“Thousands of people have lost millions of dollars and their personal information to tax scams,” according to the IRS. The scams may come in through email, text messages, telephone calls or regular mail. Criminals regularly target both individuals and businesses and often prey on the elderly.

Important: The IRS will never contact you by email, text or social media channels about a tax bill or refund. Most IRS contacts are first made through regular mail. So if you get a text message saying it’s the IRS and asking for your Social Security number, it’s someone trying to steal your identity and rob you. Remember that the IRS already has your Social Security number.

“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” said IRS Commissioner Danny Werfel. “People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams.”

Here are some of the crimes the IRS has identified in recent months:

Email messages and texts that infect recipients’ computers and phones. In this scam, a phony email claims to come from the IRS. The subject line of the email often states that the message is a notice of underreported income or a refund. There may be an attachment or a link to a bogus web page with your “tax statement.” When you open the attachment or click on the link, a Trojan horse virus is downloaded to your computer.

The trojan horse is an example of malicious code (also known as malware) that can take over your computer hard drive, giving someone remote access to the computer. It may also look for passwords and other information. The scammer will then use whatever information is gathered to commit identity theft, gain access to bank accounts and more.

Phishing and spear phishing messages. Emails or text messages that are designed to get users to provide personal information are called phishing. Spear phishing is a tailored phishing attempt sent to a specific organization or business department.

For example, one spear phishing scam targets employees who work in payroll departments. These employees might get an email that looks like it comes from an official source, such as the company CEO, requesting W-2 forms for all employees. The payroll employees might erroneously reply with these documents, which then provides criminals with personal information about the staff that can be used to commit fraud.

The IRS recommends using a two-person review process if you receive a request for W-2s. In addition, employers should require any requests for payroll to be submitted through an official process, like the employer’s human resources portal.

Scams keep evolving

These are only a few examples of the types of tax scams circulating. Be on guard for any suspicious messages. Don’t open attachments or click on links. Contact us if you get an email about a tax return we prepared. You can also report suspicious emails that claim to come from the IRS at phishing@irs.gov. Those who believe they may already be victims of identity theft should find out what do by going to the Federal Trade Commission’s website, OnGuardOnLine.gov.

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The IRS recently released its audit statistics for the 2022 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them.

Recent statistics

Overall, just 0.49% of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5% of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022.

However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones.

Be ready

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts or other proof — for all items reported on your tax returns.

Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return.

Tax return complexity

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.

In FY 2022, most examinations (78.6%) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices.

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Get professional help

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping.

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When one spouse in a married couple is not earning compensation, the couple may not be able to save as much as they need for a comfortable retirement. In general, an IRA contribution is allowed only if a taxpayer earns compensation. However, there’s an exception involving a “spousal” IRA. It allows contributions to be made for a spouse who is out of work or who stays home to care for children, elderly parents or for other reasons, as long as the couple files a joint tax return.

For 2023, the amount that an eligible married couple can contribute to an IRA for a nonworking spouse is $6,500, which is the same limit that applies for the working spouse.

Benefits of an IRA

As you may know, IRAs offer two advantages for taxpayers who make contributions to them:

• Contributions of up to $6,500 a year to a traditional IRA may be tax deductible, and
• The earnings on funds within the IRA aren’t taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but, if certain requirements are met, future distributions are tax-free.)

As long as a married couple has a combined earned income of at least $13,000, $6,500 can be contributed to an IRA for each spouse, for a total of $13,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don’t exceed the $13,000 limit.)

Higher contribution if 50 or older

In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, for 2023, a taxpayer and his or her spouse, who have both reached age 50 by the end of the year can each make a deductible contribution to an IRA of up to $7,500, for a combined deductible limit of $15,000.

However, there are some limitations. If, in 2023, the working spouse is an active participant in one of several types of retirement plans, a deductible contribution of up to $6,500 (or $7,500 for a spouse who will be 50 by the end of the year) can be made to the IRA of the nonparticipant spouse only if the couple’s AGI doesn’t exceed a certain threshold. This limit is phased out for AGI between $218,000 and $228,000.

If you’d like more information about IRAs or want to discuss retirement planning, contact us.

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If you’re age 65 and older and have basic Medicare insurance, you may need to pay additional premiums to get the level of coverage you want. The premiums can be costly, especially for married couples with both spouses paying them. But there may be an advantage: You may qualify for a tax break for paying the premiums.

Premiums count as medical expenses

For purposes of claiming an itemized deduction for medical expenses on your tax return, you can combine premiums for Medicare health insurance with other qualifying medical expenses. These includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

You must itemize

Qualifying for a medical expense deduction is difficult for many people for a couple of reasons. For 2023, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceed 7.5% of adjusted gross income.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2023, the standard deduction amounts are $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of household. (For 2022, these amounts were $12,950, $25,900 and $19,400, respectively.)

So, many people claim the standard deduction because their itemized deductions are less than their standard deduction amount.

Note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

Other expenses that qualify

In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatments, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.

There are also many other items that Medicare doesn’t cover that can be deducted for tax purposes, if you qualify. You can also deduct transportation expenses to get to and from medical appointments. If you go by car, you can deduct a flat 22-cents-per-mile rate for 2023 or you can keep track of your actual out-of-pocket expenses for gas, oil, maintenance and repairs.

Evaluate the options

We can answer any questions you have about whether you should claim the standard deduction or whether you’re able to claim medical expense deductions on your tax return.

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High-income taxpayers face a regular income tax rate of 35% or 37%. And they may also have to pay a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some ways you may be able to reduce its impact.

Affected taxpayers

The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:

• $250,000 for married taxpayers filing jointly and surviving spouses,
• $125,000 for married taxpayers filing separately,
• $200,000 for unmarried taxpayers and heads of household.

The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.

Net investment income includes interest, dividend, annuity, royalty and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.

There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Neither are Social Security benefits. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.

It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize your net investment income.

Shifting investments 

If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.

Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.

As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gains from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gains won’t be subject to the NIIT until the stocks are sold, and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.

Retirement plan distributions 

Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.

These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Contact us for strategies in your situation.

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You may think you don’t need to make any estate planning moves because of the generous federal estate tax exemption of $12.92 million for 2023 (effectively $25.84 million if you’re married).

However, if you have significant assets, you should consider establishing a living trust to avoid probate. Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. However, going through probate typically means red tape, legal fees and your financial affairs becoming public information. You can avoid this with a living trust (also commonly called a family trust, grantor trust and revocable trust).

How they work

You establish the living trust and transfer legal ownership of assets for which you wish to avoid probate to it (such as your main home, a vacation property, antique furniture, etc.).

In the trust document, you name a trustee to be in charge of the trust’s assets after you die and specify which beneficiaries will get which assets.

You can be the trustee while you’re alive. After that, you can designate your attorney, CPA, adult child, sibling, faithful friend or financial institution to be the trustee.

Because a living trust is revocable, you can change its terms at any time, or even unwind it completely, while you’re alive and legally competent. That’s why it’s called a living trust.

For federal income tax purposes, the existence of the living trust is ignored while you’re alive. As far as the IRS is concerned, you still personally own the assets that are in the trust. So, you continue to report on your tax return any income generated by trust assets and any deductions related to those assets, such as mortgage interest on your home.

For state-law purposes, however, the living trust isn’t ignored. Done properly, it avoids probate. And that’s the goal.

When you die, the living trust assets are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse aren’t included in your estate, assuming your spouse is a U.S. citizen — thanks to the so-called unlimited marital deduction privilege.

As explained earlier, you probably don’t have to worry about a federal estate tax bill with today’s huge exemption. But the exemption is scheduled to go down drastically in 2026 unless Congress extends it. If Congress fails to do so, you may need to revisit your estate plan.

Some caveats 

A living trust has several benefits, but mind these details or you won’t get the expected probate avoidance:

• When you fill out forms to designate beneficiaries for life insurance policies, retirement accounts and brokerage firm accounts, the named beneficiaries can automatically cash in upon your death without going through probate. If the distribution provisions of your living trust are different from your beneficiary designations, the latter will take precedence. So, keep beneficiary designations current because your living trust’s provisions won’t override them.
• If you co-own real estate jointly with right of survivorship, the other co-owner(s) will automatically inherit your share upon your death. It makes no difference what your living trust says.
• You must transfer legal ownership of assets to the living trust for it to perform its probate-avoidance magic. Many people set up living trusts and then fail to follow through by transferring ownership. If so, the probate-avoidance advantage is lost.

More planning may be needed 

Living trusts do nothing to avoid or minimize the federal estate tax or state death taxes. If you have enough wealth to be exposed to these taxes, additional planning is required to reduce or eliminate them. Contact us for more information.

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