Red Flags for Tax Auditors

No one wants to see an Internal Revenue Service (IRS) auditor show up at his or her door. The IRS can’t audit every American’s tax return, so it relies on guidelines to select the ones most deserving of its attention.

Here are six flags that may make your tax return prime for an IRS audit.¹

The Chance of an Audit Rises with Income

According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to nearly 4% for those with incomes between $500,000 and $1 million, and is over 8% for those making between $1 million and $5 million.²

Deviations from the Mean

The IRS has a scoring system it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others with similar income.

When a Business is Really a Hobby

Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.

Non-Reporting of Income

The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.

Discrepancies Between Exes

When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments may be deducted on one return, while alimony income goes unreported on the contra party’s return. Another common tripwire is when both former spouses claim the same dependents.

Claiming Rental Losses

Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property’s management (deduction is limited and phased out), or with real estate professionals who devote greater than 50% of their working hours to this activity. This is a deduction to which the IRS pays keen attention.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. IRS, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

“Dirty Dozen” Tax Scams to Watch For

Every year the Internal Revenue Service (IRS) releases its list of tax scams, spotlighting the myriad ways that people try to separate you from your money.¹

The 2016 “Dirty Dozen”

Identity Theft

Using your personal information, an identity thief can file a fraudulent tax return and claim a refund. If you’ve been a victim of stolen personal information, you can contact the IRS so the agency can protect your tax account.

Phishing

Be wary of fake emails or websites looking to steal your personal information. If you receive a request for information that appears to be from the IRS, contact the IRS directly to verify the request.

Telephone Scams

Scammers will contact you pretending to be from the IRS. They may say that you are due a large refund or owe money (even threatening arrest or revocation of your driver’s license). If you receive such a call, call the IRS and contact the Federal Trade Commission using their “FTC Complaint Assistant” at FTC.gov.

Promises of “Free Money”

Posing as tax preparers, scam artists may promise large tax refunds and charge big fees, while filing false returns with big refunds payable to them. Individuals may never know a tax filing was ever made in their name.

Return Preparer Fraud

Dishonest preparers may use tax preparation as an excuse to steal your personal information, so only use a preparer who signs the return and has an IRS Preparer Tax Identification Number.

Hiding Income Offshore

The IRS has strengthened its ability to identify offshore holdings, and the failure to report them will be costly.

Impersonation of Charitable Organizations

Fraudulent charities raise money or obtain private information from individuals looking to help. Donate only to recognized charities, and beware of charities whose names sound similar to the well-known ones.

False Income, Expenses or Exemptions

Falsifying your tax return is a high risk, low reward exercise, especially in this age of Big Data.

Frivolous Arguments

Ignore promoters of frivolous arguments that promise you tax relief. Not only are they expected to fail, but you may be subjected to penalties and possible jail time.

Falsely Padding Deductions or Returns

Dishonestly reporting deductions to reduce tax bills or inflate refunds may open you up to penalties and prosecution.

Abusive Tax Structures

If someone is proposing to eliminate or substantially reduce your taxes through complex tax structures, walk away—they may be offering nothing more than illegal tax evasion.

Excessive Claims for Business Tax Credits

This happens when taxpayers or their tax preparers improperly claim the research credit or the fuel tax credit, which is generally limited to off-highway uses, such as farming.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

How to Appeal Your Property Taxes

Between 30 percent and 60 percent of taxable property has an inflated assessment, which may lead to higher property tax bills. Moreover, typically fewer than 5 percent of taxpayers dispute their assessment.¹

For homeowners who think their local government may have assessed their property’s value too high, there are ways to appeal and potentially win a lower assessment, which may save hundreds or even thousands of dollars annually in future taxes.²

The procedures and requirements for challenging the assessed value of your property will differ by state, but you should consider a number of general factors.

Determine Whether an Appeal Is Justified

Your opinion of the fairness and accuracy of your property assessment is not enough. You will need to gather facts to support your claim. One way to do that is to see how your home compares to similar homes in your neighborhood.

Check to see if there are any obvious errors (e.g., is the square footage incorrect?). If you have found an outright error, you may be able to simply bring it to the assessor’s attention and get it corrected.

Consider the Cost-Benefit Ratio

Appealing your assessment may cost you money, depending on the complexity of the process and whether you choose to use professional resources. You are the ultimate judge of weighing the costs related to some uncertain financial reward, but know the cost-benefit before you start. For instance, you may not want to spend $1,000 to save $200 per year.

Use an Independent Appraiser

Your appeal will have less credence if the market evaluation is made by a local real estate agent. A comparative appraisal will carry considerably more weight when it is performed by a credible, third-party expert.

Follow All the Rules

Appeals have precise deadlines and procedures. You need to meet them; otherwise you run the risk of losing out on the opportunity to have your appeal heard for another year. Call your local officials or visit the relevant website to familiarize yourself with the appeal process requirements.

  1. National Taxpayers Union Foundation, 2016
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Six Most Overlooked Tax Deductions

Who among us wants to pay the IRS more taxes than we have to?¹

While few may raise their hands, Americans regularly overpay because they fail to take tax deductions for which they are eligible. Let’s take a quick look at the six most overlooked opportunities to manage your tax bill.

  1. Reinvested Dividends: When your mutual fund pays you a dividend or capital gains distribution, that income is a taxable event (unless the fund is held in a tax-deferred account, like an IRA). If you’re like most fund owners, you reinvest these payments in additional shares of the fund. The tax trap lurks when you sell your mutual fund. If you fail to add the reinvested amounts back into the investment’s cost basis, it can result in double taxation of those dividends.²
    Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  2. Job Hunting Costs: A tough job market may mean you are looking far and wide for employment. The costs of that search—transportation, food and lodging for overnight stays, cab fares, personal car use, and even printing resumes—may be considered tax-deductible expenses, provided the search is not for your first job.
  3. Out-of-Pocket Charity: It’s not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. Just be sure to get a receipt for any amount over $250.
  4. State Taxes: Did you owe state taxes when you filed your previous year’s tax returns? If you did, don’t forget to include this payment as a tax deduction on your current year’s tax return.
  5. Medicare Premiums: If you are self-employed (and not covered by an employer plan or your spouse’s plan), you may be eligible to deduct premiums paid for Medicare Parts B and D, Medigap insurance, and Medicare Advantage Plan. This deduction is available regardless of whether you itemize deductions or not.
  6. Income in Respect of a Decedent: If you’ve inherited an IRA or pension, you may be able to deduct any estate tax paid by the IRA owner from the taxes due on the withdrawals you take from the inherited account.³
  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
  3. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

You May Need to Make Estimated Tax Payments If…

You may have to make estimated tax payments if you earn income that is not subject to withholding, such as income from self-employment, interest, dividends, alimony, rent, realized investment gains, prizes, and awards.

You also may have to pay estimated taxes if your income tax withholding on salary, pension, or other income is not enough, or if you had a tax liability for the prior year. Please consult a professional with tax expertise regarding your individual situation.¹

How to Pay Estimated Taxes

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual and expect to owe tax of $1,000 or more when you file a return, you should use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated tax. You may pay estimated taxes either online, by phone, or through the mail.²

How to Figure Estimated Tax

To calculate your estimated tax, you must include your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Consider using your prior year’s federal tax return as a guide.

When to Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty, even if you are due a refund when you file your income tax return.

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in taxes after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.³

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.
  2. IRS.gov, 2016
  3. IRS.gov, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Does Your Child Need to File an Income Tax Return?

As parents, we encourage our children to work so they can learn important values about work and independence. At what point, if at all, do children need to file an income tax return for the money they earn?

The IRS does not exempt anyone from the requirement to file a tax return based on age, even if your child is declared as a dependent on your tax return.¹

Your dependent children must file a tax return when they earn above a certain amount of income.

Dependent children with earned income in excess of $6,300 must file an income tax return.² This threshold may change in 2017 and years after, so please consult a professional with tax expertise regarding your individual situation.

Even if your child earns less than the threshold amount, filing a tax return may be worthwhile if your child is eligible for a tax refund. The standard deduction for a child is different from that of an adult: It is the greater of $1,050 or earned income plus $350, with the maximum equal to the regular standard deduction.³

The rules change for unearned income, such as interest and dividend payments. When the annual total of unearned income exceeds $1,050, then a return must be filed for your child. If your child’s unearned income only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income, though it may result in higher income tax to you.

If you decide to prepare a separate return for your child, the same reduced standard deduction rules detailed above will apply.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.
  2. IRS.gov, for tax year 2016
  3. IRS.gov, for tax year 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Tax Rules When Selling Your Home

How the gains from the sale of a primary residence are taxed has changed in recent years. If you have recently sold your home, or are considering doing so, you may want to be aware of these new rules.

Home Sale

If you owned and lived in your home for two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, then it doubles to $500,000.¹

To qualify for this exemption, you cannot have excluded the gain on the sale of another home within two years to this sale. Please consult a professional with tax expertise regarding your individual situation.²

This profit would be excluded from your taxable income. In fact, the sale may not need to be reported unless you receive a Form 1099-S or do not meet the above requirements.

If you sold your home at a loss, unfortunately, you can’t deduct the loss.

There Are Exceptions

Even if you do not meet the above requirements, you may qualify for this exclusion:

  • If you receive the house in a divorce settlement,
  • If you are able to count short-term absences as time lived in the house
  • If a surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.

The five-year test period can also be suspended for up to ten years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service, or federal intelligence agencies.

Even if you don’t pass the five-year rule test, a reduced exclusion may be available if you have a change in employment or health, or because of unforeseen circumstances, such as divorce or multiple births from a single pregnancy. Please speak with a professional with tax expertise regarding your situation.

  1. IRS.gov, 2016
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Death is No Excuse

The federal government is an equal-opportunity tax assessor. Even the dead can’t escape taxes.

The final accounting required of the deceased is not limited to an estate tax filing, but a federal income tax return must also be filed for the year in which the taxpayer passes. Please consult a professional with tax expertise if you find yourself in this situation.¹

Filing for the Deceased

Of course, the deceased can’t file his or her own return, so that responsibility usually falls to the estate’s executor or administrator. Here are the highlights of how a tax return is filed in the name of a deceased individual.

    • The form used is the same as the one that would have been used if the taxpayer were still alive, but “deceased” is written after the taxpayer’s name.
    • The filing deadline is April 15 of the year following the taxpayer’s death.
    • Some income that might appear to belong on the decedent’s final return may in fact be taxable to the estate or to the beneficiary who receives it. Otherwise known as “income in respect of a decedent,” this is income that the decedent was entitled to receive at the time of death, but is not reported on the final income tax return.
    • Deductible expenses paid before death can be utilized on the final return. The cost of a final illness can be deducted on the deceased’s return even if the bills were paid after the date of death.
    • If the taxpayer was married, the widow or widower may file a joint return. The executor usually files a joint return, but the surviving spouse can file it if no executor or administrator has been appointed.
    • When an executor or administrator is involved, he or she must sign the return for the decedent. For a joint return, the spouse must also sign.
    • If a refund is due, you should also complete and file a copy of Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer.²
      1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.
      2. IRS.gov, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.