Are Your Social Security Benefits Taxable?

All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits.

But many people may not realize the Social Security benefits they received in 2013 may be taxable. The information outlined below should help you determine whether those benefits you receive in 2013 are taxable or not.

1. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2013, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below).

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software program will also figure this for you.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

  • First, add one-half of the total Social Security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income.
  • Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2013 base amounts are:

  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

10 Things to Know About Capital Gains

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account.

When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. Here are 10 facts you should know about how gains and losses can affect your federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis — which is usually what you paid for it — is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may only deduct capital losses on investment property, not on personal-use property.

5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2013, the maximum capital gains rate is 20 percent; however that rate only applies to taxpayers in the highest tax bracket (39.6%) whose income exceeds $400,000 (single filers) or $450,000 (joint filers). Taxpayers in the middle tax brackets pay a maximum of 15 percent. For taxpayers in the lowest tax brackets (under 15%) the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.

8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. A new form (Form 8949, Sales and Other Dispositions of Capital Assets) was introduced in 2011 to calculate capital gains and losses and list all capital gain and loss transactions. Subtotals are then carried over to Schedule D (Form 1040), where gain or loss is calculated.

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IRS Offers Tips for Year-End Giving

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

Special Tax-Free Charitable Distributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Charitable Contributions of Clothing and Household Items
To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
Reminders
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2013 count for 2013. This is true even if the credit card bill isn’t paid until 2014. Also, checks count for 2013 as long as they are mailed in 2013.
  • Check that the organization is eligible. Only donations to eligible organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2013 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

Tax Tip- Three Year-End Tax Tips to Help You Save

Although the year is almost over, you still have time to take steps that can lower your 2013 taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:
1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.
2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Use the IRS Select Check tool at IRS.gov to see if an organization is qualified.
Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. For more about these rules see Publication 526, Charitable Contributions.
If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2013. See Publication 590, Individual Retirement Arrangements (IRAs), for more information.
3. Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013.
The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim.
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Tap Your Retirement Money Early; Minimize Penalties

The purpose of retirement plans such as the 401(k) and Individual Retirement Account (IRA) is to save money for your retirement years. As such, the IRS imposes a penalty of 10% for early withdrawals taken from qualified retirement plans before age 59 1/2. Qualified retirement plans include section 401(k) plans, individual retirement accounts (IRAs), and 401(k) plan, tax-sheltered annuity plans under section 403(b) for employees of public schools or tax-exempt organizations.

While you should always think carefully about taking money out of your retirement plan before you’ve reached retirement age, there may be times when you need access to those funds, whether it’s buying a new house or paying for out of pocket medical expenses. Fortunately, IRS provisions allow a number of exceptions that may be used to avoid the tax penalty.

  1. If you are the beneficiary of a deceased IRA owner, you do not have to pay the 10% penalty on distributions taken before age 59 1/2 unless you inherit a traditional IRA from your deceased spouse and elect to treat it as your own. In this case, any distribution you later receive before you reach age 59 1/2 may be subject to the 10% additional tax.
  2. Distributions made because you are totally and permanently disabled are exempt from the early withdrawal penalty. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.
  3. Distributions for qualified higher educational expenses are also exempt, provided they are not paid through tax-free distributions from a Coverdell education savings account, scholarships and fellowships, Pell grants, employer-provided educational assistance, and Veterans’ educational assistance. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution, as well as expenses incurred by special needs students in connection with their enrollment or attendance. If the individual is at least a half-time student, then room and board are considered qualified higher education expenses. This exception applies to expenses incurred by you, your spouse, children and grandchildren.
  4. Distributions due to an IRS levy of the qualified plan.
  5. Distributions that are not more than the cost of your medical insurance. Even if you are under age 59 1/2, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply: you lost your job, you received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job, you receive the distributions during either the year you received the unemployment compensation or the following year, you receive the distributions no later than 60 days after you have been reemployed.
  6. Distributions to qualified reservists. Generally, these are distributions made to individuals called to active duty after September 11, 2001 and on or after December 31, 2007.
  7. Distributions in the form of an annuity. You can take the money as part of a series of substantially equal periodic payments over your estimated lifespan or the joint lives of you and your designated beneficiary. These payments must be made at least annually and payments are based on IRS life expectancy tables. If payments are from a qualified employee plan, they must begin after you have left the job. The payments must be made at least once each year until age 59 1/2, or for five years, whichever period is longer.
  8. If you have out-of-pocket medical expenses that exceed 10% of your adjusted gross income, you can withdraw funds from a retirement account to pay those expenses without paying a penalty. For example, if you had an adjusted gross income of $100,000 for tax year 2013 and medical expenses of $12,500, you could withdraw as much as $2,500 from your pension or IRA without incurring the 10% penalty tax. You do not have to itemize your deductions to take advantage of this exception.
  9. An IRA distribution used to buy, build, or rebuild a first home also escapes the penalty; however, you need to understand the government’s definition of a “first time” home buyer. In this case, it’s defined as someone who hasn’t owned a home for the last two years prior to the date of the new acquisition. You could have owned five prior houses, but if you haven’t owned one in at least two years, you qualify.The first time homeowner can be yourself, your spouse, your or your spouse’s child or grandchild, parent or other ancestor. The “date of acquisition” is the day you sign the contract for purchase of an existing house or the day construction of your new principal residence begins. The amount withdrawn for the purchase of a home must be used within 120 days of withdrawal and the maximum lifetime withdrawal exemption is $10,000. If both you and your spouse are first-time home buyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10% penalty.

Remember that although using the above techniques will help you avoid the 10% penalty tax, you are still liable for any regular income tax that’s owed on the funds that you’ve withdrawn. Distributions rolled over into another qualified retirement plan or distributions from a Roth IRA however, escape both the regular income tax and the 10% penalty tax. Rollovers should be made directly between your brokers, to avoid paying the 20% withholding required on distributions that you touch.

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10 Tax Breaks Set to Expire in 2013

 

Federal tax breaks come and go, and this year is no exception. Unless Congress takes action, 55 of them are set to expire on December 31, 2013. Let’s take a look at the ones that are most likely to affect taxpayers like you.

1. Teachers’ Deduction for Certain Expenses
Primary and secondary school teachers buying school supplies out-of-pocket may be able to take an above-the-line deduction of up to $250 for unreimbursed expenses. An above the line deduction means that it can be taken before calculating adjusted gross income.

2. State and Local Sales Taxes
Taxpayers that pay state and local sales tax can deduct the amounts paid on their federal tax returns (instead of state and local income taxes)–as long as they itemize. In other words, if you’re thinking of buying a big ticket item such as a boat or car and live in a state with sales tax, you might want to think about buying it this year.

3. Mortgage Insurance Premiums
Mortgage insurance premiums (PMI) are paid by homeowners with less than 20% equity in their homes. These premiums were deductible in tax years 2012 and 2013; however, this tax break is scheduled to end on December 31, 2013. Mortgage interest deductions for taxpayers who itemize are not affected.

4. Exclusion of Discharge of Principal Residence Indebtedness
Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, this tax provision, which expires at the end of this year, allows homeowners whose homes have been foreclosed on or subjected to short sale to exclude up to $2 million of cancelled mortgage debt. Also included are taxpayers seeking debt modification on their home.

5. Distributions from IRAs for Charitable Contributions
Taxpayers who are age 70 ½ or older can donate up to $100,000 in distributions from their IRA to charity. Some people do not want to take the mandatory minimum distributions (which are counted as income) upon reaching this age and instead can contribute it to charity, using it as a strategy to lower income enough to take advantage of other tax provisions with phaseout limits.

6. Mass Transit Fringe Benefits
In 2013, commuters using mass transit can exclude from income up to $245 per month on transit benefits paid by their employers such as monthly rail or subway passes, making it on par with parking benefits (also up to $245 pre-tax). This provision is set to expire at the end of the year, however and in 2014, pre-tax benefits for mass transit commuters drop to a maximum of $130 per month, while parking benefits remain the same.

7. Energy Efficient Appliances
This tax break has been around for a while, but if you’re still thinking about making your home more energy efficient, now is the time to take advantage of this tax credit, which reduces your taxes (as opposed to a deduction that reduces your taxable income). The credit is 10% of the cost of building materials for items such as insulation, new water heaters, or a wood pellet stove.

Note: This tax is cumulative, so if you’ve taken the credit in any tax year since 2006, you will not be able to take the full $500 tax credit this year. If, for example, you took a credit of $300 in 2011, the maximum credit you could take this year is $200.

8. Electric Vehicles
Buy a four-wheel electric vehicle such as a Ford Focus Electric (Model years 2012-2014), BMW i3 Sedan (Model year 2014), Fiat 500e (Model year 2013), and Nissan Leaf (Model years 2011-2013) and take a tax credit of $7,500. Other vehicles, such as a 2014 Accord Plug-In Hybrid and the Toyota Prius Plug-in Electric Drive Vehicle (Model years 2012-2014) are eligible for a lesser tax credit. Call us for additional information on tax credits for electric vehicles.

Note: The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States.

9. Donation of Conservation Property
Also expiring this year is a tax provision that allows taxpayers to donate property or easements to a local land trust or other conservation organization and receive a tax break in return.

10. Small Business Stock
If you’ve been thinking about investing in a small business such as a start-up C-corporation, consider doing it this year because this tax provision expires on December 31. If you hold onto this stock for five years, you can exclude 100% of the capital gains–in other words, you won’t be paying any capital gains. If you wait until January, you will only be able to exclude 50% of the capital gains.

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2013 Tax Changes for Individuals

From personal deductions to tax credits and educational expenses, many of the tax changes affecting individuals were related to the signing of the American Taxpayer Relief Act (ATRA), which modified, made permanent, or extended a number of tax provisions that expired in 2010 and 2011. With that in mind, here’s what individuals and families need to know about tax changes that took effect in 2013.

Personal Exemptions
The personal and dependent exemption for tax year 2013 is $3,900.

Standard Deductions
In 2013 the standard deduction for married couples filing a joint return is $12,200. For singles and married individuals filing separately, it’s $6,100, and for heads of household the deduction is $8,950.

The additional standard deduction for blind people and senior citizens increases in 2013 to $1,200 for married individuals and $1,500 for singles and heads of household.

Income Tax Rates
Beginning in tax year 2013, a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.

Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $72,500 for a married couple filing a joint return.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.25 million per individual for estate, gift and generation-skipping taxes, with a top rate of 40%. The annual exclusion for gifts is $14,000.

Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT. For 2013 exemption amounts are $51,900 for single and head of household filers, $80,800 for married people filing jointly and for qualifying widows or widowers, and $40,400 for married people filing separately.

Marriage Penalty Relief
For 2013, the basic standard deduction for a married couple filing jointly is $12,200.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA and affect taxpayers with income at or above $250,000 (single filers) and $300,000 for married filing jointly starting with tax year 2013.

Flexible Spending Accounts (FSA)
Flexible Spending Accounts are limited to $2,500 per year starting in 2013 (indexed to inflation) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains
In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remains at 2012 rates. For taxpayers in the lower tax brackets (10% and 15%), the rate remains at 0%, (the same as in 2012). For taxpayers in the middle tax brackets however, the rate increases to 15%. For taxpayers whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Individuals – Tax Credits
Adoption Credit
In 2013 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $12,970 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
For tax year 2013, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2013, the maximum earned income tax credit (EIC) for low and moderate income workers and working families rises to $6,044, up from $5,891 in 2012. The maximum income limit for the EITC rises to $51, 567 (up from $50,270 in 2012) for married filing jointly. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals – Education Expenses

Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2013. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2013, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance
In 2013, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2013, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers and $52,000 for singles and heads of household.

Student Loan Interest
In 2013 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $60,000 (single) or $125,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

Individuals – Retirement

Contribution Limits
For 2013, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $17,500. For persons age 50 or older in 2013, the limit is $23,000 ($5,500 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,000 for persons under age 50 and $14,500 for persons age 50 or older in 2013. The maximum compensation used to determine contributions increases to $255,000.

Saver’s Credit
In 2013, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $59,000 for married couples filing jointly, $44,250 for heads of household, and $29,500 for married individuals filing separately and for singles.

 

Mileage Rates Released for 2014

 

The IRS has issued its 2014 optional standard mileage rates to calculate deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 56 cents per mile for business miles;
  • 23.5 cents per mile driven for medical or moving purposes; and,
  • 14 cents per mile driven in service of charitable organizations.

The business, medical and moving expense rates decrease one-half cent from the 2013 rates. The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers can also calculate actual costs of using their vehicle, rather than using the standard mileage rates. They may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle.

In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements are in Rev. Proc. 2010-51. Notice 2013-80 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

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IRS Contends with Billions Lost to Stolen EINs

The Internal Revenue Service is losing billions of dollars to fraudsters every year from stolen Employer Identification Numbers, according to a new government report, even though it has some processes in place to authenticate individuals who apply for an EIN.

The report, released publicly Thursday by the Treasury Inspector General for Tax Administration, found the IRS needs to do more to prevent fraud from the use of stolen EINs.

The IRS issues EINs to identify taxpayers’ business accounts. Individuals who try to commit tax refund fraud oftentimes steal or falsely obtain an EIN to file tax returns that report false income and withholding. TIGTA estimated that such fraud could top $11.4 billion in potentially fraudulent refunds over a five-year period.

The overall objective of TIGTA’s review was to assess the IRS’s processes for issuing EINs and identifying stolen or falsely obtained EINs for reporting income and withholding. TIGTA acknowledged that the IRS has developed processes to both authenticate individuals applying for an EIN and ensure that there is a valid business reason to obtain an EIN.

However, TIGTA identified 767,071 electronically filed individual tax returns in tax year 2011 with refunds based on falsely reported income and withholding. Of the 285,670 EINs used on these tax returns, 277,624 were stolen EINs used to report false income and withholding on 752,656 tax returns with potentially fraudulent refunds issued totaling more than $2.2 billion, while 8,046 were falsely obtained EINs used to report false income and withholding on 14,415 tax returns with potentially fraudulent refunds issued totaling more than $50 million.

The IRS has processes to prevent fraudulent refunds claimed using stolen and falsely obtained EINs, but it does not have the third-party Form W-2 information that it needs to make significant improvements in its detection efforts. Nevertheless, the IRS does maintain data that could increase its ability to detect tax returns with false income and withholding associated with stolen or falsely obtained EINs, TIGTA noted.

“With an estimated tax gap in excess of $450 billion, it is imperative that the IRS use all available data to increase its ability to detect tax returns with false income and withholding associated with stolen or falsely obtained EINs,” said TIGTA Inspector General J. Russell George in a statement.

In response to the report, the IRS said it takes refund fraud and identity theft very seriously. “The IRS continues to increase its efforts against refund fraud, which includes identity theft,” the IRS said in a statement. “As a result of these aggressive efforts to combat identity theft since 2011, the IRS has stopped 12.6 million suspicious returns, and protected over $40 billion in fraudulent refunds. The IRS appreciates TIGTA’s recognition of the effective processes we have developed to identify and prevent the fraudulent use of Employer Identification Numbers (EIN). The creation of the Business Master File Identity Theft Team is a substantial step forward in identifying threats associated with the misuse of EINs and developing effective mitigation strategies. We are taking additional steps for the coming filing season, including preparing a new Return Review Program for 2014 that will incorporate EIN validation into our fraud detection process.”

TIGTA recommended that the IRS update its fraud filters to identify potentially fraudulent tax returns and develop processes to identify individuals who submit tax returns that report income and withholding using the EIN of a closed business. IRS officials agreed with TIGTA’s recommendations and plan to update the fraud filters.

Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, pointed to the steps the IRS has already taken to combat identity theft and tax return fraud, including the creation of the Business Master File Identity Theft Team and the Return Review Program. She pointed out, however, that the IRS is facing a number of challenges, including the potential delays in processing tax returns. That is what happened last year when the IRS tightened the identity theft filters and millions of taxpayers were left waiting months for their tax refunds from tax year 2011.

“Using the business tax return filing and withholding information will be helpful in identifying potentially fraudulent refund claims by individuals using false wage and withholding information; however, there is a risk of delaying the processing of legitimate tax returns filed by individuals whose employers are not compliant with their tax and/or information filing obligations,” Bogadi wrote in response to the report. “Our sample review of the potentially fraudulent tax returns, identified by the Treasury Inspector General for Tax Administration, found situations where the employers had remitted payroll tax deposits but were delinquent in filing employment tax returns. We also noted instances where wage and withholding information from the employer was present for prior and/or subsequent periods that, in our experience, indicate either data anomalies or non-compliance with filing requirements. In these situations, non-compliance by employers does not equate to refund fraud by employees. With filings of individual income tax returns exceeding 140 million annually, we must ensure that corrective actions do not have the unintended result of flagging legitimate returns as being potentially fraudulent.”

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