Logo, Ronald C. Tockman Certified Public Accountant - Public Accounting
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(781) 341-2400
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Tax Tip of the Week | Business Tip of the Month | Financial Tip of the Month

— CLIENT MEMO —

Manage your 2014 tax bill with summertime tax planning

Summertime: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.
1. Bump up pre-tax retirement plan contributions. Elective contributions – the ones you ask your employer to withhold from your paycheck – reduce current-year taxable income. Compare the amount you’re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year. The maximum 401(k) contribution for 2014 is $17,500. If you’re 50 or older this year, add an additional $5,500.

2. Open an education savings account. There’s no federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college expenses in a taxable account, you could realize tax savings by opening a 529 plan instead. Earnings on plan assets grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.

3. Reset basis with capital loss carryforwards. Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income? Planning point: Reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.

4. Hold off on retirement plan withdrawals. In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible. For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts.

5. Plan for required minimum distributions. What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70½' Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount. Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution.

6. Shift income. Broaden your tax-planning focus to include family members. For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings.

7. Gifting offers similar benefits. You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.) For 2014, you can give $14,000 to anyone without incurring gift tax.

8. Track passive activity losses. Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities. The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.

9. Preserve deductions. You’ve heard it before: Recordkeeping is essential. Examples of tax breaks that may be disallowed if you cannot provide proof include charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses. If you neglected to start tracking these expenses at the beginning of the year, get going now.

10. Check dependent status. Keep your college student qualified as your dependent by monitoring the “support” test. The rule: Generally, your child cannot provide over one-half of his or her own support during the year. Remember, too, that other relatives may qualify as your dependents, including parents in nursing homes.

11. Update payments. Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business. Overpaying your 2014 tax reduces your available cash flow, but underpaying can lead to penalties and interest.

12. Review health insurance subsidies. Review your eligibility for the advance premium tax credit, a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange. If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit.

The Business File:

Do a midyear review of your business tax situation. Here are three areas to start with.
•  Calculate your basis. As an S corporation shareholder, knowing your basis is key to determining whether you can deduct current-year losses. The reason: Losses in excess of basis are generally “suspended” for use in later years when your business has income. Basis is also important if you plan to take nontaxable distributions. In cases when distributions exceed your investment in the company, the distributions can be taxed as capital gain.
What to do: Perform a check-up to give yourself time to re-establish basis and avoid surprises at year-end.

•  Update expensing policies. The new “repair” regulations became effective January 1. These regulations control how you will classify the cost of assets, supplies, and repairs and maintenance – some of which you will be able to expense immediately if you have the required policies in place.
What to do: Review asset and expense accounts to determine if current practices are in compliance with the new rules. Need a good reason to get started? Because the regulations can also affect prior years, you may be able to benefit from amending previously filed tax returns.

•  Re-examine your business structure. Whenever tax rates for corporations move in a different direction from those of individuals, an evaluation of your business entity makes sense. That’s because when your business is an S corporation or a partnership, the business does not generally pay federal income tax. Instead, the income “flows through” to you and is taxed at your rate. Regular “C” corporations, on the other hand, pay tax on business income at corporate tax rates, which are presently lower than individual rates.
What to do: Analyze the benefits of potential current income tax savings against your future goals. For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision. Summertime is perfect for tax planning. There’s enough of the year behind you to establish a track record and enough ahead to make changes that matter. Please call to schedule an appointment for a midyear tax review. We can help you identify the right tax-saving opportunities for your individual circumstances.

CLIENT MEMO: Don’t get hooked by a tax scam

The IRS has made preventing identity theft and tax refund fraud a top priority.  An important part of the agency’s fraud prevention program is its campaign to inform taxpayers about the many varieties of tax fraud and how they can keep from becoming victims.

Typical telephone fraud scenario

Picture this: You’re relaxing at home when your phone rings. You don’t recognize the number on the caller identification, but it’s from your area code, so you answer. “I’m with the IRS,” the caller says. “You owe back taxes. A warrant will be issued if you do not pay, and your local police will arrest you.”
The caller knows your name and may even know the last four digits of your social security number. He tells you how much you owe, and adds that this is a serious matter. “You must submit a payment voucher within the next hour to avoid arrest. We suggest you buy a prepaid debit card immediately.”
The caller gives you a phone number to call once you have acquired a prepaid card so you can settle your debt and the arrest warrant can be canceled.
Can you identify four indicators in the above scenario that tell you this call is the latest addition to the “Dirty Dozen” list of tax scams compiled by the IRS.
Here are the tip-offs:
• An unexpected phone call. The IRS makes initial contact regarding tax issues in a written letter, sent to you via U.S. postal mail.

• The threat of arrest. Warnings of arrest or other police action are designed to frighten you into agreeing to send money or disclose personal financial information such as your social security number. Local police departments will not threaten to arrest you for federal tax-related issues.

• Request for immediate payment. If you actually owe money for any type of federal tax, payment options are available. You’ll receive notices in the mail detailing the amount due and you’ll have time to respond.

• Payment via prepaid debit card. The IRS does not require you to purchase prepaid cards to pay any tax you may owe, and will not call to ask for personal identification numbers.
The “red flags” seem obvious as you read this. However, tax-related fraud plays on your natural inclination to avoid trouble with official agencies, and the actual phone call will come from a practiced con artist armed with a script and the element of surprise. Under those circumstances, your skepticism might take a back seat to understandable confusion and fear.
How can you protect yourself?
• Advance warning gives you an advantage. Being aware of tax fraud schemes makes it likely you’ll recognize common techniques used by fraudsters, such as threats, multiple calls, and repeated demands for an immediate decision.

• Be assertive. You have no obligation to answer your phone, engage in conversation, or provide information to anyone who calls you. Let contacts from unknown numbers go to voicemail. If you do answer and the caller’s requests make you uncomfortable, disconnecting immediately is neither rude nor impolite.

• If you choose to contact the IRS directly concerning the call, do not use the phone number the caller gave you. Why? In this latest scam, the number provided will connect you with another con artist in the same organization.

Phony IRS e-mails and websites

The crooks create IRS e-mails and websites that appear to be legitimate. They are designed to look like genuine IRS communications, but they are schemes designed to steal your identity. One of the newest scams is tax refund fraud where your personal data is stolen and used to file a tax return in your name in order to claim a refund. When you then file your return, the IRS rejects it and notifies you that you have already filed.
Another example of these bogus e-mails: You receive a message confirming IRS receipt of your tax return, but the IRS needs more information to process your return. The e-mail looks official and completely legitimate. But it isn’t.
Here’s what the IRS wants you to know about bogus e-mails:
• The IRS does not initiate contact with taxpayers by e-mail or social media to request financial information.

• The IRS never asks taxpayers for detailed personal financial information.

• The address of the official IRS website is www.irs.gov; don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org, or anything else.

• If you receive an e-mail claiming to be from the IRS or directing you to an IRS site, do not reply to the message, open any attachments, or click on any links.

• To help the IRS fight identity theft and refund fraud, report any bogus correspondence and forward any suspicious e-mail to phishing @ irs.gov.

The IRS strategy

The IRS has developed a comprehensive identity theft strategy that is focused on preventing, detecting, and resolving identity theft cases as soon as possible. Though these scams proliferate during tax filing season, they continue throughout the year as the thieves continue to create new ways to steal identities for financial gain. The IRS has made numerous announcements in the past to help protect taxpayers from these scams. It repeats the message that it never uses an e-mail, text message, social media, or a phone call to initiate a contact about your tax information. So if you receive what looks like an official IRS e-mail, you should forward it to phishing @ irs.gov. Do not reply to the sender, and do not open any attachments. And if you get a scam phone call, hang up.
Please let us know any time you’re contacted about your tax information. We’re here to keep you safe and informed.