November 2015 Newsletter
Plan now to Use Health Flexible Spending Arrangements in 2016; Contribute up to $2,550; $500 Carryover Option Available to Many
The Internal Revenue Service recently reminded eligible employees that now is the time to begin planning to take full advantage of their employer’s health Flexible Spending Arrangement (FSA) during 2016.
FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2016 plan year.
Interested employees wishing to contribute during the new year must make this choice again for 2016, even if they contributed in 2015. Self-employed individuals are not eligible.
An employee who chooses to participate can contribute up to $2,550 during the 2016 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.
Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year—for example, an employee with $500 of unspent funds at the end of 2016 would still have those funds available to use in 2017. Under the grace period option, an employee has until 2½ months after the end of the plan year to incur eligible expenses—for example, March 15, 2017, for a plan year ending on Dec. 31, 2016. Employers can offer either option, but not both, or none at all.
Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. More information about FSAs can be found in Publication 969 (www.irs.gov/pub/irs-pdf/p969.pdf), available on IRS.gov.
Forget Something on Your Tax Return? You Can Amend the Return
If you realize you forgot something on your tax return, you can amend that return after it has been filed. There are many reasons individuals need to amend their returns, whether it is for the just-filed 2014 return or prior year returns. Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.
If you are amending for a refund, be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Except for amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2012 through 2014. Some states have a longer statute. The last day to file a federal amended 2012 return for a refund is April 16, 2016.
Generally, you do not need to file an amended return to correct math errors you made on the return. The IRS or state agency will automatically make those corrections.
If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
If you amend returns and owe additional tax, you will be subject to interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
If you amend multiple year returns, mail them in separate envelopes to be sure each is received and processed and not overlooked in the multiple return envelope.
A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays. Depending on why you file an amended federal return, you may be required to amend your state return.
An amended return can be more complicated than the original, so please contact our office for assistance in preparing your amended returns.
IRS Withholding Calculator
If you are an employee, the Withholding Calculator can help you determine whether you need to give your employer a new Form W-4, Employee's Withholding Allowance Certificate (www.irs.gov/pub/irs-pdf/fw4.pdf) to avoid having too much or too little Federal income tax withheld from your pay. You can use your results from the calculator to help fill out the form.
Who Can Benefit From The Withholding Calculator?
Employees who would like to change their withholding to reduce their tax refund or their balance due;
Employees whose situations are only approximated by the worksheets on the paper W-4 (e.g., anyone with concurrent jobs, or couples in which both are employed; those entitled to file as Head of Household; and those with several children eligible for the Child Tax Credit);
Employees with non-wage income in excess of their adjustments and deductions, who would prefer to have tax on that income withheld from their paychecks rather than make periodic separate payments through the estimated tax procedures.
CAUTION: If you will be subject to alternative minimum tax, self-employment tax, or other taxes; you will probably achieve more accurate withholding by following the instructions in Pub 505: Tax Withholding and Estimated Tax (www.irs.gov/pub/irs-pdf/p505.pdf).
Ready to start? Continue to the Withholding Calculator (https://apps.irs.gov/app/withholdingcalculator/).
Tips For Using This Program
Have your most recent pay stubs handy.
Have your most recent income tax return handy.
Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
To Change Your Withholding:
Use your results from this calculator to help you complete a new Form W-4, Employee's Withholding Allowance Certificate (www.irs.gov/pub/irs-pdf/fw4.pdf).
Submit the completed Form to your employer.
Fighting Tax Scam Phone Fraud Four Ways
The Internal Revenue Service has a warning for many Americans (and it’s not about paying your taxes). Instead, the agency has tips on how to protect yourself from telephone scam artists calling and pretending to be with the IRS.
These callers may demand money or say you have a refund due and try to trick you into sharing private information. The con artists can sound convincing when they call. They may know a lot about you, and they usually alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS identification badge numbers. If you don’t answer, they often leave an “urgent” callback request.
“We urge people not to be deceived by these threatening phone calls,” said IRS Commissioner John Koskinen. “We have formal processes in place for people with tax issues. The IRS respects taxpayer rights, and these angry shakedown calls are not how we do business.”
What To Watch For
The IRS reminds people that they can know pretty easily when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not:
Call to demand immediate payment or call about taxes owed without first having mailed you a bill.
Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
Require you to use a specific payment method for your taxes, such as a prepaid debit card.
Ask for credit or debit card numbers over the phone.
Threaten to bring in the police or other law-enforcement groups to have you arrested for not paying.
What To Do
If you get a phone call from someone claiming to be from the IRS and asking for money, here are four things you can do:
If you know you owe taxes or think you might, call the IRS at (800) 829-1040.
If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at (800) 366-4484 or at www.tigta.gov. You can also file a complaint with the Federal Trade Commission’s “FTC Complaint Assistant” at FTC.gov. Add “IRS Telephone Scam” to the comments of your complaint.
Get help from a licensed tax professional. Enrolled agents (EAs) are America’s tax experts. They are the only federally licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS. If you are audited by the IRS, an our office can advocate on your behalf.
The IRS does not use unsolicited e-mail, text messages, or any social media to discuss your personal tax issues. Don’t be fooled by scam artists.
Expats Worried over Passports Being Revoked for Tax Debts
An advocacy group for U.S. expatriates, American Citizens Abroad, is sounding the alarm about a provision in Congress’s highway funding bill that would revoke the passports of people who owe more than $50,000 in taxes.
The House and Senate have passed differing versions of the highway funding bill, and the two versions have yet to be reconciled. However, a provision in the Senate version would authorize the federal government to deny the application for a passport when an individual has more than $50,000 (indexed for inflation) of unpaid federal taxes which the IRS is collecting through enforcement action. It would also permit the federal government to revoke a passport for such individuals.
Before revocation, however, the federal government would be allowed to limit a previously issued passport only for return travel to the United States or to issue a limited passport that only permits return travel to the United States. The provision would be effective on Jan. 1, 2016, and is estimated to raise $398 million over 10 years, according to a description from the Senate Finance Committee.
American Citizens Abroad wrote a letter to congressional leaders last week to strongly oppose the inclusion of the passport revocation provision in the legislation. The group is urging Congress not to act on the provision until it has held hearings and explored alternative ways to solve any perceived tax collection problems.
“This provision creates a tax collection mechanism that is frankly far too draconian,” wrote executive director Marylouise Serrano. “This approach puts disproportionate pressure on the taxpayer and risks mistakes and unforeseeable consequences, which would be life-changing for the individual. It discriminates against Americans abroad who, unlike Americans living in the U.S., are overwhelmingly reliant upon their U.S. passports in their everyday lives.”
Don’t Miss These Year-End Tax-Saving Maneuvers
As we get closer to the end of yet another year, it’s time to tie up the loose ends and implement tax-saving strategies.
Of course, everyone has a unique tax situation, but here are some strategies to add to your year-end tax planning arsenal:
• Boost charitable contributions with a donor-advised fund.These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations. With donor-advised funds, which are available through a number of major mutual fund companies, as well as universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice. The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. Donor-advised funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.
• Make sure you have adequate health insurance coverage. If you and your family don’t have adequate medical coverage (referred to as minimum essential coverage), you may be subject to a penalty. Medical insurance provided by your employer or through an individual plan purchased through a state insurance marketplace generally qualifies for adequate coverage. The penalty amount varies based on the number of uninsured members of your household and your household income. If you have three or more uninsured household members, the penalty may be $975 or more for 2015 ($2,085 or more for 2016), depending on your household income.
• Harvest capital losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date.
• Increase capital losses with a bond swap. Bond swaps can be an effective means of generating capital losses. With a bond swap, you start with a bond or bond fund that has decreased in value (for example, due to an increase in interest rates or a lowering of the issuer’s creditworthiness). You sell the bond or fund shares and immediately reinvest in a similar (but not substantially identical) bond or bond fund. The end result is that you recognize a taxable loss and still hold a bond or shares in a bond fund that pays you similar or more interest than before.
• Secure a loss deduction for nearly worthless securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules capital loss and wash sale rules).
Through careful planning, it’s possible your 2015 tax liability can be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction.