Identity theft isn’t limited to criminals opening credit cards and running up debt in your name — your tax return is also at risk. During the first eight months of 2017, over 189,000 people filed affidavits with the IRS stating they were the victims of identity theft. In the same time period, the Internal Revenue Service stopped an additional 443,000 false tax returns from wreaking havoc. Although the IRS works diligently to counteract fraudulent returns, you are the first line of defense in keeping your data and identity safe.
States where Americans pay the highest in state income taxes
State income tax: 1% to 13.3%
State income tax: 5.8% to 10.15%
State income tax: 5% to 9.9%
State income tax: 5.35% to 9.85%
State income tax: 0.36% to 8.98%
State income tax: 1.4% to 8.97%
State income tax: 3.55% to 8.95%
State income tax: 4% to 8.95%
State income tax: 4% to 8.82%
State income tax: 1.4% to 8.25%
State income tax: 4% to 7.65%
State income tax: 1.6% to 7.4%
State income tax: 0% to 7%
State income tax: 3% to 6.99%
State income tax: 0.9% to 6.9%
State income tax: 1% to 6.9%
State income tax: 2.46% to 6.84%
State income tax: 2.2% to 6.6%
State income tax: 3% to 6.5%
State income tax: 1% to 6%
State income tax: 2% to 6%
State income tax: 2% to 6%
State income tax: 1.5% to 6%
State income tax: 3.75% to 5.99%
State income tax: 2% to 5.75%
State income tax: 5.75%
State income tax: 2% to 5.75%
State income tax: 0.5% to 5.25%
State income tax: 5.1%
State income tax: 2% to 5%
State income tax: 3% to 5%
State income tax: 5%
State income tax: 0.495% to 4.997%
State income tax: 1.7% to 4.9%
State income tax: 4.63%
State income tax: 2.7% to 4.6%
State income tax: 2.59% to 4.54%
State income tax: 4.25%
State income tax: 3.75%
State income tax: 3.3%
State income tax: 3.07%
State income tax: 1.1% to 2.9%
Don’t make the mistake of taking action only during tax season: Stay vigilant year-round to keep your personal information safe. Then when tax time comes, scammers won’t already have the information they need to file a fake tax return and gain access to your money. Do all you can to protect your tax refund from identity theft.
How to Prevent Tax Refund Fraud
Criminals make it their business to find ways to uncover and exploit your personal information — but you can make it your business to stop fraudulent tax returns from being filed in your name. Here are some steps you can take to protect your identity and your tax refund:
Never respond to an email, text or social media contact claiming to be from the IRS. The IRS only initiates contact with taxpayers by postal mail. Forward any suspicious or fraudulent contacts to [email protected]
Don’t give your personal or financial information to anyone who calls claiming to be with the IRS. The caller might threaten arrest or deportation, but don’t be intimidated. Instead, report these calls to the IRS by calling 800-366-4484 or via the IRS Impersonation Scam Reporting website.
Protect your personal identity information throughout the year. Always keep your Social Security number and other personal data well-protected to minimize the chances of unauthorized access. When online, use strong passwords and security software, and never click on suspicious links or downloads. Additionally, learn about phishing scams and how to avoid them.
Check your credit report regularly to detect fraudulent activity. Although you are entitled to receive a free copy of each of your credit reports annually from AnnualCreditReport.com, you can also sign up for a free or premium credit-monitoring service. Sometimes credit card companies will provide this type of service to cardholders as a perk.
Don’t ignore tax documents that you receive. A W-2 from an employer you didn’t work for can indicate that your identity might have been stolen.
Don’t wait until the last minute. Instead, file your tax return as early as reasonably possible so that criminals can’t file one first, reports CBS. To help you file as early as possible, go over your prior year’s returns and make a list of all the documents you need to file and create a checklist. Also, keep your receipts throughout the year, so they’re available when you’re ready to file.
Get an identity protection pin. An identity protection pin — aka an IP PIN — is a six-digit number assigned to you by the IRS to prevent fraudsters from using your Social Security number on a fake tax return. To get an IP PIN, you’ll need to determine your eligibility:
You must have received an IRS letter inviting you to opt-in OR
You must have filed a tax return last year with an address in California, Delaware, District of Columbia, Florida, Georgia, Illinois, Maryland, Michigan, Nevada or Rhode Island.
1. Self-Employment Tax Deduction – Unfortunately, in the eyes of the IRS, you are both an employer and an employee. Thus, you are responsible for both the employer and employee tax contributions to Medicare and Social Security. Fortunately, 50% of your employment tax payment (effectively your “employer” contribution) is tax deductible.
2. Qualified Business Income (QBI) Deduction – To level the playing field of corporate tax breaks, self-employed taxpayers now have a new deduction that assists small businesses with pass-through income (where individual tax rates apply). Sole proprietorships, partnerships, or S corporations may deduct up to 20% of QBI – although limitations can apply and some term definitions in the code are unclear. This deduction took effect from January 1, 2018, so you will be able to claim it for the first time on your return you file this spring for the 2018 tax year.
3. Home Office Deduction – You can still deduct a home office as long as it is your principal place of business, used on a regular basis, and used for nothing other than business. IRS Publication 587, “Business Use of Your Home” gives details on eligibility and how to calculate your deduction.
4. Retirement Plans – If you use a 401(k), a simplified employee pension (SEP), or some other suitable qualified retirement plan, you can deduct your contributions to that plan. Not only will you score valuable tax deductions, you will also save responsibly for retirement by growing a tax-deferred nest egg. The IRS provides details on calculating contributions and deductions based on your choice of plan.
5. Office Supplies – As long as office supplies (non-capital expenses) are purchased and used only for your business, they may be considered as standard business expenses and deducted.
6. Depreciation – Capital expenses (that have a lifespan greater than one year) may also be deducted through depreciation if they are used to generate income for your business. Depreciation may apply to equipment used for both home and business. For details, see IRS Publication 946, “How to Depreciate Property“.
The new tax law raised the depreciation limit to $1 million and the depreciation rate from 50% to 100% on equipment bought and placed into service after September 27, 2017.
7. Educational Expenses – Do you attend seminars related to your business? Do you take continuing education classes or maintain subscriptions and dues in relevant professional societies? If these expenses relate to your profession, they may be deducted.
8. Health Insurance – Health insurance is frequently challenging for the self-employed. You may be able to reduce the burden by deducting premiums for you and your family if you meet the criteria outlined in IRS Publication 535, “Business Expenses.”
Note: The new tax law eliminates the penalty for not having health insurance (aka the “Obamacare mandate”) from 2019 onwards – but health insurance was still required for tax year 2018, for which you are filing a return this season. Although there is no penalty going forward, we don’t recommend forgoing healthcare insurance as a cost-savings exercise.
9. Communication Expenses – Expenses such as Internet and data services may be deducted in whatever proportion relates to your business. Basic local telephone services are not deductible for the first phone line in your home, even if you have a home office. Long-distance business calls on that line are deductible, as are the costs of a separate line used exclusively for business.
10. Other Travel Expenses – Some business travel expenses may be 100% deductible if they occur away from your tax home and are considered “ordinary and necessary”. The new tax law has eliminated certain entertainment expenses, but the 50% deduction on food and beverage expenses still applies.
11. Promotional Expenses – Business-related advertising costs from full media promotions all the way down to simple business cards are deductible. Promotional gifts may be deductible as long as they are branded to your business.
12. Bank Fees – If you are careful to separate your business bank account from your personal accounts and maintain a clear line between transactions, you may be able to deduct some bank fees related to your business account.
13. Business-Related Interest Charges – Similarly to bank fees, interest on credit card balances and loans that are strictly related to your business may be deducted. Be sure to keep excellent and thorough records to prove the distinction. The new tax law creates limitations on interest deductions for larger businesses (gross receipts greater than $25 million), but, as a small business, your interest deductions should be unaffected.
14. Mileage – Do you use your car for business purposes? You can either take a standard mileage deduction (54.5 cents per business-related mile for tax year 2018 and 58 cents per mile for 2019) or take a deduction based on actual costs such as fuel, maintenance, licensing, and depreciation. Some public transportation expenses may also be deducted. Be sure to keep the personal and business-related mileage expenses separate, retain all necessary receipts, and keep good records as proof of business use. (See the pattern here?)
15. Contract Labor Costs – You may employ other independent contractors on a contract basis to provide services – for example, contracting with a web developer to create your website. Those expenses are generally deductible. You may also deduct the cost of tax preparation services used for the business-related part of your return.
How to Recover From a Stolen Tax Refund
It’s important to take swift action if you are a victim of tax identity theft. Follow these steps to report tax fraud:
Complete IRS Form 14039 Identity Theft Affidavit to report that your tax return was rejected because there was a duplicate tax return filed using your Social Security number.
Respond immediately to any notice you receive from the IRS in response to your affidavit. You can also call the agency at 800-908-4490 for specialized identity theft assistance.
Contact all of your financial institutions to alert them that you’ve been a victim of identity theft.
File a complaint with the Federal Trade Commission at identitytheft.gov to report identity theft.
Put a fraud alert on each of your credit records at the three major credit bureaus:
Consider filing a credit security freeze with each major credit bureau. A credit freeze restricts access to your credit report unless you authorize it with a secure PIN. This helps prevent identity thieves from being approved for credit in your name.