IRS Identity Letter 5071C
Apr 24, 2015
The IRS has been dealing with an increasing wave of tax scams this year in which fraudsters have been leaving messages on taxpayers’ phones claiming to be from the IRS demanding payment, and have been sending phishing emails to taxpayers purporting to come from the IRS. On Thursday, IRS Commissioner John Koskinen met with leaders of several of the major tax software companies, tax preparation chains, state tax commissioners and other officials to coordinate an approach to deal with identity theft. In an effort to protect taxpayers from identity theft, the IRS is releasing the Identity Letter 5071C to taxpayers whose return is deemed “suspicious” upon filing.
The letter asks taxpayers to verify their identity in order to complete processing of their return if the taxpayer did file it or reject the return if the taxpayer did not file it. The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers may use the idverify.irs.gov site or call the toll-free number provided in the letter. Due to the high-volume on the toll-free numbers, the IRS-sponsored website, idverify.irs.gov, is the safest, fastest option for taxpayers with web access.
The website will ask a series of questions that only the real taxpayer can answer. Taxpayers should have available their prior year tax return and their current year tax return; if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.
Please note that the IRS does not request such information via email, nor will the IRS call a taxpayer directly to ask this information without you receiving a letter first. The letter-number can be found in the upper corner of the page. If you have questions regarding your letter, please visit the IRS website.
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Keeping Up With Your Retirement
Apr 22, 2015
If you’re approaching retirement, it may seem like your hard work is almost done. You’re probably getting ready to relax and enjoy yourself. However, there are still a few more things you should do to complete your retirement planning. Doing them now, before you retire, can help you transition from saving to spending your savings. Here are a few ways to get the ball rolling.
Review Your Investments
First, look at your investment portfolio’s asset allocation. Your ability to recover from market downturns is generally reduced when retirement is getting closer. You may decide to shift a larger portion of your portfolio out of stocks. But keep in mind that inflation can reduce the buying power of your retirement assets. You’ll probably want to keep some stock investments in your portfolio since they have the potential to generate returns that outpace inflation.
Consider Your Distribution Options
Next, take some time to learn about your plan distribution options. If you cash out your account balance, you’ll owe income taxes in the year you receive the distribution, leaving you with less money to spend or reinvest.* Instead, you may have the option of keeping the funds tax deferred in your plan account and taking periodic payments. Or you can arrange for the distribution to be transferred directly into a tax-deferred individual retirement account (IRA). With either option, you can spread out your tax liability by withdrawing the money over time.
Keep Contributing
Finally, continue contributing to your plan. Even if retirement is only a short time away, continuing to save can make a difference in your account value at retirement. If you’re age 50 or over, your employer’s plan may allow you to make “catch-up” contributions. If possible, take advantage of this opportunity so you can accumulate even more money for your retirement.
- Qualified distributions from a Roth account are not subject to federal income taxes.
Don’t Stop Saving
Continuing to save even as you near retirement can help your account grow.
Still Saving Stopped Saving
Account Value at Age 57 $100,000 $100,000
Average Annual Total Return 6% 6%
Annual Amount Contributed
from Age 57 to Age 67 $3,600 $0
Account Value at Age 67 $226,536 $179,085
This is a hypothetical example used for illustrative purposes only and does not represent any specific investment product. Annual compounding is assumed. Your investment performance will be different.
Source: DST
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Putting Your Tax Refund To Good Use
Apr 16, 2015
Are you expecting a tax refund from the IRS this year? Although it may be tempting to spend your refund on the newest electronic gadget, consider using it to meet one or more of your financial goals
Pay Down Debt
Credit card debt can grow quickly if left unpaid. Credit card interest typically accrues at a relatively high rate. Any unpaid interest is added to the principal balance each month, and interest then accrues on the new, higher balance. And on top of that, interest on personal credit card debt is not tax deductible.
You also may want to consider allocating part of your refund to an unpaid car loan. Like credit card interest, interest on a personal car loan is not tax deductible.
Save for Retirement
The longer you delay saving for retirement, the less time you’ll have to benefit from any investment gains on your savings. You might consider using your tax refund to cover current expenses and then allocating an equivalent amount to a pretax retirement savings plan, such as a 401(k). This way, you would reduce your taxable income for the year and increase your investable savings, which can potentially compound tax-free until you retire. With this strategy, compounding works for you rather than against you.
Add to Your College Funds
Although the IRS does not allow a deduction for contributions to a Section 529college savings plan account, the tax law does provide that any earnings on your contributions will be tax deferred and ultimately tax free if applied to qualifying education expenses.
Create an Emergency Fund
Consider putting aside part of your refund in an account you can easily access to pay for unexpected expenses, such as car or plumbing repairs.
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Your Child & Taxes
Apr 14, 2015
Even though junior is still your dependent, he may have to file a federal income tax return. This may be true even if junior have a job.
Your dependent child will be required to file an income-tax return for the 2015 tax year if he or she meets any one of the following criteria:
- Your child has unearned income (investment interest, gains, dividends, etc.) of more than $1,050.
- Your child’s gross income is more than the standard deduction, which is the greater of (1) $1,050 or (2) $350 plus the child’s earned income ($6,300 maximum deduction).child
- Your child’s net earnings from self-employment (such as babysitting, yard work, etc.) are $400 or more.
Your child won’t be required to file a return if you elect to include your child’s income on your tax return. This election may be available if your child’s investment income from interest, dividends, and capital gains distributions is more than $1,050 and less than $10,500.
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Tax Implications For Rental Property
Apr 09, 2015
Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.
Rental Losses
Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.
$25,000 Loss Limitation
The tax law generally treats real estate rental losses as “passive” and, therefore, available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual owns at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.
What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples provided by the IRS of management decisions include approving tenants and deciding on rental terms.
Selling the Property
Gain realized on the sale of residential rental property held for investment is generally taxed as capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.
Exclusion of Gain
The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.
After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.
This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.
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