3 ways to cut taxes while saving for retirement

Dan Ritter for Wall St CheatSheet / USA Today writes: The start of a new calendar year is a busy time in the world of personal finance. For the most part, as far as the Internal Revenue Service is concerned, what happened in 2013 will stay in 2013 — 2014 is a new year, and households often take the time to balance holiday-stretched budgets and plan for the new year.
Unless you are already comfortably retired (and if so, congratulations!), it is probably worth your while to plan your finances, in particular your contributions toward retirement. If you don't have a clear strategy, perhaps now is the time to develop one. If you do, it is always wise to make sure that it is effective and efficient and that you are executing it well.

A top consideration when you sit down to do all this strategizing is how severely Uncle Sam is going to hit you with the tax bat. First, stay up to date on your tax bracket so you know what to expect come year's end. Second, make sure you are taking deductions where you earn them. Believe it or not, the government wants to incentivize smart financial behavior, and the more savvy you are with your retirement savings, the more tax advantages you can receive.

Here are a few things to get you started.

1. 401k — if you have it, use it

A 401k has several valuable benefits, and one of the best is that it can be funded with pre-tax earnings. That is, when you elect to have part of your paycheck deducted and contributed directly to a 401k, this part of your salary isn't counted toward your taxable income at the end of the year.

What this means is that your contributions to the plan aren't subject to most federal or state taxes (there's little escape from earned income taxes such as payroll and Social Security, which you will still be pinged for), effectively lowering your total taxable income. Keep in mind that you receive this tax benefit each time a 401k contribution is deducted from your paycheck, so you don't take a formal deduction on your tax return for the sum of your contributions.
401k contributions can have an effect on your take-home pay, as well. If your employer withholds money from your paycheck for federal income taxes, that withholding is based on your expected taxable income. Since your expected taxable income is reduced to below your actual salary when you contribute to a 401k, the withholding will be smaller.
There are online calculators available if you want to get an idea of how a contribution to a 401k could affect your paycheck.

Remember that contributing to a traditional 401k is only a temporary tax windfall, and that taxes will be levied on funds withdrawn from the account. 401k contributions will be limited at $17,500 per year for people younger than 50, while those older than 50 may contribute up to $23,000.


2. If you don't have a 401k, open an IRA

If you don't have access to a 401k account, you should definitely consider an IRA — an individual retirement account. There are some important conditions that apply in order to be eligible to contribute to an IRA, but for the most part, if you are under the age of 70.5 years old and you earn a reported income from your employer, you can open an IRA with any number of financial institutions.

An IRA works like a 401k in that your contributions will, pending certain conditions, lower your taxable income (you will still be subject to earned income taxes like payroll and Social Security regardless of IRA contributions). The annual limit on contributions to an IRA for those younger than 50 is $5,500 and $6,500 for those older than 50.

The amount you will be able to deduct depends on a number of factors. For example, in 2014, you will not get an IRA contribution deduction if you are a single adult or a head of household who has a workplace retirement plan and has an adjusted annual gross income of between $60,000 and $70,000.

There are a number of conditions that apply to the eligibility of IRA contributions for deduction, but there's a good chance that if you don't have access to a retirement plan through work, opening an IRA could make your financial life much easier.

For the record, you can often still contribute to an IRA even if you have a work-sponsored retirement savings plan, but your contributions may not count toward a tax deduction. The IRS has tons of literature on the limits.

3. The saver's credit

When it comes to saving for retirement, one of the biggest problems facing most Americans is that they simply don't have enough money to put away. Millions of Americans live paycheck to paycheck, and the idea of setting aside 10 or even 5 percent of their income for retirement is simply not feasible.

The IRS has afforded additional tax credits for those with lower income. If you are single filer with income up to $30,000 and you make eligible contributions to a qualified retirement savings account, you can earn a tax credit worth a percentage of your contribution. The percentage depends on your income — the less you make, the greater it is.

For households, the income limit is $60,000 per year, and for heads of households, the income limit is $45,000 per year. The compelling thing about this tax credit is that it stacks with the tax advantages offered by traditional savings vehicles.

For Accountants: A Last Look at Software Before Tax Season

Bob Scott  for the Progressive Accountant writes: Somewhere after everyone stops talking about healthcare, there is a tax season coming in which the major purpose is still preparing tax returns. And in the rapidly approaching season, there is a great deal of emphasis by publishers of tax software on improved performance and an unusual number of problems that afflicted tax software during the last season is only part of the reason why.
 
Publishers are tuning their systems for better performance on the Internet. Others are shaping their applications to handle different kinds of firms. That latter category includes Thomson Reuters' UltraTax software.

"One thing we have done is try to better accommodate some of the unique needs of larger firms that use our software," says Jordan Kleinsmith, enterprise product manager for the Professional division of Thomson Reuters' Tax & Accounting Business. That includes restructuring the setup to provide for easier management for firms with multiple locations.
Kleinsmith says UltraTax had been capable of such management but "It wasn't as user friendly as we might have liked." The new configuration provides "a little bit more control if they want to be consistent across different locations, for example with the same letter or filing instructions, or they can now in a more easier fashion deviate from standards." The system also provides a new tracking tier, one for reviewers, also more suited to larger organizations.

Another enhancement designed for larger firms comes in the updating process. Previously when the updates were ready for download, offices needed to have all users exit the software.
"That did not accommodate firms that need to be in the system at all hours," Kleinsmith says. "They were going to take two weeks before they could get everybody out of the system to apply updates." Now, users can continue working with downloads occurring in the background. When they close out of the software and reopen, the system will sync with the download.
Intuit also has larger firms in mind. In fact, its Intuit Practice Management which links to Lacerte, was part of the increasing number of features the software company is offering full-service firms.

One of the most significant changes for Lacerte Tax Software is the addition of firm-level passwords. The past practice has been to provide firms with passwords for individual returns. That can be a daunting tax form firms with many return.

"What we found they would save that copy and archive to document manager. When they wanted to review that, they had to know that particular password," says Lacerte product manager Mary Kroenung. "If they have 1,000 clients, they are not going to remember 1000 client passwords," The firm-level password will give authorized personnel the ability to open any of the returns.

In a year with an unusual number of tax software performance issues, Intuit had the misfortune to be one of them. It faced the embarrassment during the last tax season of having the state of Minnesota warn its taxpayers not to use the any of the company's tax software to prepare returns. Problems included the software's not calculating some taxes correctly and an array of problems afflicted ProSeries, Lacerte and Intuit Online, some of them common across the three products, some not.

"We have created a better process and we are working and building a better relationship with every single agency to make sure that everything works correctly," Kroenung says, although the company found the impact of the problems was very small.

She noted that in Minnesota the company has made sure it has been "very timely in our communication to any of our Lacerte customers," but said that "we looked at the impact, it was fairly small."

Intuit has also worked across the board to improve the speed with which its forms were approved. It changed forms technology to use the "native agency with PDF with very few changes to the forms," says product manager Julie Kozloski. That means Intuit is not rebuilding the state agency forms, which makes it easier to receive approval at the state level.
Like Thomson, Intuit has worked on the process of downloading forms. With the 2013 software, can initiate downloads from within the tax program, says Kozloski. Users go to the download page and select the forms they want and these download in the background.

ProSeries users also now have the ability to email password-protected tax returns, which Kozloski says was one of the most requested features. Practitioners can create templates for clients. "We can put a password hint in the email templates. The taxpayer should know how to assemble the password, " she says. Using this feature requires an email client be installed in Windows. For those utilizing Yahoo of Gmail, they must link through an email client

Web Work
 
With Intuit Online, the company has been improving performance. "You have to dispel the myth that the desktop system is fast than a web," says product manager Jorge Olavarrieta. In some cases, he says, the online application loads faster than does the desktop version with screen loading taking about a second and a half. "A lot of our investment has been about speed and performance," he says.

As part of Intuit Tax Online Plus, the company is offering 100 returns of any type for $1,495 and 300 returns at $3,585. That is a change from prior years when purchasers had to buy individual or business forms. Now, preparers can mix the returns together for the bundled pricing.

Newer to the Internet game, Drake is rolling out Drake Hosted, which makes the desktop suite accessible via the cloud. The company is utilizing Citrix to provide a hybrid cloud platform.

The system is available for the upcoming season, according to VP James Stork. Through it, Drake hosts its tax, write-up, payroll and document management applications for $50 per month for a 12-month contract for the first workstation and $40 monthly for the same period for each additional work station. There are higher rates for one-month and six-month subscriptions. For an additional $25 per workstation, the company will also host elements of the Microsoft Office Suite – Word, Excel, PowerPoint and Publisher.

The other big change, Stork says, is the addition of esignature functionality. " It captures signatures electronically with the signature pad so the return can be digitally signed," Stork says.

CCH is fine-tuning its CCH Axcess Tax, an online product was introduced to the market last year, but which has undergoing testing for several years.

The company has been working on improving the navigation to the system, says Mark Ryburn, a CCH product line manager. That includes adding new views. "We still have the familiar tree view with the forms down on the left," notes Ryburn. The system also forms government forms and topical views. "People work in dramatically different ways," he says. For those utilizing the forms view, the system highlights the form . The company also made Tax Notebook, its online tax organizer, available for Axcess

Also aimed at improving access to features is greater use of the tool bar. "One thing that people have said is that they really like having things accessible from the toolbar," says Ryburn. This year, CCH has added an icon that can be used to show all elections being made for the current tax year.

For both Axcess and the widely used CCH ProSystem Tax, the company has made a "ton of improvements around tax equalization," Ryburn says. The system has become more streamlined in dealing with tax issues for Americans working overseas. The system can now be configured "'the way partners want it configured," Ryburn says.

Ryburn says there has also been work to make it easier to detect and fix problems. "We've added a bunch of new diagnostics," he notes. These are offered at different levels to support reviewers, preparers and signers.

Plan ahead for a successful filing of last year’s taxes

Jeanette Showalter, CFA for Florida Weekly writes: Many think that tax planning for 2013 is not a possibility since the new year has begun. But that is far from the truth. Much work needs to be done in 2014 for accurate filing for 2013. Also, there are several tax-saving strategies that can be implemented in 2014 that will apply to 2013.

Retirement accounts

If you haven’t already funded your retirement account for 2013, do so by April 15. (A Keogh or a SEP or an individual 401(k) allow filing extensions to Oct. 15, 2014.) The deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA is April 15, 2014. (For purposes of getting investment dollars to work sooner than later, you should not wait until the last day to legally fund; rather consider making 2014’s contribution as soon as possible in 2014.)

To qualify for the full annual IRA deduction in 2013, you must either: not be eligible to participate in a company retirement plan, or if you are eligible, you must have adjusted gross income of $59,000 or less for singles, or $95,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible as long asa your combined gross income does not eI exceed $178,000. For 2013, the maximum IRA contribution you can make is $5,500 ($( 6,500 if you are age 50 or older by the es end of the year). For self-employed persons, the maximum annual addition to SEPsS and Keoghs for 2013 is $51,000.

Remember, Roth contributions are not deductible, but all withdrawals from a Roth can be tax-free in retirement while withdrawals from a traditional IRA are fully taxable in retirement. In order to contribute to a Roth, your income as a single or married must be under certain threshold levels. (The tax-free status for Roth withdrawals is under current tax law — as there have been rumblings that the tax-free aspect should be rescinded for the very wealthy — so be aware. Roths might not remain sacrosanct.)

For those newly self-employed who have not started a retirement plan, they can avail themselves of Keough and SEP plans for which contributions made in 2014 could apply to 2013. But to get a real bang for the buck, the self-employed need to consider the individual 401(k), which allows a very large amount of money to be put into a retirement plan and offers even larger amounts to those who are older and are in a catch-up mode.

Estimated payments

Second, make sure to make your estimated payments. According to IRS rules, you must pay 100 percent of last year’s tax liability or 90 percent of this year’s tax or you will owe an underpayment penalty. If your adjusted gross income for 2012 was more than $150,000, you have to pay more than 110 percent of your 2012 tax liability to be protected from a 2013 underpayment penalty. If you make an estimated payment by Jan. 15, though, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then. (Check with an accountant about circumstances in which a windfall was received after Aug. 31, 2013.)

Gather your papers

Start to collect all the information that you will need to file your taxes. For some that means tabulating medical expenses, donations, sales tax paid on purchases throughout the year, etc.

Figure out the home office

Consider taking a home office dedication if it applies. It has merits, but the downside is that it is often an IRS review trigger. It is a decision that you should make with a tax accountant’s counsel.

Account for the kids

Make sure you claim your child as a dependent and make sure that if you are divorced that only one parent is claiming the same child. There is a “personal exemption of $3,900 for each dependent and the $1,000 child tax credit for each child younger than 17. The $1,000 child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households. If there is a newly born child, make sure you get him or her a Social Security number.

Consult with the pros

Consider getting professional help sooner rather than later. Also, if your tax liability is large and complex, consider consulting with several tax professionals. Personal experience is that tax professionals with exactly the same information will make differing recommendations as to how the tax is to be reported and during what period. This might suggest that some are wrong and others are right. However, it also suggests that the tax code is sufficiently complex, and within complexities there is sometimes room for differing interpretations or approaches. And for those still in the Christmas spirit of giving, consider making a gift of a tax professional’s time to family members or others; it might set them on a better path for their financial security and retirement planning.

This is not meant to be an exhaustive list of tax planning tasks, but rather to put tax planning on your radar screen as early as possible in 2014 and offer suggestions for minimizing taxes for historical 2013 and prospective 2014.

You should consult with a tax expert as to specifics that apply to you and interpretations of an ever-changing and complex tax code. ¦

— Jeannette Showalter, CFA is a commodities broker with Worldwide Futures Systems. Find her on Facebook at Jeannette Showalter, CFA.

Growth Investors Should Take A Look At Intuit

Asif Imtiaz for US Finance Post writes: Intuit Inc (NASDAQ:INTU) INTU +0.33% is one of those companies that doesn’t get much media attention in spite of showing strong growth trends over the past few years. After all, it is not sensational to talk about a company that provides business and financial management solutions for small businesses, consumers, accounting professionals, and financial institutions. However, with over US$ 21 billion in market capitalization, this company is poised for delivering great returns to investors in 2014 and beyond.

Intuit operates in four segments; with its small business group the company offers financial, employee, and payment management solutions; in the tax segment it mainly offers consumer tax solutions and has an army of professional accountants to handle small to large commercial tax issues for corporations; in the financial solution segment it offers both mobile and online banking solutions to a range of customers; and in the other businesses segment it has various local and global business.

Intuit (NASDAQ:INTU) has built its business with a strong financial health that offers investors resilient profitability, steady cash flow, and management efficiency. Over the last 12 months, Intuit’s stock price has climbed from US$ 55.54 per share on January 2, 2013 and is currently trading at US$ 76.64, as of December 31, 2013; representing a gain of 38 percent. During the same period, this company has increased its market capitalization from below US$ 16 billion to over US$ 21 billion.

As the company continues to remain profitable with a large sum of free cash flow, it had the financial might to buy up competitors. During 2013, its board approved the acquisitions of Elastic Intelligence Inc., Good April, and Level Up Analytics Inc. This month, it bought popular document sharing site for small businesses, DocStoc. These strategic acquisitions indicate that management is expecting to grab more market share that will eventually lead to revenue growth. However, Intuit has also walked the talk with steady growth in gross profit margin since 2010!

As a growing company with a lot of acquisitions in recent months, currently Intuit (NASDAQ:INTU) is trading with a forward P/E ratio of 24 and an earnings-per-share (EPS) of 2.72. It also issued regular dividends to investors, unlike most other technology based growth companies we see in the media these days. Growth investors should consider taking a look at Intuit stocks as it has an enormous upside potential based on solid growth prospective.

Intuit Online Payroll Login On Sale

Stanlo7 for Bubblenews writes: Basically, the Intuit online payroll Login will only be accessible after clients have purchase their order. Normally, there is a 90-day trial time for new users only. They will be given a period to test the properties of the platform they want an order from. During this period, there is always a free login process that new users can envisage on. Since Intuit payroll is liable to tax of the state and other authorities, they have right to charge their clients as well. 

For this reason, after new users have experienced a 90-day trial period, they will be open to pay 9.95 dollar/ month. This will enable new users to apply the Intuit online payroll login procedure to check their account for more information. Though, the normal subscription amount remains 30 dollars/ month.

In case you are planning to make an order after subscription has been confirmed, it is better to cancel it prior to the end of the month. This is only possible when users apply the login idea to their account. For this reason, the federal identification number is given to clients when they apply for an order through Intuit payroll platform as required. 

The essence of the login information and identification details to avoid fraud. It makes people have direct access to their account being different from any other person. The basis of the login process is highly secured with the help of the federal identification number that is given to clients on application. You can also attach your credit card value to this type of payroll account online. This is also a possible way to fund your account whenever it is needed. Clients are given total authority over the creation of their account based on the login details given.

Remember that for any applicant to have access in using the Intuit online payroll login, such will have to submit total information on application. This include applicant address, full name and other required information. The Intuit payroll platform will now creat a user account for clients willing to have it. Though, all users are usually give certain period to access the service of this platform. This will eventually give clients the best idea to understand the value of service rendered. The basic thing to know is how the Intuit online payroll login process is done. You will be given tutor from the service platform based on this issue. 

In case you have finally dashed out of the service, you can simply call the intuit payroll support team to help you get through. They will be able to help clients on how they will successfully login to check their account dealings. On this note, it is now clear to new and old users of this platform that Intuit online payroll login is highly important when accessing their account. It also a good advice from the service platform towards clients on how to safeguard their login details. Once all these are done, clients will enjoy all they paid for while using Intuit payroll service for their use.

The Tax Year Now Closed, Be Wary of IRS’s Dirty Dozen Tax Scams as you Prepare Your Taxes

The Internal Revenue Service issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said IRS Acting Commissioner Steven T. Miller. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later."

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012. The Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.

We know identity theft is a frustrating and complex process for victims. The IRS has 3,000 people working on identity theft related cases — more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

• To help disaster victims, donate to recognized charities.
• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
• Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits  a contribution from you. Scam artists may use this information to steal your identity and money.
• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

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The tax joys of parenthood

Kay Bell for Bankrate.com writes: Is there a new baby in the house? That's good news in many ways, especially at tax time when the chip off the old block will help you chip away at your tax bill.

A growing family makes you eligible for a variety of tax savings. You get an additional tax exemption, may be eligible for several tax credits, and can use tax-favored ways to save and pay for Junior's college. You might even be able to lower your taxes by shifting some of your higher-taxed income to your youngster, either as an asset gift or as salary if you own your own business.

Here are some common tax matters every new -- and experienced -- mom and dad need to consider.

The first tax-return item a taxpayer encounters is the choice of how to file. For many couples raising kids together, this is easy. The married-filing-jointly option offers a larger standard deduction and allows some tax breaks that are denied unmarried filers.

If, however, you are raising children alone, don't shortchange yourself by choosing the wrong status. You can file as a head of household if, for more than six months, you provided over half the cost of keeping up a home for yourself and your kids. Tax rates and the standard deduction for head-of-household filers are more favorable than those for the single or married-filing-separately categories.

Parents who have lost spouses also have a choice. You may file as a qualifying widow or widower with a dependent child for two years after the year your husband or wife died. This status gives you the same filing consideration afforded married filers.

More child-related tax savings come from the personal exemptions you claim on your return. Each dependent is an exemption. The Internal Revenue Service sets an annually adjusted amount (it's $3,900 on 2013 taxes) that you multiply by the number of your exemptions and subtract from your income.

Determining whether your child is a dependent is not a problem when you have young kids at home. But what about when they earn their money from an after-school job or are off at college? While you may have to do a little figuring, especially to see if your young worker needs to file his or her own tax return, this generally won't invalidate your child's status as your dependent. The key considerations are whether you are the child's primary source of support or if he or she is a full-time student at State U.

Single parents have some other issues to consider. Where a formal divorce decree is involved, be sure you follow the custody rules set out there. They determine who gets to claim the children. When custody is shared, parents must decide who claims the kids.

Your growing family could pay off via several tax credits. The great thing about tax credits is that they reduce your tax liability on a dollar-for-dollar basis. A credit of $500 could cut your $1,000 tax bill in half. If you owe no tax, some credits even will get you a refund.

The easiest child-related credit to claim is called simply that, the child tax credit. There are no records to keep or extra forms to file in order to get a $1,000 credit for each child younger than 17 who's claimed as a dependent on your tax return.

If you claim tax relief for more than one kid, you must fill out Form 8812 to compute the additional child tax credit, but the paperwork could well be worth it. This tax break allows filers who owe little or no taxes to get a refund check from the IRS.

Working parents who put the kids in day care can file for the child- and dependent-care credit to recoup some of those costs. You can use up to $3,000 spent to care for one youngster under age 13, and $6,000 for two or more preteens, to figure your credit amount.
And if your child arrived via adoption, there's a tax credit for that, too.

College costs are skyrocketing, prompting many parents to start saving as soon as the little one arrives. Uncle Sam offers several tax-favored ways to help.

The American opportunity credit, a reformulation of the previous Hope credit, covers costs for the first four years of higher education and is worth up to $2,500. Even better, a portion of the American opportunity credit is refundable, meaning even if you don't owe the IRS anything, you could get some cash back. And the lifetime learning credit, which could cut $2,000 off your tax bill, is still around as well.

Credits usually are more tax beneficial than deductions because credits cut your tax bill dollar-for-dollar. But don't discount the tuition and fees deduction. This tax break lets you subtract up to $4,000 of eligible schooling costs from your income.

And a Coverdell education savings account allows parents (or grandparents or even just friends) to put away up to $2,000 per year (total, not apiece) for a youngster's schooling.

One former child-related opportunity to lower your tax bill, however, has been dramatically reduced. Previously, many parents shifted some of their higher-taxed investment income to their young children so that the earnings would be taxed at a lower bracket; for example, falling from a possible 39.6 percent rate to the youngsters' usually 10 percent or 15 percent bracket.
But the so-called kiddie tax limits this practice. When a young investor's 2013 earnings exceed $2,000, the tax rate applied to those excess earnings is the parents' -- not the child's. The higher tax rate remains in place until the child turns 19 or age 24 if the young investor is a full-time student. For 2014 planning purposes, the child's investment earnings limit remains at $2,000.

So, Mom and Dad, keep an eye on young Jimmy's or Jane's assets because you could be paying the taxes on them.

Tax Court Ruling Clarifies IRA Transactions

Ed Slott for Financial-Planning.com writes: You've been warned: A recent ruling by the U.S. Tax Court holds a costly reminder about the consequences of making inappropriate transactions within a client's IRA.

In a case that centered on two investors' relationship to a company held by their retirement accounts, the court ruled that two business partners' IRAs were disqualified under the prohibited transaction rules when they guaranteed loans to a company owned by their IRAs. As a result, when the stock of the company was later sold inside their disqualified Roth IRAs, they owed taxes on the capital gain.

The court also upheld accuracy-related penalties that the IRS assessed. In doing so it found that, as a result of the disqualification, the taxpayers were negligent for failing to report the sale of stock they owned personally.

The case serves as another reminder for advisors to talk to clients about the potential tax nightmares that can await them should they venture too far off the beaten path with their IRA investments. It is all too easy to run afoul of the prohibited transaction rules.

CASE DETAILS

In 2001, Darrell Fleck was looking to buy Abbott Fire Safety, a company specializing in providing alarms and fire protection systems for businesses. Lawrence Peek, a lawyer who had previously provided Fleck with legal services, was interested in participating, as well.

Fleck was introduced to Christian Blees, a CPA, by the brokerage firm that was offering the fire safety company for sale. Fleck and Peek hired Blees and his firm to structure the purchase of Abbott's assets and to perform due diligence on the transaction.

The CPA presented Peek and Fleck with a strategy for using their IRAs to acquire the fire safety company's assets. The strategy called for them to establish new self-directed IRAs and transfer existing IRA and retirement plan money into those accounts. They would then set up a new corporation, have their self-directed IRAs purchase the shares of that corporation and ultimately use the money from the sale to buy Abbott.

To implement the strategy, Fleck and Peek each set up self-directed IRAs funded by rollovers from existing retirement funds. Fleck and Peek set up a new firm called FP Co., over which they exercised full control as officers and directors.

In September 2001, each IRA bought 5,000 shares of the newly issued FP stock for $309,000. This gave each IRA a 50% share of ownership. It also gave the company more than $600,000 in cash, which Peek and Fleck intended to use to buy Abbott. A few weeks later, FP bought most of Abbott's assets for $1.1 million.

Since the purchase price exceeded the cash that FP had on hand, other sources were needed. Ultimately, the purchase price was satisfied in part with an additional bank loan, a promissory note from a broker and, most important, a $200,000 promissory note from FP that was personally guaranteed by Fleck and Peek. These personal guarantees remained in effect until FP was sold in 2006.

In 2003, both Fleck and Peek converted half of their IRAs to Roth IRAs; they converted the remaining IRA amounts in 2004. These conversions were accomplished by transferring shares of FP stock to the Roth IRA from the IRA. Fleck and Peek properly reported the fair market value of the shares that they converted to their respective Roth IRAs as taxable income for 2003 and for 2004.

Two years later, each of the Roth IRAs sold its FP stake for almost $1.7 million, paid over two years. The holders filed their 2006 and 2007 federal income tax returns, but did not pay taxes on the sale of the FP stock because it was held inside their Roth IRAs - and investments sold inside a Roth IRA are typically not taxable.

IRS OBJECTIONS

Typically is the key word. The IRS examined the pair's respective tax returns for 2006 and 2007 and determined that the personal guarantees of the loans were prohibited transactions. As a result, the IRS increased their personal income to include capital gains from the sale of FP stock; because of the increased income, the IRS also adjusted itemized deductions, exemption amounts and other items.

These adjustments added nearly $250,000 each to the two investors' 2006 tax bills. In addition, the IRS imposed almost $50,000 in accuracy-related penalties to each. Smaller tax liabilities and penalties were added to the men's 2007 tax returns.

The IRS contended that because of Fleck's and Peek's loan guarantees, there were prohibited transactions in 2001 through 2006. As a result of those transactions, the IRA accounts were deemed distributed in 2001 - thus invalidating the Roth IRAs financed with money from those accounts. That in turn made the gain on the sale of FP stock taxable as capital gains in 2006 and 2007.

Not surprisingly, Fleck and Peek disagreed with the IRS, and the issue went to Tax Court.

The crux of the matter was whether their guarantees on the $200,000 promissory note - which FP used to help purchase Abbott in 2001 - were prohibited transactions. The IRS argued that it was an indirect lending of money or other extension of credit between a retirement plan and a disqualified person, and therefore one of the many prohibited transactions.

Fleck and Peek countered that the loan guarantees were not between a retirement plan and disqualified persons. Their position was that although FP was wholly owned by their IRAs, the loan they guaranteed was in the name of FP and not directly connected to their IRAs - and therefore not prohibited.

ADVERSE RULING

The Tax Court disagreed. In ruling in favor of the IRS, the court said that, "given [the tax code's] obvious and intended meaning, [it] prohibited Mr. Fleck and Mr. Peek from making loans or loan guaranties either directly to their IRAs or indirectly to their IRAs by way of the entity owned by the IRAs."

The court also shot down the investors' argument that the IRS notices of deficiency for 2006 and 2007 were beyond the statute of limitations. It reasoned that the loan guarantees were not a one-and-done transaction in 2001, but continued to be ongoing prohibited transactions through 2006, when the loan was paid off.

The pair also tried to get out of the 20% accuracy-related penalty the tax code imposes for, among other factors, underpayment of federal income tax due to negligence or disregard of the rules. Fleck and Peek claimed they had acted with reasonable cause and in good faith, relying on advice from Blees, the CPA - but the court found Blees was not acting as an independent tax professional but as an "active promoter" of a business strategy. The information the two received from Blees, the court concluded, "was not advice so much as a sales pitch."

Advisors should warn clients that directing their IRA to buy shares of their own company or a newly formed corporation is risky, and a prohibited transaction could disqualify the IRA. In addition, clients need to get an independent review by a tax professional who does not have a conflict of interest.