The McKillip Group, CPAs, 3 Oakwood Park Plaza, Suite 102, Castle Rock, CO 80104
(303) 688-8680
Menu

Preventing Tax-related Identity Theft & Simplifying Your Financial Life

How You Can Help Prevent Tax-related Identity Theft

Tax-related fraud isn’t a new crime, but tax preparation software, e-filing and increased availability of personal data have made tax-related identity theft increasingly easy to perpetrate. The IRS is taking steps to reduce such fraud, but taxpayers must play their part, too.

How they do it

Criminals perpetrate tax identity theft by using stolen Social Security numbers and other personal information to file tax returns in their victims’ names. Naturally, the fake returns claim that the filer is owed a refund — and the bigger, the better.

[Read more…]

Capital Gains and Losses & Earn 5% or More on Liquid Assets

What You Should Know About Capital Gains and Losses

When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:

• Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

[Read more…]

Why Your Health Insurance Company May Ask for Your Social Security Number & How Working Impacts Social Security Benefits

Why your health insurance company may ask for your Social Security Number

Your health insurance company may request that you provide the Social Security Numbers (SSNs) for you, your spouse, and your children covered by your policy. This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer — and by individuals to show compliance with — the health care law.

[Read more…]

Year-End Tax Planning & Shared Equity Financing Arrangements

Time to Start Year-End Tax Planning

The federal income tax rates for 2015 are the same as last year: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. However, the rate bracket beginning and ending points are increased slightly to account for inflation. For 2015, the maximum 39.6% bracket affects singles with taxable income above $413,200, married joint-filing couples with income above $464,850, heads of households with income above $439,000, and married individuals who file separate returns with income above $232,425. Higher-income individuals can also get hit by the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% net investment income tax (NIIT), which can both result in a higher-than-advertised marginal federal income tax rate for 2015.

[Read more…]

Planning for the 3.8% Net Investment Income Tax & Same-Sex Marriages

Planning to Avoid or Minimize the 3.8% Net Investment Income Tax

The net investment income tax, or NIIT, is a 3.8% surtax on investment income collected from higher-income individuals. It first took effect in 2013. After filing your 2014 return, you may have been hit with this extra tax for two years, and you may now be ready to get proactive by taking some steps to stop, or at least slow, the bleeding for this year and beyond.

[Read more…]

Updating Beneficiary Designations & Benefits of Health Savings Accounts (HSA)

The importance of updating beneficiary designations

Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

[Read more…]

Tax Planning and Organizing & Combined Business and Vacation Travel

Summer time is a good time to start planning and organizing your taxes

You may be tempted to forget all about your taxes once you’ve filed your tax return, but that’s not a good idea. If you start your tax planning now, you may avoid a tax surprise when you file next year. Also, now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some tips to give you a leg up on next year’s taxes:

Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 (“Employee’s Withholding Allowance Certificate”) with your employer. If you make estimated payments, those may need to be changed as well.

[Read more…]

Identity Verification Letters & Donating a Life Insurance Policy

What you should do with an identity verification letter from the IRS

In its efforts to combat identity theft, the IRS is stopping suspicious tax returns that have indications of being identity theft, but contain a real taxpayer’s name and/or Social Security number, and sending out Letter 5071C to request that the taxpayer verify his or her identity.

Letter 5071C is mailed through the U.S. Postal Service to the address on the return. It asks taxpayers to verify their identities in order for the IRS to complete processing of the returns if the taxpayers did file it or reject the returns if the taxpayers did not file it.

It is important to understand that the IRS does not request such information via e-mail; nor will the IRS call you directly to ask this information without first sending you a Letter 5071C. The letter number can be found in the upper corner of the page.

Letter 5071C gives you two options to contact the IRS and confirm whether or not you filed the return: You can (1) use thewww.idverify.irs.gov site or (2) call a toll-free number on the letter. However, the IRS says that, because of the high volume on its toll-free numbers, the IRS-sponsored website, www.idverify.irs.gov, is the safest, fastest option for taxpayers with Web access.

Before accessing the website, be sure to have your prior-year and current-year tax returns available, including supporting documents, such as Forms W-2 and 1099. You will be asked a series of questions that only the real taxpayer can answer.

Once your identity is verified, you can confirm whether or not you filed the return in question. If you did not file the return, the IRS will take steps at that time to assist you. If you did file the return, it will take approximately six weeks to process it and issue a refund.

You should always be aware of tax scams, efforts to solicit personally identifiable information, and IRS impersonations. However, www.idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely. IRS.gov is the official IRS website. Always look for a URL ending with “.gov” — not “.com,” “.org,” “.net,” or other nongovernmental URLs.

Donating a life insurance policy to charity

A number of charities now ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem, because charities normally earmark such gifts for their endowment or long-term building funds.

Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Still, for individuals with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense.

If handled correctly, a life insurance policy donation can net the donor a charitable deduction for the value of the policy. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, no deduction is allowed. For this reason, we encourage you to contact us if you are considering donating a life insurance policy. We can help ensure that you receive the expected income tax deduction and that the contribution works as planned.

Filing 2014 Foreign Financial Account Reports & Taxation of College Financial Aid

Filing 2014 foreign bank and financial account reports

If you have a financial interest in or signature authority over a foreign financial account exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the IRS by filing a Financial Crimes Enforcement Network (FinCEN) Form 114 (“Report of Foreign Bank and Financial Accounts (FBAR)”).

Specifically, for 2014, Form 114 is required to be filed if during the year:

1. You had a financial interest in or signature authority over at least one foreign financial account (which can be anything from a securities, brokerage, mutual fund, savings, demand, checking, deposit, or time deposit account to commodity futures or options, and a whole life insurance or a cash value annuity policy); and

2. The aggregate value of all such foreign financial accounts exceeded $10,000 at any time during 2014.

The FBAR is filed on a separate return basis (that is, joint filings are not allowed). However, a spouse who has only a financial interest in a joint account that is reported on the other spouse’s FBAR does not have to file a separate FBAR.

The 2014 Form 114 must be filed by June 30, 2015, and cannot be extended. Furthermore, it must be filed electronically through http://bsaefiling.fincen.treas.gov/main.html. The penalty for failing to file Form 114 is substantial — up to $10,000 per violation (or the greater of $100,000 or 50% of the balance in an account if the failure is willful).

Please give us a call if you have any questions or would like us to prepare and file Form 114 for you.

Taxation of college financial aid

If your college-age child is or will be receiving financial aid, congratulations. Now, you’ll probably want to know if the financial aid is taxable. Keep in mind that the economic characteristics of financial aid, rather than how it is titled, will determine its taxability. Strictly speaking, scholarships, fellowships, and grants are usually awards of “free money” that are nontaxable. However, these terms are also sometimes used to describe arrangements involving obligations to provide services, in which case the payments are taxable compensation.

Tax-free awards. Scholarships, fellowships, and grants are awarded based on the student’s financial need or are based on scholastic achievement and merit. Generally, for federal income tax purposes, these awards are nontaxable as long as (1) the recipient is a degree candidate, (2) the award does not exceed the recipient’s “qualified tuition and related expenses” (tuition and enrollment fees, books, supplies, and equipment required for courses, but not room and board or incidental expenses) for the year, (3) the agreement does not expressly designate the funds for other purposes (such as room and board or incidental expenses) or prohibit the use of the funds for qualified education expenses, and (4) the award is not conditioned on the student performing services (teaching, research, or anything else).

Work-study arrangements. If the financial aid is conditioned on the student performing services, the amount that represents payment for such services is taxable income and will be reported on a Form W-2 or Form 1099. This is true even if the work is integrated with the student’s curriculum or if the payment is called a scholarship, fellowship, or grant. Students typically work for the school they’re attending. However, they could work for other employers under the auspices of a work-study program.

Student loans. Naturally, student loan proceeds are not taxable income because the borrowed amounts must be paid back. However, some college education loans are subsidized to allow borrowers to pay reduced interest rates. Fortunately, college loan interest subsidies are nontaxable to the same extent as if they were provided in the form of an outright scholarship, fellowship, or grant. An above-the-line deduction (i.e., available whether or not the borrower itemizes) of up to $2,500 is allowed for interest expense paid by a taxpayer on a loan to fund qualified higher education expenses. The deduction is phased out for taxpayers with adjusted gross income exceeding certain amounts.

What happens when financial aid isn’t free? Fortunately, taxable scholarships, fellowships, grants, and compensation from work-study programs count as earned income. Assuming the student is your dependent, this means that for 2015 he or she can offset this income by his or her standard deduction of the greater of (1) $1,050 or (2) earned income plus $350, up to $6,300. Since taxable scholarships, fellowships, grants, and compensation count as earned income, they increase the student’s standard deduction. If the student isn’t anyone’s dependent for 2015, he or she can offset earned income of up to $10,300 with his or her personal exemption ($4,000) and standard deduction ($6,300). (Dependents are not entitled to a personal exemption.)

Taxable financial aid in excess of what can be offset by the student’s personal exemption (if any) and standard deduction is usually taxed at only 10%. (For 2015, the 10% bracket for single taxpayers applies to taxable income up to $9,225.)

Warning: The “kiddie tax” rules may cause investment income (such as interest, dividend, and capital gains) received by students who are under age 24 to be taxed at the parent’s higher rates instead of at the student’s lower rates. The student’s earned income (including taxable scholarships, fellowships, grants, and compensation) is not subject to the kiddie tax.

Please give us a call if you have questions or want more information.

Tax Calendar Q2 2015 & Gift Treatment

Tax Calendar Q2 2015

April 15

Besides being the last day to file (or extend) your 2014 personal return and pay any tax that is due, 2015 first quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today. So are 2014 returns for trusts and calendar-year estates, partnerships, and LLCs, plus any final contribution you plan to make to an IRA or Education Savings Account for 2014. SEP and Keogh contributions are also due today if your return is not being extended.

June 15

Second quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today.

Avoid Gift Treatment by Paying Expenses Directly

The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.

So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.

Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.