (insurance), or $13,000. That amount is reduced to $12,900 ($13,000 less $100). Finally, subtract $5,000 (10% of your AGI). Your casualty loss, for tax purposes, is $7,900.

If, after you figure your loss deduction, it’s more than your income, you may have a net operating loss. However, you don’t have to own a business to claim a casualty loss. You can find out more about operating losses here.

As with most deductions, you’ll want to keep excellent records. It’s a good idea to take pictures of the damage: hopefully, you have some before pictures to compare to the after. Keep receipts of repairs and replacement values. In some cases, you may need or want to obtain an appraisal.

(You can find out more about tax, insurance and business records, here.)

Casualty losses are generally deductible in the year the loss occurred. However, if you have a casualty loss from a federally declared disaster, you can choose to treat it as having occurred in the previous year.

(You can find out more about losses at IRS Publication 547, which downloads here as a PDF.)

Tax relief other than casualty loss deductions may also be available, including extensions of time to file and make payments. To find out if you may be affected, check back with me, or head over to the IRS website for updates.

As terrible as disasters are, they can also bring out the good in people. Remember that your gifts to qualifying charitable organizations are tax-deductible (again, assuming you itemize) in the year that you make the gift. Be generous, be smart, and get receipts. You can find out more here.

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Before A Hurricane Hits, Here’s How To Protect Your Tax, Insurance And Business Records https://www.taxgirl.com/2019/08/31/before-a-hurricane-hits-heres-how-to-protect-your-tax-insurance-and-business-records/ https://www.taxgirl.com/2019/08/31/before-a-hurricane-hits-heres-how-to-protect-your-tax-insurance-and-business-records/#respond Sat, 31 Aug 2019 14:55:02 +0000 https://www.taxgirl.com/?p=39165 Late last night, Hurricane Dorian became a Category 4 hurricane with the maximum sustained winds of near 145 mph (225 km/h). Dorian is expected to remain a powerful hurricane and will likely make landfall on the U.S. East Coast later this week – bringing flooding rains and heavy winds. While the storm is unpredictable, the National Hurricane Center has advised folks in the path of the storm to have a hurricane plan in place and to monitor the storm closely. At the same time, the Internal Revenue Service (IRS) is reminding those individuals and businesses in other parts of the country that it’s a good time to create or update their emergency preparedness plans.

Your emergency plan should also include ways to protect the things that you own, including valuables. Here are some things to keep in mind:

  • Protect original documents. Records you should keep include bank statements, tax returns, deeds, and insurance policies (for more, click here).
  • Make sure you keep your documents in a safe place. There is no single “safe place” for records: it depends on your lifestyle. In my case, it’s a mix of keeping records above-ground (basements in this part of the world can be damp) and away from prying eyes and sticky fingers (since we have kids). You’ll want to consider not only moisture, but pests, sun-bleaching, and other nature-related alterations when making decisions about where to store documents. 
  • Records should also be easy to retrieve. I don’t recommend safe deposit boxes for tax and other business documents because they can be inconvenient. Locking file cabinets and home safes (fireproof is best) are good alternatives. 
  • Consider scanning select records and storing them electronically. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22 (downloads as a PDF). Be sure that your scanned or electronic receipts are as accurate as paper records. Your records must be organized, and you must be able to produce them in a hard copy form if needed.
  • Better safe than sorry. If you rely on the cloud for offline storage, be sure that it’s both secure and that there’s a dependable backup system. Make sure that your advisors do the same (more here).
  • Do not assume that your tax professional will retain sufficient copies of your records for you. It’s your responsibility to produce documentation to the IRS upon request so don’t toss out your information because you assume that you can get them from your accountant or tax preparer. 
  • Have a backup plan. Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. While you can always order tax transcripts and tax histories from the IRS in a pinch (more here), you’re at their mercy as to availability, accuracy, and completeness. Additionally, the IRS doesn’t retain supporting documentation, such as receipts and donor letters – that’s your job – and you may need those to substantiate deductions and credits. 
  • Keep friends and family in the loop. Once you secure your records, make an extra set of key documents to keep with a family member or trusted friend.
  • Memorialize your property. All property, especially expensive items, should be recorded. Take pictures or videos of the contents of your home or business, especially high-value items. Documentation can help support insurance claims, as well as any tax benefits like a casualty loss. Remember that the deduction for personal casualty and theft losses is repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President. For more on casualty losses after a disaster, click here.
flood insurance
  • Ask about flood insurance. Flood damage is rarely covered under your homeowner’s or renter’s insurance policy. According to FEMA, the cost of flood insurance is $700/year for the average flood insurance policy, while the cost of flood damage is $43,000 for the average flood insurance claim.
  • Tuck some cash away. The ultimate rainy day fund could be a few dollars stashed away. Banks and ATMs may close during an emergency, so having cash on hand can be useful. 
  • Don’t be hesitant to take advantage of available resources. The IRS has a disaster loss workbook for individuals (Publication 584, Casualty, Disaster, and Theft Loss Workbook) that can help you compile lists of belongings.

If you have a business, consider these extra steps:

  • Have a plan. Have a readiness plan for your business and share it with key employees and other advisors. The Department of Homeland Security offers tips and resources on ready.gov to help you craft an emergency plan suitable for your situation.
  • Break out your pencils. If you don’t have time to take photographs or videos of your business, sketch an outline of the inside and outside of your location and fill in the details (for example, where is the copier located?).
  • Make sure that copies of your federal, state and local tax returns are in a secure location. This includes sales tax reports, payroll tax returns, and business licenses from the city or county.
  • Review Insurance Coverage. Not having enough insurance can lead to financial loss. Understand what your policy covers and what it does not, and ask about risk mitigation.
  • Think about how you will pay creditors, including tax authorities, and employees. Be aware of deadlines and check with tax agencies, like the IRS, for possible extensions and relief. 
  • If you use a payroll service provider, ask your provider about a fiduciary bond. The bond could protect you in the event of default by the payroll service provider. (You can also create an EFTPS.gov account to monitor payroll tax deposits and sign up for email alerts.)
  • Don’t be hesitant to take advantage of available resources. The IRS has a disaster loss workbook for businesses (Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook), too. The book can be a resource for compiling a list of business equipment.

After a disaster, a taxpayer impacted by a disaster may qualify for some relief (you can check here to see if your area has been declared for individual assistance). For more on tax issues, check out the tax relief page on the IRS website or call 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Hurricanes, tornados and other natural disasters can be more than an inconvenience: they can result in loss of life, property, and livelihoods. I grew up in coastal North Carolina and I’ve seen the impact of those storms many times. I know that a one-size plan doesn’t fit all, and your needs can vary. But one thing remains constant: It’s important to be prepared. Take steps now to protect your home, business, and family. And let’s be careful out there.

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When A Resident Isn’t A Resident: Sorting Through Immigration And Tax Terms https://www.taxgirl.com/2019/08/29/when-a-resident-isnt-a-resident-sorting-through-immigration-and-tax-terms/ https://www.taxgirl.com/2019/08/29/when-a-resident-isnt-a-resident-sorting-through-immigration-and-tax-terms/#respond Thu, 29 Aug 2019 14:49:53 +0000 https://www.taxgirl.com/?p=39162 When you see a headline or come across a snippet involving federal agencies like the Internal Revenue Service (IRS) and U.S. Citizenship and Immigration Services (USCIS), don’t assume that terms are interchangeable and don’t be fooled into thinking that the same kinds of treatment apply across the board. A policy alert issued this week by the USCIS addressed requirements for residence, making clear that there is a distinction between residence and physical presence (link downloads as a PDF). But for tax purposes, residence and physical presence can mean something very different.

When it comes to tax, I’m often asked, “Where do I pay taxes?” Sometimes it comes from a person from another country who is present in the United States (U.S.) on a work or student visa. Sometimes it’s directed from a U.S. citizen living and working in a foreign country. Other times, it’s from a long-term resident in the U.S. who returns to a home country for stretches at a time. But my answer is almost always the same: It depends. And that’s not just because I’m a lawyer. It’s because the rules for tax law (which are constantly changing) don’t always line up nicely with the rules for immigration law (which are also constantly changing). 

A lot of the confusion for international taxpayers focuses on the idea of residence. Residency feels like it should be an easy thing – it’s where you live, right? But what if where you live changes? Or if where you live isn’t where you intend to remain? Or if where you live isn’t the country where you were born? On the tax side, things can get tricky. It’s complicated even more because the definitions used by the Internal Revenue Service (IRS) to describe residency aren’t necessarily the same as those used by the USCIS.

Our tax system generally starts with the premise that all U.S. citizens are taxed on their worldwide income unless otherwise excluded. That’s a pretty big net.

For tax purposes, those who are not U.S. citizens are considered aliens. Aliens are further divided into non-resident aliens and resident aliens. By default, non-U.S. citizens inside the country are considered non-resident aliens unless they meet one of two tests: the green card test or the substantial presence test. 

The green card test is precisely what it sounds like: You are a resident for U.S. federal tax purposes if you are a Lawful Permanent Resident of the U.S. at any time during the calendar year. The most obvious evidence is an alien registration card, Form I-551, which we also call a green card.

The substantial presence test is more complicated – and there’s math. To meet this test, you must be physically present in the U.S. on at least 31 days during the current year, and 183 days during the three-year period that includes the current year and the two years immediately before that, counting:

  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.

(Ok, it’s not just simple math: there are fractions involved.)

For tax purposes, you’re present in the U.S. for any day that you’re physically present in the country for any period of time. And typically, the longer you are here, the more likely you are a resident for tax purposes. There are some exceptions. Those exceptions include commuting days to Canada or Mexico, days you are in transit or in the country as a crew member of a foreign vessel, days that you can’t leave because of a medical condition that developed while you were in the U.S., and days that you are an exempt individual. Exempt individuals typically include folks here on certain kinds of visas (mainly government, student and teacher visas) and professional athletes here to compete in a charitable sports event.

Even if you pass the substantial presence test, you can still be treated as a non-resident alien if you have a closer connection to a foreign country in which you have a tax home than to the U.S. Some exceptions apply, but the IRS typically looks at where you and your family live, where you keep your stuff, where you conduct your business, and where you drive and vote when determining how close your connection is to a foreign country. It’s very facts and circumstances dependent.

(For more information, check out IRS Pub 519, which downloads as PDF.)

You probably assume that folks are clamoring to be considered residents, right? Not always. For U.S. tax purposes, residents are treated – and taxed – like U.S. citizens. On the plus side, that means that they’re entitled to the same tax credits and deductions as U.S. citizens. But that also typically means that they must report their worldwide income and disclose their foreign assets; perhaps not so surprisingly, that doesn’t have universal appeal.

Non-residents, on the other hand, typically only have to report and pay tax on their U.S.-sourced income. But they also do not get the benefit of most tax breaks afforded to U.S. citizens.

For tax reasons, physical presence in the country is typically (but not always, remember there are exceptions) linked to residency. The longer you stay here, the more likely it is that you are a resident. But for immigration purposes, that is not necessarily the case. In their policy alert, the USCIS purported to make clear that there is a distinction between residence and physical presence. Citing the Immigration and Nationality Act (INA), the USCIS explained: The term residence should not be confused with physical presence, which refers to the actual time a person is in the United States, regardless of whether he or she has a residence in the United States.

The policy alert was an effort to clarify the status of children who are not yet citizens and are adopted or born to U.S. service members or certain government employees overseas. The controversial statement made clear that those children would not automatically become citizens because they do not meet the residency requirements under existing immigration law. USCIS policy had previously provided that children of U.S. government employees and members of the U.S. armed forces who were employed or stationed outside of the country should be considered to be both “residing in the United States” and “residing outside of the United States” for immigration purposes. However, the USCIS has rescinded the prior policy permitting children of U.S. government employees and U.S. armed forces members stationed outside of the country to be considered “residing in” the U.S. With that, it may be necessary for affected parents to apply for citizenship on behalf of their children. 

(Again, you can find the update, which downloads as a PDF here. You can find the complete USCIS manual here.)

A key takeaway from the update is the importance of understanding that terms don’t always mean what you might think they mean, and even interpretations that you might think are settled can change over time. It also underlines that different agencies may use similar terms and yield different results. For example, for tax purposes, U.S. tax residents are largely treated like U.S. citizens. But that’s not the case for immigration purposes: lawful permanent residents may not vote in elections, and if they remain outside of the U.S. for extended periods, they may be considered to have abandoned their permanent residence. That presumption is hard to refute for immigration purposes; it’s a lot easier to prove a U.S. connection for tax purposes even if you leave the country.

It’s also complicated when the two worlds – immigration and tax – collide. Under U.S. law, immigrants can be deported if they are convicted of a crime of moral turpitude or an aggravated felony. Aggravated felonies include certain financial crimes such as those involving fraud or deceit. When it comes to tax, something as relatively minor as the failure to file a tax return is typically considered a misdemeanor – but if the violation is found to be willful, it can be treated as a felony.

For those who are not permanent residents, that could result in removal proceedings. As Jonathan Grode, an immigration attorney for Green & Spiegel, LLC, explains, “With nonimmigrant status, a crime that renders the person inadmissible – one involving a crime of moral turpitude and a sentence that carries a maximum of greater than a year – then under INA 212 the foreign national is removable from the United States.” But deportation can also extend to permanent residents – remember Joe Giudice?

As the world grows smaller, it’s clear that tax and immigration will continue to overlap and change. That doesn’t mean that the terms that apply to one apply to the others, or that the respective agencies share common guidelines. When you see words that could have dual meanings, use caution and make sure that you’re applying them in the right context. If you have questions, it’s always a good idea to check with a professional for guidance.

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Charitable Donation Deductions Plummet After Tax Reform https://www.taxgirl.com/2019/08/28/charitable-donation-deductions-plummet-after-tax-reform/ https://www.taxgirl.com/2019/08/28/charitable-donation-deductions-plummet-after-tax-reform/#respond Wed, 28 Aug 2019 14:45:51 +0000 https://www.taxgirl.com/?p=39159 According to the most recent data available from the Internal Revenue Service (IRS), just 12,177,779 taxpayers claimed the charitable donation deduction for the 2018 tax year, totaling $102.7 billion. That compares to 33,629,985 taxpayers who claimed the charitable donation deduction for the 2017 tax year, totaling $160 billion. That’s a difference of 21,452,206 taxpayers claiming nearly $37 billion less in donations.

This data reflects forms 1040 processed by the IRS on or before week 30 of each calendar year. It’s worth noting that while the total taxpayer returns processed from year too year are similar (141,156,150 for the tax year 2018 versus 140,456,686 for the tax year 2019), the kinds of returns may be different. Specifically, the returns which have not been processed include taxpayers who may have filed for extension. Typically, taxpayers who file for extension are those with more complicated returns. For this year, that likely includes those who might have been waiting for state and local tax (SALT) or other Schedule A related guidance; that could translate into a slight uptick in taxpayers who also claim a charitable deduction.

(You can read more about the changes to Schedule A here.)

Still, it’s telling that the numbers have declined. Initially, the change in the standard deduction amounts was meant to simplify the deduction scheme. Analysts predicted that the number of taxpayers who would itemize their deductions would drop from one-in-three taxpayers to one-in-ten. That’s pretty close to what happened. For the 2017 tax year, 42,156,751 taxpayers itemized their deductions – about 30%. In contrast, for the 2018 tax year, only 14,662,008 taxpayers itemized their deductions – about 10%.

And it was expected that the drop in taxpayers who itemized would result in fewer taxpayers who claimed the charitable donation deduction: that’s just math. And a drop in the number of charitable donation deductions doesn’t necessarily mean that fewer taxpayers felt charitable last year: they just might not have been able to claim a deduction for their generosity. 

Some models took that behavior into consideration. Penn Wharton Budget Model (PWBM), a nonpartisan, research-based initiative at the University of Pennsylvania, estimated that “the TCJA will cause total charitable contributions to fall by about $22 billion in 2018.” This reduction, they explained, accounted for a 5.1% reduction in total charitable giving, and a 9.6% reduction in charitable giving reported on individual tax returns. This estimate, they claimed, was consistent and confirmed the estimates of other recent researchers (downloads as a PDF).

Will the downward trend continue? Probably. The standard deduction is slated to remain at its current levels, adjusted for inflation, through 2025. That means that the number of taxpayers who will itemize their deductions is not likely to change.

The more concerning question is whether taxpayers who did itemize for the 2018 tax year may choose to scale back their giving. The irony of lower tax rates is that they also make deductions less valuable. Remember, deductions are reductions in your taxable income (unlike credits which are dollar-for-dollar reductions to your total tax bill). So, when tax rates dipped, your home mortgage deduction was not subsidized as much as before; the deduction is smaller meaning that the after-tax cost of your home is higher. The same is true for other Schedule A deductions; for some taxpayers, a decrease in rates actually boosted the after-tax price of charitable donations. In fact, the Tax Policy Center had predicted that “the TCJA will reduce the marginal tax benefit of giving to charity by more than 30 percent in 2018, raising the after-tax cost of donating by about 7 percent.”

While it’s true that not all donors make their decisions based solely on tax, it’s clear that tax incentives do play a role in the decision to give as well as how much and how often to give. For donors looking to maximize the tax benefits of being charitable, it’s a good idea to check with your tax professional. You can also find some charitable giving tips here.

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IRS Issues Warning On New Email Tax Scam https://www.taxgirl.com/2019/08/23/irs-issues-warning-on-new-email-tax-scam/ https://www.taxgirl.com/2019/08/23/irs-issues-warning-on-new-email-tax-scam/#respond Fri, 23 Aug 2019 14:43:21 +0000 https://www.taxgirl.com/?p=39157 Tax season may be at an end for most taxpayers, but scammers aren’t letting up. The Internal Revenue Service (IRS) recently warned taxpayers and tax professionals about a new IRS impersonation scam email. 

The email subject line may vary, but according to the IRS, recent examples use phrases like “Automatic Income Tax Reminder” or “Electronic Tax Return Reminder.” The emails include links that are meant to look like the IRS website with details about the taxpayer’s refund, electronic return or tax account. The emails contain a “temporary password” or “one-time password” that purports to grant access to the files. However, these are actually malicious files. Once the malware files are installed on your computer, scammers may be able to secretly download software that tracks every keystroke, giving the bad guys access to information like passwords to your financial accounts.

Don’t be fooled: the IRS does not send unsolicited emails and never emails taxpayers about the status of refunds.

IRS Commissioner Chuck Rettig confirmed, “The IRS does not send emails about your tax refund or sensitive financial information. This latest scheme is yet another reminder that tax scams are a year-round business for thieves. We urge you to be on-guard at all times.”

The IRS doesn’t initiate contact with taxpayers by email, text messages, or social media channels to request personal or financial information. This includes requests for PIN numbers or passwords used to access your credit cards, banks, or other financial accounts. The IRS also doesn’t call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer (more on those scams here). The IRS will typically send a bill to a taxpayer who owes taxes. 

(You can find out more about real tax notices here. You can find out how to respond to your tax notices here.)

Phishing and phone scams topped the 2019 “Dirty Dozen” list of tax scams. The common thread, according to the IRS: Scams put taxpayers at risk. Don’t engage or respond with scammers. Here’s what to do instead: 

  • If you receive a call from someone claiming to be from the IRS and you do not owe tax, or if you are immediately aware that it’s a scam, just hang up.
  • If you receive a robocall or telephone message from someone claiming to be from the IRS and you do not owe tax, or if you are immediately aware that it’s a scam, don’t call them back.
  • If you receive a phone call from someone claiming to be with the IRS, and you owe tax or think you may owe tax, do not give out any information. Call the IRS back at 1.800.829.1040 to find out more information.
  • Never open a link or attachment from an unknown or suspicious source. If you’re not sure about the authenticity of an email, don’t click on hyperlinks. A better bet is to go directly to the source’s main web page. 
  • Use strong passwords to protect online accounts and use a unique password for each account. Longer is better, and don’t hesitate to lie about important details on websites since crooks may know some of your personal details.
  • Use two- or multi-factor authentication when possible. Two-factor authentication means that in addition to entering your username and password, you typically enter a security code sent to your mobile phone or other device.

If you believe you are a victim of an IRS impersonation scam, you should report it to the Treasury Inspector General for Tax Administration at its IRS Impersonation Scam Reporting site and to the IRS by emailing phishing@irs.gov with the subject line “IRS Impersonation Scam.” That’s how the IRS was alerted about the most recent scam: According to the IRS, taxpayers began notifying phishing@irs.gov about these unsolicited emails from IRS imposters. 

The IRS and its Security Summit partners, consisting of state revenue departments and tax community partners, continue to be concerned about these scams.

(You can read more about the Security Summit group here.)

Keep your personal information safe by remaining alert – and when in doubt, assume it’s a scam. For tips on protecting yourself from identity theft-related tax fraud, click here.

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IRS Grants Temporary Relief For Some Taxpayers In Danger Of Losing Passports https://www.taxgirl.com/2019/08/20/irs-grants-temporary-relief-for-some-taxpayers-in-danger-of-losing-passports/ https://www.taxgirl.com/2019/08/20/irs-grants-temporary-relief-for-some-taxpayers-in-danger-of-losing-passports/#respond Tue, 20 Aug 2019 14:40:51 +0000 https://www.taxgirl.com/?p=39155 Earlier this month, the Internal Revenue Service (IRS) issued a reminder to taxpayers with significant tax debts that their passports could be at risk. Now, IRS Commissioner Charles Rettig has granted a reprieve for some taxpayers.

A memo (TAS-13-0819-0014) from Acting National Taxpayer Advocate Bridget Roberts has advised that there is “a temporary change” related to the revocation of passports for taxpayers working with the Taxpayer Advocate Service. According to the memo, effective July 25, 2019, all open TAS cases with a certified taxpayer will be decertified; new TAS taxpayer cases will also be systemically decertified. 

The authority to revoke passports dates back to December 4, 2015, when the Fixing America’s Surface Transportation Act, or “FAST Act,” became law. Under the FAST Act, the State Department will yank passports from taxpayers after notification from the IRS that there’s a seriously delinquent tax debt. A “seriously delinquent” tax debt is defined as “an unpaid, legally enforceable federal tax liability” greater than $50,000, including interest and penalties. The limit is adjusted each year for inflation and cost of living: for 2019, it’s $52,000. 

Taxpayers with serious debts could be excluded under some circumstances, including those account which are being paid on time as part of an installment agreement or under an Offer In Compromise.

(You can read more about the passport revocation program here.)

Former National Taxpayer Advocate Nina Olson has expressed serious concerns about the program, including the exclusion of taxpayers with open TAS cases. Taxpayers with TAS cases are those with tax problems that taxpayers were typically unable to resolve through normal IRS channels.

The TAS also helps address large-scale, systemic issues that affect groups of taxpayers. That’s why, in 2018, even before the passport revocation program was implemented in full, Olson issued almost 800 Taxpayer Assistance Orders (TAOs) ordering the IRS not to certify taxpayers that the TAS identified as eligible for passport certification and who had an open TAS case. Those taxpayers were not certified, and the reprieve did not extend to those with new TAS cases. Olson continued to advocate for taxpayers who were seeking assistance from TAS, but there was no formal policy in place to provide them with relief.

(You can read more about the TAS and the Taxpayer Bill of Rights here.)

Without a formal procedure, the TAS will be tasked with the continuous administrative burden of chasing the IRS for relief for affected taxpayers on a case by case basis. With a temporary stay, the TAS can focus on helping taxpayers with their underlying tax issues rather than following up on passport revocation. How that might change long-term is uncertain. According to the TAS memo, official IRS guidance will follow once IRS Commissioner Rettig makes a final decision about the process.

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As Rumors Swirl, Here’s What A Payroll Tax Cut Might Look Like https://www.taxgirl.com/2019/08/20/as-rumors-swirl-heres-what-a-payroll-tax-cut-might-look-like/ https://www.taxgirl.com/2019/08/20/as-rumors-swirl-heres-what-a-payroll-tax-cut-might-look-like/#respond Tue, 20 Aug 2019 14:38:22 +0000 https://www.taxgirl.com/?p=39153 As concerns circulate about a potential recession, President Donald Trump insists that the economy remains healthy. Despite those assertions, there have been rumblings that White House officials are exploring the possibility of a temporary payroll tax cut to put more money in the hands of consumers. 

According to reports, economists inside the White House have drafted a white paper about the potential for a payroll tax cut. Earlier, a White House official released a statement saying that “more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time.” However, President Trump confirmed to reporters that payroll tax cuts are on the table, along with those rumored potential changes to capital gains, saying, “I’ve been thinking about payroll taxes for a long time. Many people would like to see that.”

If the back-and-forth sounds familiar, it echoes themes from an earlier time. The last payroll tax cut for American workers—also controversial—was pushed through by the Obama administration in 2011, despite concerns that the cut would increase the federal deficit. The theory was that the benefit would offset any costs: The cut was intended to kick-start the economy following the 2008 recession. After the first round, Congress renewed the temporary payroll tax cuts in 2012.

Here’s how the payroll tax cuts worked. Wages and self-employment income are subject to Social Security and Medicare taxes. Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken right out of your paycheck. Taxes on self-employment income are separately referred to as SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.

(You can find out more about withholding here.)

If you’re employed, you pay Social Security tax (6.2%) as the employee, and your employer also pays the same rate of tax (6.2%); again, if you’re self-employed, you pay both portions.

Unlike Medicare, Social Security taxes are subject to a wage cap. In other words, you pay Social Security taxes on your earnings until you hit a magic number. After that, your wages are no longer subject to Social Security taxes. For 2019, that magic number is $132,900. That means that whether you make $1,000 or $100,000, you will pay Social Security taxes on that income. But if you earn $132,901? You’ll pay Social Security taxes on $132,900, but not on the extra dollar. And if you earn $1,132,900? You’ll pay Social Security taxes on $132,900 but not on the extra million.

In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax (1.45%) as the employee, and your employer kicks in tax at the same rate (1.45%). As before, if you’re self-employed, you’ll pay both portions. And, thanks to a change in the law which took effect in 2014, high-income taxpayers are also subject to a Medicare surtax (0.9%) tacked on to wages that exceed $200,000, or $250,000 for married taxpayers.

Your employer collects those Social Security and Medicare payments and remits them to the government on your behalf (or you pay them directly if you’re self-employed). These taxes are sometimes referred to as “trust fund” taxes and are credited toward your retirement benefits.

(You can find out more about trust fund taxes here.)

With that, here’s how the 2011 payroll tax cut worked. On the employer side, payroll tax contributions for federal purposes remained the same. On the employee side, payroll tax contributions for federal purposes were reduced by 2%: Instead of paying in at 6.2% for Social Security taxes (up to the cap, which was, at the time, $106,800), contributions were 4.2% for Social Security taxes (still up to the cap). Self-employed persons also got a 2% reduction. Contributions for Medicare remained the same.

A similar payroll tax cut in 2019 could save top wage earners up to $2,658. Most full-time wage and salary workers would save in the neighborhood of $908, or about a week’s wages (based on data from the Bureau of Labor and Statistics for the quarter ending July 2019, downloads as a PDF).

Whether a payroll tax cut will become a reality is yet to be seen. However, discussions about more tax cuts are likely coming. National Economic Council Director Larry Kudlow told Fox News Sunday viewers, “Tax cuts 2.0, we are looking at all that.”

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e-Services To Be Down For Maintenance https://www.taxgirl.com/2019/08/19/e-services-to-be-down-for-maintenance/ https://www.taxgirl.com/2019/08/19/e-services-to-be-down-for-maintenance/#respond Mon, 19 Aug 2019 17:45:23 +0000 https://www.taxgirl.com/?p=39037

Internal Revenue Service (IRS) E-Services will be unavailable on Monday, August 19 and Wednesday, August 21, 2019, from approximately 1 a.m. to 5 a.m. Eastern time due to planned maintenance.

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IRS Announces Automatic Penalty Waivers For 2018, Will Issue Refunds To Affected Taxpayers https://www.taxgirl.com/2019/08/14/irs-announces-automatic-penalty-waivers-for-2018-will-issue-refunds-to-affected-taxpayers/ https://www.taxgirl.com/2019/08/14/irs-announces-automatic-penalty-waivers-for-2018-will-issue-refunds-to-affected-taxpayers/#respond Wed, 14 Aug 2019 14:35:40 +0000 https://www.taxgirl.com/?p=39151 Did you owe an estimated tax penalty for 2018 but didn’t claim the waiver? All is not lost. The Internal Revenue Service (IRS) has announced that it is waiving the estimated tax penalty for those eligible taxpayers who filed their 2018 federal income tax returns but did not claim the waiver. The relief is expected to impact more than 400,000 taxpayers. 

You already know that the Tax Cuts and Jobs Act (TCJA) made significant changes to individual taxes, including cutting tax rates, tweaking itemized deductions normally claimed on a Schedule A, and eliminating personal exemptions. As a result, the withholding schemes were not adequate for many taxpayers in 2018, causing the General Accounting Office (GAO) to warn that unless adjustments were made to withholding, some taxpayers might owe more in 2019. That turned out to be true and early in the year, the IRS announced that penalty relief might be available to some taxpayers. In March of 2019, the IRS expanded the relief to include those taxpayers making payments of at least 80% of the tax shown on the return for the 2018 taxable year. (You can find more from Forbes’ Ashlea Ebeling here).

Unfortunately, not everyone got the memo. So, the IRS is now tweaking the process with an automatic waiver: The automatic waiver applies to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year. The IRS will apply this waiver to tax accounts of all eligible taxpayers, so there is no need to contact the IRS to apply for or request the waiver.

“The IRS is taking this step to help affected taxpayers,” said IRS Commissioner Chuck Rettig. “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed.

The IRS has confirmed that, over the next few months, the agency will be sending letters to affected taxpayers. Taxpayers who are eligible for relief will receive a CP 21 notice. 

So what if you’ve already paid the penalty? You may be entitled to a refund. Refunds for eligible taxpayers will be mailed about three weeks after the CP 21 notice.

If you haven’t filed your 2018 tax return yet, the IRS urges you to claim the waiver when you file. This includes those (like me) with extensions to file through October 15, 2019. The penalty waiver should appear automatically if you use a tax software package. If you choose to file on paper, you’ll need to fill out form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (downloads as a PDF), and attach it to your 2018 return. 

To avoid surprises next year, the IRS has launched a new Tax Withholding Estimator that they hope will make it easier for everyone to figure the right amount of tax withheld during the year. You can find out more here.

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