We’re almost half-way through 2013. Are you prepared for all the new tax laws that will impact you this year? This month’s letter reviews some common events that should trigger a review of your tax situation. Also included is an update of IRS statistics regarding recent audit rates. In addition, this month’s letter suggests some ideas to help your kids create summertime income and protect themselves from identity theft.
A Dozen Tax Planning Triggers
With all the tax law changes for 2013 here are some things that should trigger you to conduct a full tax planning session to ensure your tax bill next year is not higher than it needs to be.
|You owed tax in 2012.With tax rate increases in 2013 you may be in for a big surprise.|
|Your household income is over $150,000 single and $200,000 joint.There are a number of new taxes that could impact you and your family. This includes things like; itemized deduction phase-out, exemption phase-outs, increase in capital gains tax rate, increase in general dividend tax rate, new medicare surtaxes plus more.|
|You are getting married or divorced. The tax penalty for being married is higher than ever. Are you prepared?|
|You have kids attending college next year. There are a number of tax programs that can help.|
|You have a small business. There are depreciation benefits plus new tax laws, mentioned earlier, that will also impact any “flow through” business entity like Sub Chapter S or LLC companies.|
|You plan on selling investments. Capital Gains tax rates can now range from 0% to 39.6% (or even higher with Medicare surtaxes added in 2013).|
|There are changes in your employer provided benefits. These changes could impact your taxable income this year.|
|You buy, sell or go through home foreclosure. Understanding foreclosure tax programs could save you thousands.|
|You have major medical expenses. The threshold for itemized medical deductions goes from 7.5% to 10% for those under 65 years old.|
|You recently lost or changed jobs. Federal unemployment benefits remain extended over historical levels.|
|You have not conducted a tax withholding review. New tax rates and laws, including the reintroduction of 6.2% Social Security tax could catch you by surprise.|
|Your estate has not been reviewed in the past 12 months. New gift tax and estate tax laws make 2013 a key year for an estate tax review.|
If any of these triggers apply to you, please schedule a tax planning appointment.
Protecting Your Kids from Identity Theft
As the IRS and press focus on the recent identity theft epidemic, a large segment of our population is often overlooked: our kids.
The new risk
Many school forms now require personal information and often the information that is collected is not stored with the same discipline that a bank or the IRS might store the information. In addition, child activities and service providers, like doctors, are asking for and storing your child’s sensitive information. Is this a problem?
The warning signs
According to the Federal Trade Commission, there are a number of warning signs that your child’s identity is being misused.
|You are turned down for benefits. This is often due to someone else using your child’s social security number for similar benefits.|
|The IRS sends you a notice. A notice from the IRS often means someone else has filed a tax return using your child’s information.|
|Your e-filed tax return is rejected. An automatic rejection can occur when someone else is using your child’s information to claim them as a deduction.|
|You start receiving mail and bills in your child’s name. These vendors received this information from someone. Best case? There is an information leak. Worst case? Someone is purchasing things using your child’s identity.|
|You receive collection calls. In this case the damage has been done and you will need to assess the scope and breadth of the problem.|
What you can do
|A safe location. Place all your child’s sensitive information in a safe location. If it is stored digitally, make the file a password protected file and a file that is not easy to find.|
|Be careful what you share. Do not use your child’s social security number in any application that is not absolutely necessary. If you do, make sure you trust the other party and understand how they are protecting the information.|
|Create an identifier. Instead of using your child’s social security number, create another identifier that can be used and given to outside vendors.|
|Shred. Shred all documents that show personal information prior to throwing it out.|
|Pay attention. Read all the forms and notices sent home from school. If personal information is included, ask why and how it is being protected.|
|Know your privacy rights. The Federal Family Educational Rights and Privacy Act (FERPA) protects the privacy of student records. Schools should have a student directory information policy and a policy on school surveys. Know your rights before filing out the forms.|
When your child reaches the age of 16, check their credit reports with the major credit reporting companies. Hopefully, there is not one. But if there is, you should have ample time to review the reports and correct errors prior to your child needing a clean record for employment, school, or other credit needs. The three companies are:
- Equifax: 1.800.525.6285 or www.equifax.com
- Experian: 1.888.397.3742 or www.experian.com
- TransUnion: 1.800.680.7289 or email@example.com or www.transunion.com
The Chances of Being Audited
Every year the IRS publishes the statistics of who they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends:
|Audit Rate Statistics for INDIVIDUALS|
|Fiscal Year Year||2012||2011||2010||2008|
|All Individual Tax Returns||1.03%||1.11%||1.11%||1.00 %|
|No Income (AGI)||2.67%||3.42%||3.19%||2.15%|
|Income under $25,000||1.05%||1.22%||1.18%||.90%|
|$25,000 – 50,000||.70%||.73%||.73%||.72%|
|$50,000 – 75,000||.64%||.83%||.78%||.69%|
|$75,000 – 100,000||.64%||.82%||.64%||.69%|
|$100,000 – 200,000||.85%||1.00%||.71%||.98%|
|$200,000 – 500,000||1.96%||2.66%||1.92%||1.92%|
|$500,000 – $1 million||3.57%||5.38%||3.37%||2.98%|
|$1 million – $5 million||8.90%||11.80%||6.67%||4.02%|
|$5 million – 10 million||17.94%||20.75%||11.55%||6.47%|
|$10 million and over||27.37%||29.93%||18.38%||9.77%|
|Note: These audit rates are stated as a percent of total tax returns with “total positive income” (TPI) as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year.
Source: IRS Data Books
|After dramatic audit increases in incomes over $200,000 during 2011, the audit rates have come down slightly, but still at least 2x the rates in 2008.|
|Those with incomes over $10 million will have a 1 in 4 chance of being audited.|
|Automatic spending cuts from sequestration could impact the audit rates in 2013. How far they will drop is anyone’s guess.|
|It is also unknown what the 2013 tax increases for those with incomes over $250,000 will do to audit rates as more of the total revenue collected will come from these upper income groups.|
Play it safe
Always retain your tax records and support documents for as long as they may be needed to substantiate your tax return. This is usually three years after the filing due date or when the tax return was actually filed (whichever is later). Make sure you include any state record retention requirements as you review when it is safe to destroy old records. Remember some records need to be retained indefinitely. This includes, at minimum, copies of original tax returns, legal documents, and real estate transactions.
Creative Summer Jobs
Schools are entering summer break and you have a teen looking for a job. Is it too late to find summer work? What advice can you give your child? Here are some ideas to create summertime income.
Make your own income
Some final thoughts
Being creative during the summer can bring financial opportunity. But often it is not the idea that creates success, but how you go about it. Some advice for your success:
Should you have any questions or concerns regarding your situation please feel free to call or email.