Charitable Deductions: Donations can reduce tax liability
November 28th is known as #GivingTuesday or Tuesday of generosity. Therefore, it’s important to know how this impacts your taxes. If you give money or property to a non-profit or tax-exempt charity before December 31, you will likely be able to take a charitable deductions for the tax year.
Accordingly, taxpayers who want to save tax as much as possible before the end of the year should consider making charitable contributions to charities. By making a donation, the taxpayer can reduce his or her tax liability from charitable deductions.
Only donations made to eligible organizations are eligible as charitable deductions
A tool called Exempt Organizations Select Check is available on IRS.gov. The Select Check is an online database that lists most eligible charities. Eligible charities include churches, synagogues, temples, mosques and government agencies, whether or not found in the database.
Itemize to claim your charitable deductions
Charitable deductions arising from donations to charities are not available for individuals who choose the standard deduction. Importantly, tax preparation software usually warns taxpayers about the options for tax savings if the total itemized deductions exceed the standard deduction. As a result, retaining a professional to conduct an analysis of your tax return to determine how to maximize your giving. Furthermore, you could also consider gifting appreciated stock and claim a deduction for the fair market value of the stock, without selling it and incurring a tax liability. Also, you could consider a donor-advised fund.
Get proof of monetary donations
In most cases, the charitable organization should provide written documentation of the amount and date of any monetary donation. Monetary donations can include cash, checks, electronic funds transfer, credit card, and payroll deduction. Taxpayers who choose payroll deductions should retain a pay stub, Form W-2, or other proof showing the total amount withheld from your paycheck for charitable donations, along with a receipt showing the name of the organization .
Donations of property
Deduct the fair market value of donations of clothing and other household items. Clothing and household items must be in good or excellent condition to be deductible.
Those who make donations should receive a written statement of the organization for all gifts worth $250 or more. Hence, they should include a description of the donated items. Special rules apply to cars, boats and other property donations.
Take into account any benefits you receive for your donation
It is possible that people who make donations and receive something in return have to reduce the deduction. Hence, these benefits may include merchandise, meals, tickets to events or other goods and services. Thus, proof of the donation must state whether the organization gave goods and services by making the donation, along with a description and estimated value of those goods and/or services.
Seniors with IRA retirement accounts have another way to donate
Every year, people age 70½ or older with IRA retirement accounts may transfer up to $100,000 tax-free to an eligible charity. Especially relevant, the transfer counts as a required minimum distribution for the year. To qualify, direct your IRA administrator to perform a Qualified Charitable Distribution or QCD, which directly transfers the funds directly to the eligible charity.
Keep good records
Consequently, it is important that you retain records related to your charitable contribution. The larger the gift, the more documentation you should keep to establish the deduction.
10 Legal Tax Savings Secrets: Learn How to Save…
Client Talking Points
Do you want to add some value? Here are some points that can add value to you and your clients right now…
- Legal Tax Savings Secret: Holding Real Estate in the corporate solution (C-Corp or S-Corp). Is your client holding assets that appreciate in value using the corporate solution? Corporations do not get the benefit of long-term capital gains rates. The corporate rate is presently 35% and corporation dividends to shareholders are not deductible to the corp., and are thus, double-taxed. Holding assets that depreciate (go down) in value in a corporate solution makes sense. However, if the value of the asset increases, liquidating that asset has inefficient tax consequences for the small business owner. This applies to S-Corporations as well. Nevertheless, if President Trump, Senator Ted Cruz, and Congress achieve their goal of reducing corporate tax rates to 15%-20%, then this would be a future opportunity to liquidate corporate holdings at reduced corporate tax rates. TALKING POINT: Ask your client to monitor this proposed legislation, anticipated for 2018.
- Legal Tax Savings Secret: 1031 Like-Kind Exchange. Is you client aware of 1031 Exchanges? 1031 exchanges allow clients to sell business property including real estate or business personal property and exchange it for similar items. Taxes from the exchange are deferred and the client’s basis carries to the new property. Corporations can use this as well. TALKING POINT: Ask your client whether he or she is planning to liquidate business property (especially real estate, or rental real estate) to take advantage of an opportunity. If the client doesn’t need the cash and would prefer to re-invest, mention the 1031 exchange.
- Legal Tax Savings Secret: IC-DISC. Does your client export products that have US-made components? The IC-DISC is an export incentive permitted by the tax code. Essentially, a manufacturer, exporter, or supplier can reduce its tax rate to 20% by paying sales commissions to an IC-DISC that it owns and controls. The IC-DISC is a corporation that makes an election to be treated as an IC-DISC. Instead of paying 35%, it pays 20%, and can defer income as well. TALKING POINT: Ask your client if they export goods produced or remanufactured in the US, or whether the client knows if its goods or services are ultimately exported downstream. If Harley Davidson’s motorcycles are exported by unrelated suppliers, Harley would be eligible.
- Legal Tax Savings Secret: Cost Segregation. Is your client aware of cost segregation studies? Normally commercial buildings are depreciated over 39.5 years. This means the price paid for the building is recovered at 2.5% annually. Cost segregations allow buildings to be depreciated in part as personal property, allowing significant depreciation in early years. TALKING POINT: Speak to your client about newly acquired or recently renovated buildings. Good candidates are buildings recently remodeled or perhaps less than 15 years old.
- Legal Tax Savings Secret: IRS Penalties. Has your client recently been penalized by the IRS? IRS penalties can be issued for a variety of reasons. However, the IRS can be surprisingly gracious with removing penalties from accounts under the right circumstances. If a client has been given significant penalties, simply asking to remove them may do the trick.
- Legal Tax Savings Secret: Asset Protection. Corporate entities and LLCs often can provide significant asset protection. The entity acts as a shield between the creditor and its shareholders. However, the entity’s assets themselves may be subject to creditor’s claims. On the other hand, operating a thinly-capitalized company could render the corporate shield weak, and subject to piercing (attacking personal assets). TALKING POINT: Ask clients with significant assets in their corporate accounts if they have an asset protection strategy, or have considered whether their assets could be subject to attack from creditors.
- Legal Tax Savings Secret: Non-US-Residents and Non US Domiciliaries owning real estate in the US. US citizens and US residents get generous estate and gift tax exemptions currently in excess of $5.5 million filing single, and $11 million for married persons. By contrast, foreign owners of real property receive a $60,000 exemption. TALKING POINT: Why give all that hard-earned money to the IRS, needlessly? Utilize a foreign corporation to block the tax, as shares of foreign corporations are not subject to the estate tax. Be aware, as discussed above, that capital gains tax rates become corporate rates. But see President Trump’s proposal, above, regarding reducing corporate rates. Therefore, some planning is involved. Also, you may consider life insurance to pay for the potential tax consequences.
- Legal Tax Savings Secret: Compliant on Estimated Taxes. What is better: to pay down back taxes or make estimated tax payments? A big issue we encounter is people fall behind on past tax debts. This causes them to miss estimated tax payments because they are devoting resources to paying back taxes. The best strategy is to make sure estimated taxes (future taxes) are paid before back taxes. How you accomplish this warrants a discussion with a professional and an analysis of your client’s situation.
- Legal Tax Savings Secret: Filing Tax Returns. Has your client filed all tax returns? This is important for many reasons. Firstly, it is criminal to willfully fail to file returns. Also, the penalty for failing to file a return is greater than failing to pay. Finally, for those people who are W-2 wage earners, failing to file a return is a compliance risk for your employer. Yes. One of the first things the IRS requests in a corporate audit is copies of the C-Suite’s personal tax returns. Other responsible parties may be requested as well.
- Legal Tax Savings Secret: Estate Planning. When is the last time your client considered his or her estate plan. Believing you’ll live a long time is wishful thinking. You’ll never know what tomorrow brings. Make sure your family is protected.
Missed Required Minimum Distribution? What to do…
You missed the deadline to take a required minimum distribution from your qualified retirement plan. What do you do?
The deadline was December 31, 2017. You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year. A different deadline may apply to RMDs from pre-1987 contributions to a 403(b) plan.
What happens if a person does not take a RMD by the required deadline?
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, with his or her federal tax return for the year in which the full amount of the RMD was not taken.
Can the penalty for not taking the full RMD be waived?
Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.
What to do… take a correcting RMD as soon as possible. Then ask to have the penalty waived using Form 5329.
IRS Letter: What to Do…If You Get a Letter from the IRS…
What You Need to Know if You Get a Letter in the Mail from the IRS
Each year, the IRS mails millions of notices and letters to taxpayers for a variety of reasons. If you receive one:
1. Be alert for tax scams. The IRS sends letters and notices by United States Postal Service First Class Mail (Trademark) and USPS Certified Mail (Trademark), in many cases in duplicate. An IRS agent doesn’t contact people by email or social media to ask for personal or financial information. An IRS agent could call you on your telephone, but will never ask for payment over the phone, nor do they demand you make payment immediately, nor do they demand a specific type of payment such as debit or credit card. If you owe tax, you have several payment options and you should ask for an extension of time, such as a month, to evaluate your options and talk to your advisors.
2. Don’t panic. You can usually deal with a notice simply by responding to it. Each notice has specific instructions, so read the notice carefully because it will tell you what you need to do.
3. If your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return. If you don’t agree with the notice, you need to respond. Write a letter that explains why you disagree, and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub.
4. For most notices, you may call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call. If you ever have a verbal communication with the IRS, be sure to use our IRS Contact form to allow you to record the information you need to document the call and record the agent’s ID number. Note: the call may be recorded and the IRS will make notes in their CRM system.
5. Always keep copies of any notices you receive with your tax records.
Call a tax attorney to help you…