Monthly Archives: December 2014

9 Rules for Tax-Smart Charitable Giving

You have to itemize deductions. Sorry, but if you take the standard deduction, you can’t write off your gifts to charity on top of that.

You need to give to a legit charity. To check if a nonprofit is a qualified charity in the eyes of the Internal Revenue Service, use the IRS’s Select Check tool. You can also deduct donations to your church, synagogue, mosque, or temple.

You can donate right down to the wire. For a gift to qualify for a deduction, you simply need to get your check in the mail by December 31. Need more time? You can put your gift on a credit card before year-end and then pay the bill in January. (Keep in mind, though, that when you pay by credit card, processing fees may reduce the value of your gift.)

You should save your backup. Make sure you have a receipt for your gift. A cancelled check or credit card statement may be enough. But if you make a donation worth $250 or more, you must get a written acknowledgment from the charity.

Your time can be worth money. As a volunteer, you can’t deduct the value of your time. But you can deduct 14¢ for every mile you drive as part of your volunteer work, so keep track.

You shouldn’t take credit for giving away actual junk. If you donate clothes or household items, you’ll be able to deduct the fair market value—as long as the items are in good condition or better. Keep any paperwork you have for valuable items, and take photos of your donations for your records. It’s up to you, not the charity, to assign a value to your stuff. To do that, you can use thrift store guides published by the Salvation Army, Goodwill, and others, or the ItsDeductible app.

You can’t inflate the value of your old car. When you donate your old wheels to charity, your deduction is generally limited to what the nonprofit brings in by selling your car, not the Kelley Blue Book value. Plus, when you donate a car or other property worth more than $500, you’ll need to file IRS Form 8283.

You can get two tax breaks if you donate winning investments. Another way to save on taxes is to give highly appreciated stocks, bonds, or mutual funds directly to a charity. You won’t owe any taxes on your capital gains. And you can deduct the full market value of the investment as a charitable gift.

You can contribute a big sum now and give it away later. If you open what’s called a donor-advised fund, you can deduct the entire gift on your 2014 tax return and parcel out the money to good causes later. With as little as $5,000, you can open a donor-advised fund at firms such as Fidelity or Schwab.


 @ellenstark, Dec. 1, 2014



7 Smart Year-End Tax Moves To Prepare For 2015

The end of the year often serves as a reminder to evaluate our lives and set goals for the future (even if we don’t call them resolutions). For many, this includes putting a magnifying glass to their finances. There is no better time to think about your investments and budgets and to make a plan for the upcoming 365 days. One thing that is often left out of this plan however, is how taxes will play into the equation.

Tax season might still be several months away, but now is actually the best time to begin preparing for April 15, because you can still make moves to lower your 2014 taxes and can make plans to keep your taxes down next year.

Here are seven steps to do this. They go beyond simply updating your tax software and gathering your W2s. The goal: to make sure you’re kicking off 2015 as financially fit and tax-ready as possible.

1. Find last minute deductions for 2014. There are a number of different ways to reduce your taxable income for 2014 before the end of the year.

First, consider putting more money into a pre-tax retirement savings account, such as a 401(k) or traditional IRA. Just remember not to exceed the 2014 contribution limits: $5,500 for an IRA if you’re under 50 ($6,500 for people 50 and up) and $17,500 for 401(k)s ($24,000 if you’re 50 or older).

Donating to charity in November or December lowers your taxable income, too, and gives you a tax deduction. Check with your tax adviser first to determine the maximum amount you can deduct based on your income.

2. Take a financial inventory. This will help you position your investments properly for 2015. Determine how much money you have in your pre-tax and after-tax 401(k)s and IRAs. This will help you understand what taxes are going to be deducted from your current year’s income and what will be taxed in retirement.

Sit down with your financial and tax planners to help make a more informed action plan for your year-end retirement and tax planning.  It could save you money in taxes this year and in retirement.

3. Know your effective tax rate. You’re probably familiar with your tax bracket but you might not know your effective tax rate — that’s the percentage of your total income that you pay in taxes every year. For example, if your net income is $90,000 and you file as single, you’re in the 25% bracket for taxes of $18,300. However, after deductions, your total taxable income might drop to $80,000. So your effective tax rate — your total taxes actually paid divided by your taxable income — is slightly lower: 22%.

Why is this important to understand now?

Knowing your effective rate can help you determine whether to allocate money before the end of the year in a traditional pre-tax 401(k) or use an after-taxRoth account instead.

If you believe your effective rate is likely to be lower now than when you retire (either because you will be making more money or because you expect taxes to increase), you may want to have your money taxed now by putting it into a Roth savings option before year-end.

4. Make conversions count. Once you understand the impact of your effective tax rate on retirement planning, go back to your inventory. Ask yourself: Do you have more retirement funds in pre-tax money than in other categories? If the answer is “yes” (which it is for many people, thanks to 401(k) plans) and you think your effective tax rate will increase in retirement, you may want to consider a series of Roth conversions which must be done by Dec. 31to count for this year’s taxes. (Either a financial adviser or your investment company can set up a Roth conversion account.)

Roth conversions let you move money in small increments into a taxable retirement vehicle like a Roth IRA. Since this conversion is a taxable event, you would be paying taxes on the money now. Doing conversions year over year, a little at a time and ideally with the guidance of your financial and tax advisers, can help minimize taxes in retirement.

5. Address any 2015 withholding issues. Are you afraid you’ll owe taxes next year? Rather than waiting to see if you have an issue, run the numbers now — with your tax professional or tax software. Then, make any necessary adjustments to your withholdings before the New Year to help avoid a tax bill next year. Conversely, if you expect to get a refund, lowering your 2015 tax withholdings can give you more disposable income every month next year.

6. Make the most of your 2014 investment losses. This has generally been a good year for investors. Still, you may have had some paper losses, particularly if you owned retail stocks. If so, you may want to sell those investments and incur those losses this year, allowing you to can write off some of them when you file your taxes in April — especially if you do not think the investments are going to recover.

Just remember that the amount of investment losses that you can write off is limited tp $3,000 per year. You’ll need to talk with your tax professional and financial adviser to assess whether selling the losses makes sense.

7. Leverage your resources. If you have taken advantage of a Flexible Spending Account (FSA) this year to lower your taxable income, check to see how much money is left in your account. If you don’t spend the money you put away by Dec. 31, you will lose it. (A Health Savings Account (HSA) also lets you lower your taxable income, but it allows you to roll over your account balance year to year.) Should you have any FSA money remaining, try to use it up by taking care of doctor appointments, flu shots and other medical expenses.

Too many of us wait until we file our taxes in the spring to learn what we should have done to create a better tax picture for the year. Take time now and be proactive; it’ll help you go into 2015 wiser about your tax situation.

By Holly Kylen, Next Avenue Contributor


Business Gift Giving & Tax Deductions

There are many wonderful reasons for buying gifts for your customers and business associates: maintaining good work relations, opening doors for opportunities, professional networking, and a thank-you for a job well done.

There’s also one more incentive to make those gift purchases. All or part of the cost of your business gifts can actually become tax deductions. Here are the rules.


Cost of the Gift

Like some tax deductions, there is a limit on exactly how much you can deduct when spending money on business gifts. Currently, that limitation is $25 per recipient.

Of course, you are free to spend as much as you want on gifts for your clients and business associates, but the IRS only allows you to deduct up to $25 of the cost of the gift. Its important to note that the $25 deduction refers to the recipient of the gift, not the actual gift itself. For instance, if you purchase a gift for the same customer three times during the year totaling $45, you may only deduct $25 since each gift went to the same person.

However, if you bought those same three gifts and gave them to three different customers, you could end up deducting $25 for each gift, thus deducting your total purchase.

Understanding Incidental Costs

When purchasing gifts, it’s necessary to know what adds to the value of the gift and what does not. Let’s face it, when we’re filling out the deduction paperwork, it’s important to be accurate.

This is where incidental costs come into play.

The $25 limitation on tax-deductible gifts does not include incidental costs: these are costs that cannot truly increase the intrinsic value of the gift. Things such as gift-wrapping, shipping and handling, or engraving don’t really add anything to the value of the gift and therefore cannot be included in the value of the gift. Obviously these costs must be paid for by someone, but they cannot be added to the total value when deducting the gift from your income.

Indirect vs. Direct

Once again, the IRS has a subcategory – the government subdivides business gifts into two categories: direct gifts and indirect gifts.

Direct gifts are given directly from the giver to the recipient with no middleman or third party recipient. A direct gift isn’t a box of donuts given to the office staff at Christmas. A direct gift is a pound of Dunkin Donuts coffee given to a single individual for a job well done.

Indirect gifts are gifts given to an individual by way of another person. As an example, an indirect gift could be a set of kitchen knives given to a customer, but actually intended to be given to the spouse, knowing full well that the customer would never use them.

Its important to understand this distinction because the IRS will count the gift towards the recipient’s $25 yearly allowed deduction. Remember, the deduction limitation is $25 per recipient per year.

Entertainment and Gift Giving

Although it’s not really a loophole, there is a subtle gift-giving circumstance that can help you deduct even more than the $25 limitation. According to the IRS, if a gift is a gift of entertainment, you can deduct up to 50% of the cost.

Business entertainment gifts are things such as concert tickets, sports tickets, movie passes, or even vacations and hotel stays. If you give multiple gifts to the same people throughout the year, chances are good that you’ll quickly exceed the $25 recipient limitation. For your next business gift, you might think about something a little entertaining. The recipient will surely love it and you may be able to increase your deductions.