Year-end is a good time to ensure you have proper documentation to substantiate your tax deductions. This is important as many banks start deleting online documentation that is over one year old.

Background

Two things have happened over the past ten years that have greatly reduced the ability to have a canceled check as proof when the auditor comes calling. The first is the advent of online bill paying services. The second is a regulation commonly known as Check 21. With online bill paying, you pay a bill via an online banking service. Your only receipt is often just an entry in your checking account. With Check 21, the law allows banks to digitally capture the check and then destroy the paper copy without returning it to you. So what do you do if you need proof that you paid for a tax deductible item?

Some Tips

• Know your bank. Understand what your bank keeps and for how long. This includes digital statements and digital copies of checks (both front and back). Understand if there are any fees charged if you need to request copies of payments.
• Retain copies of all bank statements. Review your records to ensure you have copies of all monthly bank statements. This is often the starting point for an IRS agent that wants proof of payment, so it should be yours as well. These copies may be in either paper or digital format. Download online copies of your statements and place them in a password protected file.
• Collect copies of tax related proof of payment. Go through your statements and mark the payments that will, in all likelihood, be used as a tax deduction. Make sure you have copies of the front and back of each of these payments. If you do this work now, the copies are often still available online for no fee. Even online bill payments often have a digital copy that can be used.
• Get independent acknowledgements. If you have larger payments you should also make sure you have independent acknowledgement from the merchant or organization to substantiate the deduction. This is true for charitable contributions of $250 or more, and any business or medical expenses.

While having the traditional proof of an expenditure is now harder to come by, the IRS understands that approved technologies are changing the type of substantiation available for them to review. By being on top of this documentation at the end of each year, you can save yourself a lot of headaches should you ever need to prove your deductions.

Just when you thought you had a firm grasp on all the tax changes, the IRS is making a dramatic change to the way tax withholdings are calculated on your paycheck. Form W-4, used to calculate your paycheck withholdings, has had a major overhaul, and the changes go into effect on Jan. 1. Here’s what you need to know:

The withholding allowance system is gone. The previous form converted your tax situation into a number to determine the proper withholdings. You would take one allowance for yourself, your spouse and each dependent. The new form nixes the numeric allowance system, and instead asks you to provide estimates for income, deductions and credits. A new worksheet is included to help households with more than one job calculate the amount to withhold.

More accurate paycheck withholdings.The goal of the new form is to help you anticipate your tax liability in the new income tax environment. If properly prepared, this new version should provide payroll processors with the information they need to more accurately calculate the tax withholdings from your paychecks. But to accomplish this, you will need to make calculations and fill out worksheets on the front end.

Required for withholding changes after December. You are not required to submit a new form for 2020, but any changes to your withholdings after Dec. 31 will have to be done using the new version of Form W-4. Old forms using the allowance system will no longer be allowed to update your withholdings.

Tax planning is more important than ever. Unless you have a very straightforward tax situation, you will now need to provide a basic tax forecast on the new Form W-4. Accounting for all income, deductions, credits and potential changes to your situation that may arise in the next year are key components to an accurate forecast. Running through the tax planning process now will get your tax withholdings started off right for 2020.

Before 2019 comes to a close, take some time to review these essential items to ensure you are not missing something that could cause tax trouble when you file your tax return:

1. Take required minimum distributions (RMDs). If you are age 70½ or older, you need to take RMDs from certain retirement accounts before Dec. 31 to avoid a 50 percent penalty! This includes most IRAs (except Roth IRAs) and 401(k)s. Your annual RMD is calculated by dividing the prior Dec. 31 balance by the life expectancy factor provided by IRS tables.

2. Watch for your IRS PIN. If you are a victim of IRS identity theft, you will be mailed a one-time use personal identification number (PIN) as added security.You can expect to receive it in the mail sometime in December. Save the PIN as it is required to file your tax return. 

3. Contribute to retirement accounts. Making contributions to tax-advantaged retirement accounts like a traditional IRA or 401(k) is a great way to lower your tax liability even if you don’t plan to itemize your deductions!

4. Harvest gains & losses. If you expect to have capital gains from your investments, selling stocks in a loss position to offset the gains will lower your tax liability. In fact, you can claim excess losses of up to $3,000 to decrease your ordinary income! Timing matters with investment sales and income taxes, so having a year-end strategy can help lower your tax bill. 

5. Make last-minute tax moves. Here are a few ideas worth considering: 

• Donate to charity to maximize itemized deductions 
• Make a tax efficient withdrawal from your retirement account if you are over age 59½
• Take advantage of the annual $15,000 gift-giving limit
• Delay receipt of income or accelerate expenses for your small business

Understanding your current situation and having a plan will help maximize your tax savings.

The IRS recently announced key tax figures for 2020, using information based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.

Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 37 percent. Each of the income brackets increases between 1.59 and 1.80 percent.

Standard Deductions:

Other Key figures:

Caution: Remember, these early IRS figures are prior to any potential tax law changes currently under consideration in Washington D.C.

Here are five tax saving ideas that can be used by most taxpayers. But act soon, there’s not much time left until our tax year comes to an end.

1 Make late-year charitable donations. Consider making donations with appreciated stock you have owned over one year. You can typically receive the higher value donation without paying capital gain taxes. Also consider non-cash donations of items in good or better condition. But pay attention to your total deductions. With higher standard deductions, you should use your charitable giving to ensure you can maximize your tax savings. This may mean making next year’s donations this year!

2 Make contributions to your qualified retirement plans. Remember there is still time to make contributions to traditional IRAs, SEP IRAs and 401(k) accounts to reduce your taxable income this year. While you’re at it, take a look at next year’s limits and plan to increase your contributions to make next year’s tax obligation even better than this years.

3 Take distributions from your retirement accounts. If you are over 70 1/2 years old you will need to take required minimum distributions. The penalty for not taking minimum distributions is 50%. But if you are over 59 years old you should also be taking distributions from tax deferred accounts in the most tax efficient way possible. This may mean taking some money out, even it you do not quite need it now.

4 Take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your ordinary income. 

5 Consider making any final gifts to dependents. You may provide gifts of up to $15,000 per year per person. Remember all gifts given (birthday, holiday and cash) count towards this total. This can provide a future source of possible investment income for your kids. While the “kiddie tax” may ultimately come into play, this can be avoided by using the gifts to fund a 529 college savings account.

With the new tax rules in place beginning in 2018, tax planning is more important than ever.  You still have time to lower your tax bill, but the clock is ticking.

Tax identification theft is becoming all too common. Victims know how frustrating the experience can be. Thankfully, the IRS is willing to help.

The frustration

If you are a victim of IRS identity theft, your first instinct is to find out what was filed and who filed it. In the past, most requests by victims of this theft could not receive this information. The IRS often stonewalls these requests because of active investigations and because it wishes to protect other potential victims’ identification.

There is help

As long as you follow IRS instructions, you are now able to get transcripts of what thieves attempted to do with your tax information. But be forewarned. The IRS may mask or redact information on the fraudulently filed tax return. Its goal is to provide you with enough information to determine how your personal information was used on the tax return without putting other information at risk.

To receive a transcript you must:

• First, file an identity theft Form 14039, Identity Theft Affidavit
• Then file Form 4506-F, Identity Theft Victim’s Request for Copy of Fraudulent Tax Return

To be successful in your request, your name and Social Security number (SSN) must be listed as the primary or secondary taxpayer on the fraudulent tax return. Plan on receiving an acknowledgement from the IRS within 30 days and a copy of the transcript within 90 days. Be prepared to have to work through masked or redacted information to determine what was stolen.

Why the stolen information may be important

• You can see what personal information has been stolen. What has been compromised? Name, address and SSN? Do they have your dependent’s or spouse’s information? Perhaps they also have your income and withholding data. Knowing this will help you plan the extent of data protection you will need.
• There may be clues as to where the identity theft occurred. Of the information stolen, who had access to it? Did the data breach involving your information happen through the IRS or somewhere else?
• There may be more tax years impacted than you thought. Request information from the year you first became aware of the identity theft at the IRS. But you may wish to request information from a prior year and from the year following the theft. The IRS has access to up to six years of tax returns. Try to determine whether the theft is ongoing or a one-time occurrence.

The request requires specific information. You can read more about it in the IRS’s Instructions for Requesting Copy of Fraudulent Returns.

Thankfully, the IRS is now more helpful in sharing fraudulent information to allow victims to take action to protect themselves.

The Social Security Administration announced a 1.6 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2020. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2019.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.6 percent this year, to $137,700. A recap of the key amounts is outlined here:

2020 Key Social Security Benefits

What does it mean for you?

• Up to $137,700 in wages will be subject to Social Security taxes, up $4,800 from 2019. This amounts to $8,537.40 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
• For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,503 per month in 2020 – an average increase of $24 per month.
• SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
• A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2019 to 2020.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Too often a charitable tax deduction is disallowed upon review by the IRS. Do not let this happen to you. Here is what you need to know.

Think all your stock sales will be subject to capital gains tax? Think again. With proper planning some of your gains may not be taxed at the federal level. Here is what you need to know.

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