Category Archives: Blog

Identity Theft and Your Tax Returns: How to Protect Yourself

February 11, 2019

Tax returns are a prime target for identity thieves. After all, the IRS processes billions of dollars in tax refunds every year, and criminals follow the money. A thief needs little more than your name and Social Security number (SSN) in order to file a fraudulent tax return and pocket the refund. Then, when you attempt to file your return, the IRS or state tax authority informs you that you’re attempting to file a duplicate return. It can take months to resolve the matter, cause unwelcome headaches and delay any legitimate refunds you expect.

Increasingly, identity thieves also target entities — including corporations, partnerships, estates and trusts — and use stolen information to file phony tax returns. Criminals also attempt to steal employee data from employers to help them execute individual identity theft.

IRS Cracks Down on ID Theft

In recent years, tax-related identity theft has substantially declined, due in large part to actions taken by the IRS. For example, the IRS has improved filters in its computer systems, enabling it to flag potentially fraudulent returns. The system looks for anomalies, such as dramatic differences in a taxpayer’s returns from one year to the next or wage information that doesn’t match information provided by employers.

In addition, online tax preparers and software companies have beefed up their security and implemented measures to confirm their customers’ identities. For example, many providers use multifactor authentication — such as a password plus a code sent by text — to verify a user’s identity. On the business side, the IRS now requires tax preparers to furnish additional information to verify that a return is legitimate.

These efforts have been effective, but tax-related identity theft remains a major threat. So it’s important for individuals and businesses to take steps to protect themselves.

Preventive Measures

For individuals, one of the keys to preventing tax-related (and other forms of) identity theft is to keep your SSN private. Don’t carry your Social Security card with you and don’t provide your SSN to others unless absolutely necessary (and never provide it via email).

Beware of phishing emails. These are official-looking emails designed to look like they’re from the IRS, a financial institution or an executive at your company, but are actually from criminals attempting to steal your SSN, bank account numbers or passwords. Never click on links or attachments in emails unless you’re positive they’re legitimate. And remember that the IRS, banks and most other legitimate businesses will never ask you for financial or personal information via email.

Other steps you should take to protect yourself include:

  • Using strong passwords for computers, mobile devices and financial websites, and changing them periodically,
  • Using antispam and antivirus software on your computers and installing all security updates,
  • Reconciling bank and brokerage statements and reviewing them for suspicious activity,
  • Storing bank statements and tax documents in a secure location and shredding them when no longer needed,
  • Reviewing your credit report periodically for suspicious activity,
  • Locking your mailbox, retrieving mail daily and shredding credit card solicitations and other mail thieves can use to obtain your SSN or other personal information, and
  • Exercising caution when using public wi-fi networks. Use a virtual private network (VPN) service to encrypt any information you transmit over these networks.

Finally, file your return as early as possible. In the event identity thieves do obtain your SSN or other information, filing first will prevent them from claiming a refund in your name.

Businesses should take steps to protect their own information as well as that of their employees. If you’re an owner, provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails; using secure methods to send W-2 forms to employees; and implementing risk management strategies designed to flag suspicious communications. If you’re an employee, try to find out if your employer is following these best practices.

Responding to a Theft

If you become a victim of tax-related identity theft:

  • File a complaint with the Federal Trade Commission ( and local law enforcement,
  • Contact the three major credit bureaus to place a “fraud alert” on your credit records, the IRS and your tax advisor, and
  • Submit an Identity Theft Affidavit (Form 14039) to the IRS. You’ll receive a six-digit Identity Protection Personal Identification Number (IP PIN) for use in filing electronic or paper returns.

You should also contact your financial institutions and close any accounts that have been compromised or opened fraudulently.


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Dynasty Trusts are More Valuable Than Ever

January 15, 2019

The Tax Cuts and Jobs Act (TCJA), signed into law this past December, affects more than just income taxes. It’s brought great changes to estate planning and, in doing so, bolstered the potential value of dynasty trusts.

Exemption Changes

Let’s start with the TCJA. It doesn’t repeal the estate tax, as had been discussed before its passage. The tax was retained in the final version of the law. For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the generation-skipping transfer tax exemption amounts have been increased to an inflation-adjusted $10 million, or $20 million for married couples ($11.18 million and $22.36 million, respectively, for 2018).

Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

GST Avoidance

Now let’s turn to dynasty trusts. These irrevocable arrangements allow substantial amounts of wealth to grow free of federal gift, estate and generation-skipping transfer (GST) taxes. The specific longevity of a dynasty trust depends on the law of the state in which it’s established. Some states allow trusts to last for hundreds of years or even in perpetuity.

The GST tax is an additional 40% tax on transfers to grandchildren or others that skip a generation, potentially consuming substantial amounts of wealth. The GST tax exemption is the same as the gift and estate tax exemption, $11.18 million for 2018. For a transfer to a “skip” person to be completely tax-free, generally both the GST exemption and the gift or estate tax exemption must be applied.

The power of the dynasty trust post-TCJA is that, assuming you haven’t yet used any of your gift and estate tax exemption or your GST tax exemption, you can transfer a whopping $11.18 million to a properly structured dynasty trust. There’s no gift tax on the transaction because it’s within your unused exemption amount. And the funds, plus future appreciation, are removed from your taxable estate.

Most important, by allocating your GST tax exemption to your trust contributions, you ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will avoid gift, estate and GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.

Nontax Reasons to Set Up a Dynasty Trust

Regardless of the tax implications, there are valid nontax reasons to set up a dynasty trust. First, you can designate the beneficiaries of the trust assets spanning multiple generations. Typically, you might provide for the assets to follow a line of descendants, such as children, grandchildren, great-grandchildren, etc. You can also impose certain restrictions, such as limiting access to funds until a beneficiary earns a college degree.

Second, by placing assets in a properly structured trust, those assets can be protected from the reach of a beneficiary’s creditors, including claims based on divorce, a failed business or traffic accidents.

Best Interests

Naturally, setting up a dynasty trust is neither simple nor quick. You’ll need to choose a structure, allocate assets (such as securities, real estate, life insurance policies and business interests), and name a trustee. Your tax advisor and your attorney can help you determine whether a dynasty trust is right for you and, if so, help you maximize the tax benefits.

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Three Ways to Deduct the Cost of Business Property

January 4, 2019

Under current law, taxpayers have a variety of options for deducting some or all of the cost of property used in business rather than depreciating it over a period of years. Here’s a quick overview of three of them:

De Minimis Expensing Safe Harbor

Taxpayers with “applicable financial statements” (such as a certified audited financial statement) can deduct up to $5,000 per invoice or item for certain tangible property costs to the extent they deduct them for financial reporting or bookkeeping purposes. Those without applicable financial statements can deduct up to $2,500. Certain exceptions apply.

This safe harbor avoids the need to determine whether low-cost items are deductible or must be capitalized, as well as the need to depreciate large numbers of small-dollar capital asset purchases. It does not, however, preclude the deduction of higher-cost items if they’re otherwise deductible. Taxpayers who make the election must take the deduction for all qualifying property within the chosen threshold.

Sec. 179 Expensing

Sec. 179 allows taxpayers to deduct, rather than depreciate, up to $1,000,000 in costs of qualifying tangible property. The deduction is phased out on a dollar-for-dollar basis to the extent Sec. 179 property exceeds a $2.5 million “investment ceiling.” Property eligible for expensing generally includes most depreciable property, including computer software (subject to special rules), other than buildings and certain real property. Certain exceptions and limitations apply.

Bonus Depreciation

Taxpayers are permitted to deduct up to 100 percent of the cost of eligible property acquired and placed in service after 2017 and before 2023. Starting in 2023, bonus depreciation is reduced by 20 percent each year and eliminated after 2026. Bonus depreciation is taken with respect to a particular property after any Sec. 179 deduction and before regular depreciation.

Property that currently qualifies for bonus depreciation includes both new and used tangible property with a recovery period of no more than 20 years, as well as water utility property and off-the-shelf computer software. Before 2018, certain building improvements also qualified for bonus depreciation, but in what appears to be a legislative oversight, the Tax Cuts and Jobs Act of 2017 eliminated that option. It is hoped that Congress will restore bonus depreciation for this “qualified improvement property.”

Special rules apply to property a taxpayer manufactures, constructs, or produces for its own use: long-production-period property and aircraft; passenger automobiles; and certain other types of property. Taxpayers can elect out of bonus depreciation for any class of property in a given tax year.

You should work closely with your tax advisors to take advantage of these options in the most effective manner. All three tax breaks can be used in the same year, but they can’t be applied to the same costs. Please contact our office with any questions.

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