February 2017 Letter

As your mailbox fills up with information required to organize your 2016 tax records, now is the time to think about productive ways to use your potential refund. Outlined here are some ideas to consider. Unfortunately, tax-filing season is also tax-scam season. This month's newsletter shows you how to identify possible fraudsters that may target you. Information regarding the pending overtime law change and the taxability of collectibles round out this month's newsletter.

Should you know of someone who may benefit from this information please feel free to forward this to them.

Reminder: It is Tax Scam Season Too

Imagine you receive a call from an IRS agent who says you owe back taxes and threatens to arrest you if you don't immediately make a payment over the phone. Thousands of Americans faced this situation in 2016, though the people on the other end of their phone lines weren't actually from the IRS. They were scam artists calling across the world from Mumbai, India. Their aggressive intimidation of U.S. taxpayers brought in $150,000 a day until police cracked down on their call center. Amazingly, con artists impersonating IRS agents were involved in a quarter of all the consumer fraud incidents reported to the Better Business Bureau last year, making it by far the most common financial scam. With the new tax-filing season underway, now is the time to be especially vigilant. The threatening approach used in Mumbai is just one variety of IRS scam. Another involved sending emails from fake IRS addresses telling taxpayers that due to a mistake they were owed larger refunds. According to the email, all they had to do was provide their bank information and prepay the tax due on the larger refund. Once they made the prepayment, both the scammer and their supposed refund disappeared. See through any IRS scam By following a few guidelines you can see through any IRS scam:
Digital communication is a big no. The IRS will never initiate contact with you via email, text message or social media, nor will they request personal or financial information over those channels. If you do get an email communication purporting to be from the IRS don't click on any links or open any attachments. Instead, forward the email to phishing@irs.gov. Mail first. The first contact from the real IRS will be through the mail. If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website, www.irs.gov. Compare what you find there with what you received. If it doesn't look right, you can call the IRS help desk at 1-800-829-1040 to question it.
Never pay by phone. A legitimate IRS agent will never make a call to demand immediate payment of a bill or ask you to provide your debit or credit card information over the phone. If you are suspicious, ask for the employee's name, badge number and phone number. A real IRS agent won't hesitate to provide this information. You can then politely end the call and dial the IRS at 1-800-366-4484 to confirm the person's identity.

Overtime Rules Go Into Overtime The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration. The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries. Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump's appointee to lead the Labor Department. Andrew Puzder, chief executive of fast food corporation CKE Restaurants Holdings Inc. (owner of Hardee's and Carl's Jr.) is undergoing Senate confirmation for the role. Until the case is resolved, the previous salary cap of $23,660 remains in place.

Use Your Tax Refund Wisely

Three of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:
Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you're 50 years old or older. Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don't own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early. Invest in yourself. Sometimes the best investment isn't financial, but personal. If there's a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run. Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn't the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains' pleasure centers more than receiving the equivalent amount.1 If a refund is in your future, start planning now on how it can best help your financial situation. 1 https://www.wired.com/2010/12/the-science-of-charity

Collectibles and the Tax Collector

It typically takes a great deal of personal interest and expertise in a given field — whether it's rare art, coins or baseball cards — to judge a treasure from a trinket. For those of you who have been bitten by the collector's bug, here are some tax considerations. Collectibles defined According to the IRS: "Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible properties." 1 What makes something a collectible is that it carries additional value based on its rarity and its market demand. Essentially, the opinion of other collectors and experts, based on what they are willing to pay for your collection, determines its value. For example, a typical one-ounce gold coin is worth about $1,200 based upon the value of the metal and would not be considered a collectible by the IRS. However, a rare antique double eagle gold coin produced in the 19th century could be worth $20,000 to a collector, even though it is made of exactly the same amount of gold as the non-rare coin. Collectibles special tax rate When collectibles are sold, they become taxable at a maximum tax rate of 28 percent. The tax applies to profit on the sale of your collectibles. That tax rate is considerably higher than the average capital gains tax of 15 percent that most people pay for non-collectible investments such as stocks and bonds (the tax range for long-term capital gains is from 0 to 20 percent). The exception to this rule is that if you've held your collection less than a year before you sell it, your capital gain will be taxed as regular income. It's all about the basis In order to calculate what you owe to the IRS if you sell your collectibles, start with your basis. Your basis typically equals the amount you paid for your collectibles, plus any auction or broker fees incurred during your purchase. If you spent money to refurbish, restore or maintain collectibles while you owned them, you can also add that to your basis. Then, subtract your basis from the sale price of your collectibles; the amount left over is what is taxed. Here's an example: Ima Dahl decides to sell an 1898 German Bisque porcelain doll from her collection. She's owned the doll for ten years and originally paid $700 for it. She also paid $150 two years ago to repair its cracked finish. She receives $1,800 by selling it at an online auction and spends $100 paying her auction fees and shipping to the new owner. Since she owned the doll for more than one year, her long-term capital gain is $850 and her potential maximum tax is $238. The calculation: $1,800 net sales price, minus the $700 basis, minus $150 for repairs, minus $100 selling expense multiplied by 28%. Some collectible hints
Know the market value. If you inherit a collectible you will need to know the value of the object on the date you obtain it. This will usually become your basis when you sell it. Investment or personal use. If your collectible is an investment you can usually take a loss on the sale of the collectible. Unfortunately, if the IRS deems the collectible has an element of personal use, you may not deduct the loss. An example of personal use may be the hanging of a painting on your wall. Being careful how you sell your collectible can also make a difference in managing your potential tax liability.
Collectibles tax rate good or bad. The 28 percent capital gain tax on collectibles is the maximum tax rate. For example, if you are in the 15 percent income tax range, your collectible gain is taxed at that rate. If your income tax bracket is higher than 28 percent, the collectibles tax rate is capped at 28 percent, resulting in a potentially lower tax rate versus ordinary income taxes. As you can imagine, the taxes on buying and selling collectibles can be complex. If you are considering selling a potentially valuable item, ask for assistance. 1 Source: IRS 2016 Schedule D instructions

As always, should you have any questions or concerns regarding your situation please feel free to call.

January 2017 Letter

Happy New Year! With the transition in the White House, 2017 could be a very eventful tax year. One thing we've all learned from the uncertainty of the past few tax years is to not make plans based on what may happen. Instead, make plans using current law while remaining flexible to possible changes.

Included in this month's edition are some audit risk factors to consider, determining whether a Roth IRA makes sense for you, and some New Year's resolutions for 2017. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Know Your Audit Risk

Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared. Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book. Areas that get attention
Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS. Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more. Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.
Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented. Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially "noncash" donations of property with unclear value. Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction. Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony. Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you. Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies. Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

When Converting to a Roth Makes Sense

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.
Roth Basics Major benefits of a Roth IRA: Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement. Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½. Unlike Traditional IRAs, there are no minimum required distribution rules. Downsides of a Roth IRA:
Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds. If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty. Things to consider Prior to making the decision to convert funds into a Roth IRA, consider the following: You should have enough money outside of your retirement account to pay the tax on the conversion. A Roth makes the most sense if you think you will face higher tax rates when you retire. A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren't careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits. A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense. It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

An Early Roth IRA Conversion Tip It's best to take action early in the tax year if you want to roll funds into a Roth IRA. That's because an early move into a Roth typically gives you the option to re-convert your funds through October 15th of the following tax year. The IRS calls this process recharacterization. Example: Sam converts $50,000 from a Traditional IRA to a Roth in January. By October, the Roth is worth only $40,000 because Sam's investments lost value. If Sam does nothing he will still pay taxes on $50,000 converted from his Traditional IRA in January. Instead Sam can recharacterize some or all of the funds back into a Traditional IRA and pay no taxes on the conversion. Here are some things to consider with an early rollover to a Roth IRA. Full year of earnings growth. After your conversion, you will have a full year to build after-tax earnings (or accumulate losses) in your new Roth, giving you time to see if a recharacterization makes sense. You have a full year to plan for the tax. Remember, you will want to pay the tax on rollovers with after-tax funds. This allows you to maximize the amount converted. Separate the account. Keep the funds you convert in a separate account from other Roth investments. This will keep the account clean should you need to undo your conversion. Each person's situation is unique. Carefully review your options prior to taking action.

Seven Tips for a Better 2017

New Year's resolutions are notoriously easy to make, but hard to follow. With that in mind, here are a few ideas worth trying this year:
Pay yourself first. This time-honored personal finance tip simply means setting aside a portion of every paycheck for your personal savings before you pay your bills or spend money on the pleasures of life. Make a habit in 2017 of depositing a consistent percent of your pay into a savings account and you'll have started down the road toward financial independence.
Chart your financial course. Sit down with a 2017 calendar and mark each month with all the major expenses you can predict for the coming year, such as rent, mortgage, car payments, insurance premiums, tuition, and vacations. Think of it as your map through 2017, with the expenses as your major landmarks. Making a physical document to visualize your financial path is a good first step toward creating a solid budget for the year. Become time-aware. The first step toward using your time better is to be aware of how you are using it now. Use a digital calendar to chart out your ideal week for the coming year, accounting for every minute, including the time used to sleep, eat, work and commute. Now spend a week tracking how you actually use your time in a notebook, and compare it to your digital calendar. Carve out time to exercise. Speaking of time management, it's worth carving out three to four exercise sessions every week. Moderate exercise will help make you healthier, feel more alert and sleep better. You may find the time you invest in exercise every week will add both extra years and quality to your life. Plan to learn. Resolve to become proficient in one new activity this year. Consider learning a foreign language, picking up a new sport, playing a musical instrument, or improving a professional activity such as public speaking or bookkeeping. Learning something new will keep your mind sharp, add variety to your life, and expand your social network. Reward yourself. Adopting new habits and learning new things is hard work. It's easier if you reward yourself regularly. One famous study on motivation tasked participants with working out difficult puzzles. One group was given chocolate chip cookies as a reward and the second was given... radishes! Not surprisingly, the first group was able to do a better job solving puzzles, and for a longer time.* Take the long view. Most New Year's resolutions fail because we are set in established habits and too impatient to change them. Allow yourself to pause, forgive yourself if you fail, and resume your effort when you feel stronger. As Mark Twain said, "Habit is habit, and not to be flung out of the window ... but coaxed downstairs one step at a time." *[ Baumeister study, American Psychological Association. ]

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.

2017 Standard Mileage Rates Mileage Rate/Mile Business Travel 53.5¢ Medical/Moving 17.0¢ Charitable Work 14.0¢

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates Mileage Rate/Mile Business Travel 54.0¢ Medical/Moving 19.0¢ Charitable Work 14.0¢

Remember to properly document your mileage to receive full credit for your miles driven.

As always, should you have any questions or concerns regarding your situation please feel free to call.

This newsletter is provided by

Lev Agranovich AGS TAX GROUP
Accounting and Payroll Solutions

1009 Chestnut St
Newton, MA 02464

Cell: (617) 840-0982
Fax: (617) 845-0405
Office: (617) 977-3005