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7 posts from March 2017

03/25/2017

Do's and Don'ts of Deducting Charitable Donations

So, you donated six bags of clothes to Goodwill and gave your used washer and dryer to the Salvation Army.  Now you hope to claim the donations as a deduction. There are a few things to know before your tax preparer reports your Gifts to Charity on your federal income tax return.

Please Give Jar picFirst, donations must be made to a qualified charity in order to be deductible.  Gifts to individuals, political organizations or candidates are not deductible.  A qualified charity that is designated as a non-profit organization or a 501(c)(3) must not benefit or have as a focus any private shareholder or individual.  Qualified charities must also be up-to-date on their information reports to the IRS that show that their profits are being used for their tax-exempt purposes. To check the status of a charity the IRS now provides a one-stop online tool called Exempt Organizations Select Check (EO Select Check).

In order to deduct a charitable contribution, you must first itemize deductions on Form 1040, Schedule A - Itemized Deductions.  It is important to have documentation that shows the dollar amount of all claimed qualified donations and the specific organization to which the donation was made.  Noncash contributions should have information or may even need an appraisal that reflects the fair market value of the donation at the time it was given.

If you happened to get something in return for your donation, the value of what you received must be subtracted from the claimed donation amount.  You may only deduct the amount that exceeds the fair market value of the benefit received.  Many taxpayers miss this point.  For example, let’s say you participated in a silent auction fundraiser and you “won” with the highest bid, and the item you received was worth more than the amount you paid for it.  You may only deduct the difference between what you paid for the item and the fair market value of the item.  This includes benefits you received like merchandise, meals, and tickets to events or goods and services.

If you donate property instead of cash, the deductible amount is limited to the donated item’s fair market value or the price a seller would receive if the property sold on the open market.  Many taxpayers struggle with determining the value of things like used clothing and household items.  The IRS requires that the items be in good condition or better, and has an online resource to help taxpayers determine the fair market value of items.  Technically each item, including a pair of socks, is supposed to be identified on a worksheet along with its value in order to calculate the actual value of a donation.  Many taxpayers simply take their chances and submit only a receipt from a recognized charitable organization that lists the date and a general description of what is donated, such as “2 boxes of clothing”.  If a taxpayer is audited, they must provide proof for each donation.  Cars, boats and other types of property donations are subject to additional rules.

Whether you donate cash or goods, if the amount of any specific donation is $250 or more, you must submit a written statement from the charity confirming the details.  That statement must report the same donation amount that you’re claiming, and a description of any property that was given.  It must also state whether any goods or services were received in exchange for the donation.

If you make total noncash charitable contributions that exceed $500 for the year, you’ll need to fill out another form, Form 8283, that requires more details and more proof of value.  The type of records that a taxpayer must keep depends upon the amount and type of donation.

Here are examples of charitable contributions:

  • Money or property given to churches, synagogues and other religious organizations
  • Gifts to nonprofit schools and hospitals
  • Gifts to qualified charities such as The Salvation Army, Boy Scouts or Girl Scouts of America, CARE and Goodwill Industries
  • Donations to War Veterans groups
  • Out-of-pocket expenses when you serve a qualified organization as a volunteer

Here are items that are NOT deductible as charitable contributions:

  • The value of your time or services
  • The value of blood given to a blood bank (yes, it has been tried)
  • Cost of raffle, bingo, or lottery tickets
  • Dues, fees or bills paid to country clubs, lodges or fraternal orders
  • Money or property to groups that lobby for law changes
  • Donations to candidates for public office or political groups

If you have any questions about deducting charitable donations from your federal income tax, please contact one of our tax preparation experts at McRuer CPAs for more information.

Find out more about deducting Medical and Dental Expenses in our blog.

03/22/2017

Deducting Medical and Dental Expenses

If you incurred medical or dental expenses, you may be able to deduct them on your federal income tax return.  You may also include medical expenses you paid for your spouse and/or a dependent.  To do so you must itemize your deductions; so keeping receipts and good records is important as is knowing what qualifies as a deductible expense.

Qualified medical and dental expenses generally include the costs of:

  • diagnosing, treating, easing and preventing disease
  • prescription drugs and insulin
  • insurance premiums for policies that cover medical care
  • dental x-rays, extractions, dentures and teeth cleaning
  • chiropractic and acupuncture treatments
  • and much more!

Healthcare-costsEquipment and property improvements that are medically necessary may also be deducted.  This would include the cost of updates like installing railings and support bars, porch lifts, and widening doorways to address medical care needs.  However, the deductible amount of the capital improvement costs may be reduced if it increases the value of your property.  The allowable deduction would be reduced by the increase in the value of your property.

Even travel costs specifically related to medical care may be deducted; including public transportation, ambulance service, tolls and parking fees.  Personal vehicle mileage used for qualified medical care travel may be deducted using the standard medical travel mileage rate which is 19 cents per mile for 2016, or the actual travel costs may be deducted.

Costs that have been reimbursed by insurance and other sources do not qualify for a deduction.  You also may not claim a tax deduction for medical expenses that were paid from a Health Savings Account or Flexible Spending Arrangement, as those payments are made from pre-tax dollars and would be considered a double benefit.

Generally, you can deduct only the amount of your medical and dental expenses that is more than 10% of your Adjusted Gross Income (AGI).  But if either you or your spouse was born before January 2, 1952, you can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI.

To find out more about allowable qualified medical and dental expense deductions, click here for the tax information guide.  If you have questions, please contact one of our tax preparation specialists at McRuer CPAs for more information.

03/20/2017

April 1 Deadline For Required IRA Distributions

Taxpayers who reached age 70½ during 2016 have until April 1st to apply for and begin receiving required minimum distributions (RMDs) from an Individual Retirement Account (IRA) and/or workplace retirement plan.

Deadline approaches picThe April 1st deadline applies to owners of traditional IRAs, such as SEP and SIMPLE IRAS, but not Roth IRAs.  It also generally applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.  Some employees who are still working may wait to receive distributions, if their plan allows, until April 1st of the year after they retire.

The April 1st deadline only applies to the required distribution for the first year.  For all subsequent years, the RMD must be made by December 31st of each year.  So, a taxpayer who turned age 70½ in 2016 and has received the first required distribution by April 1, 2017, must still receive the second RMD by December 31, 2017.

The amount of the distribution is calculated using life expectancy tables matched to the year-end IRA account value of the IRA.  Worksheets and life expectancy tables are available in in IRS Publication 590-B “Distributions From Individual Retirement Arrangements”.

It can be costly to miss the deadline for receiving a distribution, as the taxpayer faces a 50 percent tax that would be applied to any required amount not received by the April 1st deadline.

For more information, click here to read through frequently asked questions or contact one of our tax experts at McRuer CPAs.

03/17/2017

Saver's Credit Option Offers Rewards

Hand holding moneyThere’s a little known tax credit for people who have low to moderate income and are putting money aside to save for retirement.  The Saver’s Credit is available to eligible taxpayers to use in conjunction with the tax deduction they may already have qualified for by contributing to an IRA.

If your adjusted gross income is below $30,750 as an individual, $46,125 as a head of household or $61,500 as a married couple in 2016, you might be eligible for tax credit.  It can be worth between 10 and 50 percent of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.  You would receive the tax credit on top of the benefits of a tax-free or tax-deferred retirement fund contribution.

The Saver’s Credit applies to contributions made to a traditional or Roth IRA, a 401(K) plan, a SIMPLE IRA, a SARSEP, your 403(b) plan, 501(c)(18) plan or a governmental 457(b) plan.  Voluntary after-tax employee contributions to a qualified retirement and 403(b) plans may also be eligible for the tax credit.

Find out more by clicking here for detailed information.

Splitting Your Tax Refund

Many taxpayers are choosing to split their tax refunds. Splitting refunds is easy and is done electronically through direct deposit allowing the Department of Treasury to deposit your refund dollars in any proportion you want. You may split funds for deposits in up to three different accounts with U.S. financial institutions.

Splitting wood with axe 1A taxpayer may also choose to have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card. A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

By splitting your refund, you benefit from the convenience of opting to have some of the money deposited into your checking account for immediate use and some deposited to an interest-bearing savings for future use.  In addition, you receive the safety and speed of direct deposit, allowing access to your refund faster than if you opt to receive a paper check. (See more about the direct deposit option in our blog “Going Digital with Direct Deposits”.)

You also may use part or all of your refund to buy U.S. Series I Savings Bonds for yourself or someone else.  The splitting of refunds is a rapidly growing choice among taxpayers as more digital resources become available and security concerns increase about paper trails and identity theft.

03/16/2017

IRA Moves That Save Tax Dollars

There’s still time to reduce your 2016 tax bill as you take steps to maximize the benefits of saving money for retirement.  There are different strategies that can save money or defer taxes through contributing to IRAs and retirement funds each tax year.  For the 2016 tax year, you have until April 18th to make a move. However, if you do make a qualifying IRA contribution between January 1 and April 18, make certain you specifically instruct your financial institution to apply the deposit to the 2016 tax year.  Otherwise, the deposit may automatically be considered a 2017 deposit.

Taxes and moneyUsing a Tax Refund for Tax Savings  Here’s another tip regarding your tax refund and saving for retirement: consider depositing all or part of your tax refund directly into an IRA.  It saves a step by directly depositing the money, it can speed up the timing of the contribution and ensures the deposit is made as you intend.  With a direct deposit, you can even choose to use your 2016 refund to pay for the amount of your 2016 IRA contribution as long as the tax return can be processed and the refund paid before the April 18th deadline. You would designate on Form 8888 “Allocation of Refund” how much of your refund should be deposited directly into your IRA and that it should be designated as your 2016 contribution.

How Much You Can Save  A working taxpayer can defer paying income tax on a contribution of pre-tax dollars up to $5,500 to a Traditional IRA and may split contributions to more than one IRA.  Income tax won’t be due on the money until it is withdrawn from the account.  Contributions to a Roth IRA are after-tax dollars and do not qualify for a tax deduction, though qualified distributions may be withdrawn tax-free at retirement. Contributions to both Traditional and Roth IRAs are limited depending upon modified adjusted gross income.

The actual amount of the tax deduction on a Traditional IRA depends upon the taxpayer’s income tax rate.  For example, a worker in the 25% tax bracket may save $1,375 in income taxes by making the maximum IRA contribution.  Workers in the 35% tax bracket may save $1,925 for the same contribution amount.

If you are age 50 and above, you may contribute an additional $1,000 to an IRA up to a total tax-deductible contribution of no more than $6,500. For example, the tax deduction can range from $975 for individuals in the 25% income tax bracket to $2,275 for those who are in a 35% tax bracket.

Married couples can double their tax deduction if they make the maximum contribution to an IRA in each spouse’s name.  Even if one of the spouses doesn’t work, a contribution can be made for that spouse subject to the spousal IRA limit. The combined contributions must be no more than $11,000 if both are under age 50, $12,000 if one spouse is 50 or older and $13,000 if both are at least 50 years old.

Who Qualifies For Tax Deduction  A taxpayer must earn income in order to save in an IRA. If a worker has no retirement plan at work, the tax deduction for Traditional IRA contributions is allowed in full regardless of income.  If a person or spouse has a retirement plan at work, the tax deduction and the contributions may be limited.  Amounts for both the allowable deduction and contributions phase out at higher income levels calculated as modified adjusted gross income.

People aged 70 ½ and older may no longer claim a tax deduction for their contributions to Traditional IRAs. Upon reaching that age, the fund’s owner must start taking required minimum distributions (RMDs).  Any deductible contributions and earning withdrawn from a Traditional IRA are taxable. Early withdrawals by a person under the age of 59 ½ may be subject to a 10% penalty.  Contributions made to a Roth IRA can be made after age 70 ½ and the amount in the account can be left there as long as the person lives. Qualified distributions are generally not taxable, but early withdrawals are subject to a 10% penalty.

Click here for a description of the difference between Traditional and Roth IRAs.

03/15/2017

Going Digital With Direct Deposits

More than ever before, taxpayers are choosing digital tools to file their tax returns and receive refunds. The latest numbers show 4 out of 5 taxpayers filed electronically in 2016 using a professional tax preparer or online software.  Of those taxpayers who qualified for a refund, 8 out of 10 chose to have the money deposited directly into a bank account rather than waiting for a check to arrive by mail.

Picture1The growth in digital tax tools use is due in part to IRS mandates.  Paper returns require more man hours to process; costing more and lengthening the time to receive a tax refund by weeks or months.  The IRS now requires most tax preparation professionals to file all tax returns and attachments electronically.  While under no mandate, more do-it-yourself taxpayers with simple tax returns are choosing to use the internet to prepare their returns using the IRS Free File software, and send electronically prepared returns through IRS e-File.  This trend reflects security and privacy concerns as well as worries about delays that can come from paper filings and paper checks.

Combining IRS e-File with the direct deposit program is the fastest way to receive a refund and the transaction is free.  Most refunds are issued within 21 calendar days once the IRS receives a tax return.  A taxpayer may request that their refund be split into deposits in up to three separate financial accounts.  There are also options to purchase savings bonds, have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card.  A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

Tax agency officials try to reassure taxpayers the system used to receive tax records and payments as well as send refunds is the safest system available.  In the fall of 2015 and again in January 2016, new IRS software updates crashed the system and a small part of its online payment collection system was hacked causing delays and the need to reset taxpayer pins for security.  

Today, the IRS uses the same electronic transfer system for refunds that is used to deliver almost all Social Security and Veterans Affairs benefits to millions of accounts.  It combines built-in security protection tools with layers of online protection programs provided by banks and financial institutions.

You can request the electronic direct deposit option to receive your refund even if you file a paper return by mail; yet know that processing a paper return takes the IRS on average two months longer than processing a digital return.  Requesting a direct deposit of your refund will not speed up the processing time.

If you have questions about the direct deposit option for income tax refunds, please contact one of our tax preparation specialists at McRuer CPAs for more information.

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