Six Must-Dos When You Donate to Charity

Charity Donations Donations are a great way to give to a deserving charity, and they also give back in the form of a tax deduction. Unfortunately, charitable donations are under scrutiny by the IRS, and many donations without adequate documentation are being rejected.

Here are six things you need to do to ensure your charitable donation will be tax-deductible.

 

Bullet Point Make sure your charity is eligible. Only donations to qualified charitable organizations registered with the IRS are tax-deductible. You can confirm an organization qualifies by calling the IRS at (877) 829-5500 or visiting the IRS website.
Bullet Point Itemize. You must itemize your deductions using Schedule A in order to take a deduction for a donation. If you’re going to itemize your return to take advantage of charitable deductions, it also makes sense to look for other itemized deductions. These include state and local taxes, real estate taxes, home mortgage interest and eligible medical expenses over a certain threshold.
Bullet Point Get receipts. Get receipts for your deductible donations. Receipts are not filed with your tax return but must be kept with your tax records. You must get the receipt at the time of the donation or the IRS may not allow the deduction.
Bullet Point Pay attention to the calendar. Donations are deductible in the year they are made. To be deductible in 2017, donations must be made by Dec. 31, although there is an exception. Donations made by credit card are deductible even if you don’t pay off the charge until the following year, as long as the donation is reported on your credit card statement by Dec. 31. Similarly, donation checks written before Dec. 31 are deductible in the year written, even if the check is not cashed until the following year.
Bullet Point Take extra steps for noncash donations. You can make a donation of clothing or items around the home you no longer use. If you decide to make one of these noncash donations, it is up to you to determine the value of the donation. However, many charities provide a donation guide to help you determine the value. Your donated items must be in good or better condition and you should receive a receipt from the charitable organization for your donations. If your noncash donations are greater than $500, you must file a Form 8283 to provide additional information to the IRS. For noncash donations greater than $5,000, you must also get an independent appraisal to certify the worth of the items.
Bullet Point Keep track of mileage. If you drive for charitable purposes, this mileage can be deductible as well. For example, miles driven to deliver meals to the elderly, to be a volunteer coach or to transport others to and from a charitable event, can be deducted at 14 cents per mile. A contemporaneous log of the mileage must be maintained to substantiate your charitable driving.

Remember, charitable giving can be a valuable tax deduction — but only if you take the right steps.

 

 

Dos and Don’ts of Business Expensing

Home office deductions

Knowing whether you can or can’t expense a purchase for business purposes can be complicated. However, there are a few hard-and-fast rules to help you.

According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You’ll need to maintain records (such as statements and ledgers) and supporting documents (receipts and invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.

Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.

Do: + Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
+ Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.
Don’t: Rely on estimates to determine the business vs. personal components of your expenses.
Deduct any of your travel expenses if your trip is primarily for personal purposes.
Deduct any of your meal costs if they could be considered unreasonably extravagant.

Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it’s highly likely you’ll get income or future business benefits. Expenses from entertainment that aren’t considered directly related may still be deductible if they are associated with your business and happen right before or after an important business discussion.

Do: + Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates and times of the pertinent business discussions.
+ Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.
Don’t: Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.

Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).

Do: + Log odometer readings for each business trip and record your business purpose.
+ Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.
Don’t: Claim mileage or expenses pertaining to commuting to and from work.

If you have any questions about how to handle your business expenses, reach out for further guidance.

Contractor or Employee?

Company benefits

Knowing the difference is important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

 The basics…

 

As the worker. If you are a contractor and not considered an employee you must:

Bullet Point Employee Pay self-employment taxes (Social Security and Medicare-related taxes)
Bullet Point Employee Make estimated federal and state tax payments.
Bullet Point Employee Handle your own benefits, insurance and bookkeeping.

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

Bullet Point Employer Payment and penalties related to Social Security and Medicare taxes.
Bullet Point Employer Payment of possible overtime including penalties for a contractor reclassified as an employee.
Bullet Point Employer Legal obligation to pay for benefits.

Things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:

Bullet Point Consider The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee.
Bullet Point Consider The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner.
Bullet Point Consider The more businesslike the arrangement the more likely you have an independent contractor relationship.

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.

Say Goodbye to the College Tuition Deduction

Mortarboard and money

It’s hard enough to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive.

But it isn’t as bad as it sounds. That’s because Congress left in place two popular education credits that often offer a more valuable tax break:

Bullet Point The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).
Bullet Point Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $132,000 per year (or singles making $66,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.

So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction was generally the only means you had to reduce your tax bill.

But there’s still hope! In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives. Please call if you’d like an overview of the alternatives available to you.

The Most- and Least-Taxed States for Retirement

When it comes to choosing where to live during retirement, weather isn’t the only consideration. State and local tax laws have a big impact on your nest egg.

The charts here show the highest and lowest state tax rates and costs of living, from data provided by nonprofit think tanks the Tax Foundation and the Council for Community and Economic Research.

State Income Tax Rates
Highest Lowest
1. California (13.3%) 50. Alaska (0%)
2. Oregon (9.9%) 49. Florida (0%)
3. Minnesota (9.85%) 48. Nevada (0%)
4. Iowa (8.98%) 47. South Dakota (0%)
5. New Jersey (8.97%) 46. Texas (0%)
6. Vermont (8.95%) 45. Washington (0%)
7. Washington DC (8.95%) 44. Wyoming (0%)
State and Local Sales Taxes (state and average local tax rates combined)
Highest Lowest
1. Louisiana (10%) 50. Delaware (0%)
2. Tennessee (9.5%) 49. Montana (0%)
3. Arkansas (9.3%) 48. New Hampshire (0%)
4. Alabama (9%) 47. Oregon (0%)
5. Washington (8.9%) 46. Alaska (1.8%)
Property Taxes (Rankings based on the statewide average of local rates.)
Highest Lowest
1. New Jersey 50. Hawaii
2. Illinois 49. Alabama
3. New Hampshire 48. Louisiana
4. Connecticut 47. Delaware
5. Wisconsin 46. Washington DC
If taxes were the only consideration in our retirement destinations, everyone would move to Alaska, which has no state income or sales taxes. However, the “last frontier” state also has one of the highest costs of living in the U.S. Therefore, you may also wish to consider which states have high and low costs of living.
Don’t Forget: Cost of Living
Highest Lowest
1. Hawaii 50. Mississippi
2. District of Columbia 49. Arkansas
3. California 48. Oklahoma
4. Alaska 47. Michigan
5. New York 46. Tennessee

Simplified Home Office Deduction

Time ClockThere’s a simple “safe harbor” home office deduction.

You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it’s often worth getting help to calculate your full deduction using the standard rules.

Marriage Tax Tips

Credit Score Ingredients

If you recently got married, plan to get married, or know someone taking the matrimonial plunge, here are some important tax tips every new bride and groom should know.

 

 

 

 

 

1 Notify Social Security. Notify the Social Security Administration (SSA) of any name changes by filling out Form SS-5. The IRS matches names with the SSA and may reject your joint tax return if the names don’t match what the SSA has on file.
1 Address change notification. If either of you are moving, update your address with your employer as well as the Postal Service. This will ensure your W-2s are correctly stated and delivered to you at the end of the year. You will also need to update the IRS with your new address using Form 8822.
1 Review your benefits. Getting married allows you to make mid-year changes to employer benefit plans. Take the time to review health, dental, auto, and home insurance plans and update your coverage. If both of you have employer health plans, you need to decide whether it makes sense for each of you to keep your plans or whether it’s better for one to join the other’s plan as a spouse. Pay special attention to the tax implication of changes in health savings accounts, dependent childcare benefits and other employer pre-tax benefits.
1 Update your withholdings. You will need to recalculate your payroll withholdings and file new W-4s reflecting your new status. If both of you work, your combined income could put you in a higher tax bracket. This can result in reduced and phased-out benefits. This phenomenon is known as the “marriage penalty.”
1 Update beneficiaries and other legal documents. Review your legal documents to make sure the names and addresses reflect your new marital status. This includes bank accounts, credit cards, property titles, insurance policies and living wills. Even more importantly, review and update beneficiaries on each of your retirement savings accounts and pensions.
1 Understand the tax impact of your residence. If you are selling one or two residences, review how capital gains tax laws apply to your situation. This is especially important if one of you has been in your home for only a short time or if either home has appreciated in value. This review should be done prior to getting married to maximize your tax benefits.
1 Sit down with an expert. It is natural for newlyweds to focus their attention on the big day. There are so many decisions to be made from selecting a venue to planning the honeymoon. Because of this, reviewing your tax situation often is an afterthought. Do not make this mistake. A simple tax and financial planning session prior to the big day can save on future headaches and avoid potentially expensive tax mistakes.

If you’d like a review of how marriage will affect your tax and financial situation, call at your earliest opportunity.

 

 

Three Popular Tax Breaks are Gone

Expense paperwork

As you make plans for the 2017 tax year, take note that three popular tax breaks expired last year and won’t be available unless Congress acts to extend them.

1 Tuition and fees deduction. You used to be able to deduct as much as $4,000 in college tuition and fees as an adjustment to taxable income. This provision was popular because it provided an alternative to other credits and did not require you to itemize deductions to receive the tax benefit. While this tax benefit is currently expired, several tax breaks geared toward students still exist:

student loan interest expense deductions
student education savings plans (529 plans)
education credits such as the American opportunity credit and the lifetime learning credit
1 Mortgage insurance premiums. The ability to deduct the cost of mortgage insurance premiums as an itemized deduction expired last year. This expired benefit used to phase out for taxpayers with more than $100,000 in adjusted gross income. Mortgage insurance is typically required of homeowners with a less than 20 percent down payment on their home purchase.
1 Lower senior threshold for medical expense deductions. The threshold for deducting itemized medical expenses raises to 10 percent of adjusted gross income for all taxpayers beginning in 2017. Prior to this, those age 65 or older had a lower 7.5 percent threshold. Only unreimbursed, qualified medical expenses in excess of 10 percent of your adjusted gross income can now be taken as an itemized deduction. For example, if a 70 year old taxpayer has $50,000 in adjusted gross income, he could have deducted his medical expenses that exceeded $3,750 as an itemized deduction. This year that number rises to $5,000 with the same income, putting it that much further out of reach for seniors.

Remember to plan for these changes. But also keep an eye on future action from Congress that could bring these dead tax deductions back to life.

IRS Announces Annual Tax Scams

Tax ScamsEach year the IRS announces a list of the “Dirty Dozen Tax Scams” its agents encounter most frequently. Highlighted here are seven of the most common.

Bullet Point Creating fake income. It has come to the attention of the IRS that some taxpayers are creating false income for the sole purpose of obtaining tax credits like the Earned Income Tax Credit. This false income can be in the form of a fake 1099-MISC or fictitious self-employment income. The penalties for this type of fraud can be severe.
Bullet Point Falsely padding deductions. Creating deductions and inflating dollar amounts of legitimate deductions is now on the IRS Dirty Dozen list. While it may seem a little thing to stretch the amounts, the increased reporting received by the IRS makes it easier for them to see these inflated deductions.
 Bullet Point Excessive business credits. This scam focuses on two commonly misused business credits: the fuel credit and the research credit. The fuel credit is usually only available for off-street vehicle use (typically for farming). While the research credit may seem straightforward, there are stringent qualifications and reporting requirements. Prior to using either of these credits, you should ask for a review of your situation.
Bullet Point Fake charities. After major disasters, many charitable givers are scammed into making donations to fake charities. This makes donations to them nondeductible. To protect against this, prior to donating funds make sure the charity is both legitimate and deemed a qualified charity by the IRS. Here is a link to the IRS tool to confirm charitable organizations. IRS Exempt Organizations List Check
Bullet Point Identity Theft. Identity theft tops the Dirty Dozen list every year. Thankfully, the IRS takes precautionary measures to curtail this out-of-control problem. In addition to limiting the number of direct deposits it will make to any single account, the IRS is working with states and tax preparation software vendors to put more controls in place. This includes some states requiring drivers license numbers on their tax forms, delays in early processing of tax refunds, internal tracking within software programs, and continual checking for heavy filing activity.
Bullet Point Phone scams. Phone calls from thieves representing themselves as IRS agents continue to get more sophisticated. The caller ID may show as coming from the IRS and the scam may involve numerous phone calls instead of a single contact. These thieves often have some of your personal information and try to intimidate their victims with threats of jail time, deportation or license revocation. Remember, never give information over the phone to someone claiming to be from the IRS.
Bullet Point Phishing. This recurring scam involves receiving fake emails and websites that look like the real deal. The IRS will not send you billing information or refund information via email. Do not click on any email link received from the IRS unless you requested it. Remember the IRS does not initiate contact through emails.

Collectibles and the Tax Collector

Collectible Coins

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

Bullet Point 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.
Bullet Point 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.
Bullet Point 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.