Monthly Archives: July 2022

Portability of Unused Estate Tax Exclusion

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Article Highlights:

Estate Tax
Lifetime Exemption
Surviving Spouse
Portability Election
Financial Drawback
Election Considerations
Portability Extension

When an individual dies, the value of that individual’s estate is subject to estate taxation, which is currently 40% of the individual’s taxable estate. However, there is a lifetime exclusion (exemption) to the estate tax, which for 2022 is $12.06 million. The lifetime exclusion can also be used to offset taxable gifts – those that exceed the annual gift tax exclusion. This means for someone dying in 2022 who hasn’t previously dipped into their lifetime exclusion to offset gift tax, the first $12.06 million of the individual’s estate is exempt from estate tax and passes tax-free to the individual’s beneficiaries. This lifetime exclusion amount is annually adjusted for inflation and is also subject to the whims of Congress. The table below illustrates the exclusion amounts for recent years.

Lifetime Estate Tax Exclusion

Year
Amount

2019
$11.40 Million

2020
$11.58 Million

2021
$11.70 Million

2022
$12.06 Million

In the case of married taxpayers, each spouse has a separate lifetime exclusion equal to the $12.06 million (for 2022).
Example – Looking at a simplistic situation, let’s say a married couple, Ben and Sylvia, have a joint estate valued at $15 million in 2020 when Ben passed away. He had not made any taxable gifts during his lifetime. Ben’s estate subject to estate tax was $7.5 million (half of the $15 million). In 2020, the estate and gift tax exemption amount was $11.58 million; thus Ben’s estate subject to tax is zero ($7.5 million less $11.58 million). Sylvia is Ben’s sole beneficiary, so she inherits his $7.5 million estate, which combined with her $7.5 million brings her estate total to $15 million (and for this example doesn’t increase or decrease over the coming years). Sylvia passes away in 2022 when the estate tax exemption is $12.06 million. Sylvia’s taxable estate is $2.94 million ($15 million less $12.06 million), resulting in an estate tax of $1,121,800 (based on the estate tax rate schedule which is $345,800 on the first $1 million and 40% of the balance).
However, married taxpayers have a special benefit that allows a surviving spouse to make what is called a portability election. The portability election essentially allows the surviving spouse to add the deceased spouse’s unused estate tax exclusion to their own. During the surviving spouse’s remaining lifetime, the exclusion can be used to offset taxable gifts and whatever isn’t used that way is available to reduce the surviving spouse’s estate tax upon his or her death.
Example – Using the previous example, when Ben passed in 2020, the estate tax exclusion was $11.58 million, and his estate was $7.5 million. Thus, his unused estate tax exclusion was $4.08 million ($11.58 million – $7.5 million). Sylvia made no taxable gifts since Ben’s death. Had the portability election been made, which required filing an estate tax return for Ben’s estate, Sylvia’s estate tax exclusion in 2022 would have been $16.14 million ($4.08 million + $12.06 million). Thus, none of Sylvia’s $15 million estate would have been taxed since the exclusion of $16.14 million exceeded the value of her estate. The resulting tax savings is $1,121,800.
However, there is a significant financial drawback related to making the portability election. Even though filing an estate tax return for the first spouse to die might not be required because the estate’s value is less than the exclusion amount, to make the portability election, filing an estate tax return, IRS Form 706, is required. An estate tax return is lengthy, complicated, and costly to have prepared. This, tied to the fact that the preponderance of surviving spouses’ estates will be less than the lifetime exclusion and they will probably see no benefit from electing carryover of their deceased spouse’s unused exclusion, most surviving spouses make the decision not to go to the expense of filing the Form 706. However, there are factors that must be carefully considered before making that the decision.
As discussed in the prior examples the surviving spouse will have inherited the deceased spouse’s estate assets, thus increasing the value of the surviving spouse’s estate.
Inflation can cause the value of the surviving spouse’s estate to substantially increase depending upon the number of years the surviving spouse lives after the death of the deceased spouse, the type of assets inherited and how they are invested, the surviving spouse’s expenses, etc.
Then there is the potential that Congress could actually reduce the lifetime exclusion. There has been proposed legislation in the past that would have reduced the exemption to as little as $3.5 million.
There is the possibility of the surviving spouse receiving an inheritance from a relative or friend.
The possibility of hitting the lotto big.
The list goes on, and all possibilities must be considered before making the decision to incur the expense of making the election or not. Should the decision be made not to file the portability election, the deceased spouse’s estate executor can expect the tax preparer to request a signed statement that preparation of a Form 706 for the deceased spouse’s estate and electing to claim the deceased spouse’s unused exclusion are declined, in case that decision might be questioned in the future by the surviving spouse’s beneficiaries. Extension to File for Portability – The IRS recently issued Revenue Procedure 2022-32 that provides a liberal extension of time for filing Form 706 exclusively for the purpose of making the portability election, does not require a user fee, and should be used in lieu of the letter ruling process that was previously in effect. Under this simplified procedure, the portability election may be made if a complete and properly prepared Form 706 is filed on or before the fifth anniversary of the decedent’s death. The simplified method is only available to estates that are not required to file an estate tax return based on the value of the gross estate decedent’s date of death must be after Dec. 31, 2010, and the decedent must have been a U.S. citizen or resident on their date of death and have a surviving spouse. All of this can be quite complex, and you are strongly urged to contact this office for assistance.

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Will Your Planned Retirement Income Be Enough after Taxes?

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Article Highlights:

States With No Income Tax
Social Security Benefits
Roth IRA Retirement Account
Traditional IRA Retirement Account
Spousal IRA
Back-Door Roth IRA
Saver’s Credit
Employer Pensions
Employee Funded Retirement Plans
Health Savings Accounts
Brokerage Accounts
Municipal Bonds Investments
Home Equity & Gain Exclusion
Reverse Mortgage
Whole Life Insurance Cash Value

That is an important question because the actual money you have to spend when you retire depends upon the after-tax sources of your retirement income. Thus it is important to understand how the various retirement vehicles are taxed. There is significant diversity in taxation since a retiree must consider both Federal and state taxes on retirement income. Of all the states one might consider retiring to, there are eight that have no state income tax. These are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. However, to make up for no revenue from individual income taxes these states may be funded by other types of taxes, such as property taxes, sales taxes, or excise taxes. Social Security Benefits – Social Security is probably the leading source of retirement for most retirees, and determining the federal taxation can be somewhat complicated and the IRS provides a worksheet. Without using the worksheet we know that no more the 85% of Social Security benefits are subject to federal taxation and in many lower income situations none of the Social Security benefits are taxable. The actual calculation involves adding your other income to half of your annual Social Security benefit. If the amount is less than $32,000 for married tax filers or less than $25,000 for single filers in 2022, you will avoid federal taxes on your benefits. However, those filing Married Separate will find that 85% of their Social Security benefits are always taxable. State Tax – Besides the states that have no state tax, there 30 that do not tax Social Security benefits, The balance, VT, CT, RI, WV, MO, MN, ND, NE, KS, CO, UT, NM, and MT, tax Social Security benefits based on factors such as age and income or a modified amount. See the Tax Foundation Map. Roth IRA Retirement Account – Roth IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). With a Roth IRA, a taxpayer gets no tax deduction when contributions are made. However, what the taxpayer gets is tax-free accumulation, and after age 59-½, all distributions are tax-free, including the account earnings, provided the 5-year holding period has been met. Since the earnings are also tax free once the age and holding period requirements are satisfied, the sooner an individual begins making contributions, the greater the benefits at retirement. However, contributions to Roth IRA are restricted for higher income taxpayers. Traditional IRA Retirement Account – Like Roth IRA contributions, traditional IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). Unlike Roth IRAs, generally contributions are deductible in the year of the contribution. Thus future distributions are fully taxable including the earnings. Where an individual also has a qualified retirement plan, the deductibility is phased out for those with higher incomes. However, they can still make non-deductible contributions, in which case a prorated amount of the distributions will be nontaxable. In addition, individuals can elect to make non-deductible contributions which may be appropriate when an individual intends to subsequently convert the traditional IRA to a Roth IRA as discussed next. Spousal IRA – Generally, IRA contributions are only allowed for taxpayers who have compensation (the term ‘compensation’ includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, if their spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse.
Example: Tony is employed, and his W-2 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA.
Back-Door Roth IRA – Where a high-income individual would like to contribute to a Roth IRA but cannot because of the high-income limitations, there is a work-around, commonly referred to as a back-door Roth IRA, that will allow funding of a Roth IRA for some individuals. Here is how a back-door Roth IRA works:
First, an individual contributes to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.
Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, the individual can convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.
Potential Pitfall – There is a potential pitfall to the back-door Roth IRA that is often overlooked by investment counselors and taxpayers alike that could result in an unexpected taxable event upon conversion. For distribution or conversion purposes, all IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable. This may or not may affect the decision to use the back-door Roth IRA method but does need to be considered prior to making the conversion. Saver’s Credit – Low- and moderate-income workers can take advantage of a special tax credit that helps them save for retirement and earn a special tax credit. This credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Employer Pensions – Generally, since employer pension plans are fully funded by the employer, pension payments will be fully taxable. Employee Funded Retirement Plans – These include plans such as 401(k) plans, 403(b) plans, self-employed plans, and SEP IRAs. Since these plans are funded with pre-tax dollars the individual receives a current tax deduction (income deferral); thus, the income and accumulated earnings will be taxable when withdrawn for retirement, after reaching age 59½ or later. Health Savings Accounts (HSA) – Although the tax code refers to these plans as ‘health’ savings accounts, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement plan options, an HSA provides another resource for retirement savings—one that isn’t limited by income restrictions in the way that IRA contributions are. Since there is no requirement that the funds be used to pay medical expenses, a taxpayer can pay medical expenses with other funds, allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses. Unlike traditional IRAs, no minimum distributions are required from HSAs at any specific age. Withdrawals from an HSA that aren’t used for medical expenses are taxable and subject to a 20% penalty, with one exception: an individual age 65 or older will pay income tax on non-medical related distributions from their HSA but won’t owe a penalty for using the funds for other than medical expenses.
Example: Henry, age 70, has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is both tax- and penalty-free. If Henry had been 64 years old or younger, he’d be taxed on the $6,000 and pay a penalty of $1,200 (20% of $6,000).
Brokerage Accounts – Some individuals invest in stocks and mutual funds for their future retirement. These investments, if held more than a year, will produce long-term gains or losses. Long-term gains are taxed at zero, 15% or 20% depending on the individual’s total income for the year. However, investments held for less than a year will be taxed as ordinary income (taxed at the individual’s regular tax rate, which could be as high as 37%). In addition, a surtax may apply on the individual’s investment income. It is 3.8% of the lesser of the taxpayer’s net investment income or the excess of their modified adjusted gross income over $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others. Bond Investments – Those who are approaching retirement or have already retired may wish to switch their retirement investments into less uncertain investments since they may not have the longevity to stay the course for a recovery. Bonds provide a safer alternative. Generally, income from municipal bonds is exempt from taxation for federal purposes. In addition, interest earned from municipal bonds issued by an individual’s home state is also exempt from state income taxes. Home Equity – Provided a retiree has not used up their home equity, that equity can provide a source of retirement income by selling the home and taking advantage of the home gain exclusion of $500,000 for married couples ($250,000 for others). They can do this by downsizing or selling and renting. To qualify for the exclusion the individual must have owned and lived in the home for at least two out of the last five years before the sale. For married taxpayers filing jointly, both spouses must have used the home as their main residence for two of the fives years before the sale, while only one spouse need be the owner for two of the five years. Reverse Mortgage – As an alternative to selling the home, homeowners aged 62 and older can stay in their home while converting the home equity via a reverse mortgage. With a reverse mortgage the lender pays the homeowner rather than the homeowner making payments. In addition, since the payments constitute home equity they are not taxable. Whole Life Insurance Cash Value – Cash value accumulated in an insurance policy can also provide a source of income during retirement. The income will be tax-free up to the amount that was paid into the policy. For some individuals there may be other available sources of retirement income. Please call this office for assistance in your retirement planning.

Tax Benefits for People with Disabilities

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Article Highlights:

ABLE Accounts
Disabled Spouse or Dependent Care Credit
Medical Deductions
Home Modifications
Special Schooling
Nursing Services
Impairment-related Work Expenses

Individuals with disabilities, as well as parents of disabled children, are eligible for several income tax benefits. This article explains some of these tax breaks. ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contracts with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $16,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses. Through 2025, a tax provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:

The beneficiary’s taxable compensation for the year, or
The prior year’s inflation-adjusted poverty level (so using the 2021 poverty level amounts for a one-person household, the 2022 ABLE beneficiary’s contribution could be up to $12,880. The equivalent amount for residents of Hawaii is $14,820 and $16,090 for Alaska.

However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf. The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000. Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent of any age who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,400 or more (2022) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals. Note that for 2021 only, the credit rate and care expenses allowed were significantly higher and the credit was refundable. Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 7.5% of their adjusted gross income. Eligible expenses include:

Prostheses
Vision Aids – Contact lenses and eyeglasses
Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
Wheelchair – Costs and maintenance
Service Dog – Costs and care of a guide dog or service animal. The IRS has stated that “the costs of buying, training, and maintaining a service animal to assist an individual with mental disabilities may qualify as medical care if the taxpayer can establish that the taxpayer is using the service animal primarily for medical care to alleviate a mental defect or illness and that the taxpayer would not have paid the expenses but for the disease or illness.”
Transportation – Modifications or special equipment added to vehicles to accommodate a disability
Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense. If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included if the tutoring is recommended by a doctor.
Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school, as well as the costs of meals and lodging supplied by the school, are also included as medical expenses.
Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse if the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
Impairment-related Work Expenses – An employed individual with physical or mental disabilities may claim a deduction for impairment-related work expenses for attendant care at the individual’s place of employment or for other expenses at the job location that enable the individual to work. Those with a physical or mental disability that limits their being employed, or substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working are eligible to deduct their impairment-related work expenses if they itemize deductions. These expenses are claimed as a miscellaneous itemized deduction on Schedule A, not as a medical expense.

If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call.

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How QuickBooks Online Tracks Products and Services

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Most small businesses maintain a changing inventory of multiple products. Even if you sell one-of-a-kind goods, you need to know what you’ve sold and what’s available. And if your company sells services, you also have to keep track of what you’re able to offer customers. QuickBooks Online can meet these needs. It allows you to create detailed records for both products and services. If you carry inventory, it can make sure that you always know what’s available to sell. When you enter sales and purchase transactions, the site draws on the records you’ve created to help you complete invoices, sales receipts, purchase orders, etc., without having to leave the form you’re working on. Creating your records initially can take some time. And your products and services require regular monitoring and maintenance. But if you’re conscientious about these tasks, you’re not likely to run short on inventory or have too much money tied up in products that aren’t selling fast enough. Preparing QuickBooks Online Before you begin creating records and tracking inventory, you need to make sure that QuickBooks Online is set up correctly. Click the gear icon in the upper right. Under Your Company, click Account and settings. Click the Sales tab in the toolbar. You’ll see the Products and services section near the middle of the screen.
Make sure you’ve turned on the Products and services features you’re going to need.
Toggle the slider buttons on and off by clicking on them, and be sure to save your changes when you’re done. One option allows you to turn on price rules. This is still classified as a beta feature, but it’s live on the site. It’s also quite complicated to set up and can create confusion for your customers and revenue loss for you if it’s not done correctly. Let us help if you want to use this tool. Creating Your Product and Service Records Your first task, of course, is to build your product and service records. Hover your mouse over Sales in the left vertical toolbar on the home page and select Products and Services. The screen that opens is your home base for dealing with inventory and services. Eventually, it will contain a detailed table containing information about both. Two large buttons at the top of the page warn you when you have Low Stock or you’re Out of Stock. Click New in the upper right corner. A vertical panel slides out from the right displaying your four options for Product/Service information. They are:

Inventory. If you buy and/or sell products whose quantities you must track, these items are considered inventory.
Non-inventory. You may have products that you buy and/or sell, but you don’t need to track the amount you have in stock. These are considered non-inventory.
Service. These are, well, services that you provide to customers, like landscaping or web design. You might sell these by the hour or project, for example.
Bundle. You might call these assemblies. Bundles are multiple products and/or services that you sell as a package for one price.

Click on Inventory for this example. Here is a partial view of the pane you’ll see:
You can track your inventory levels and reorder points when you create inventory product records in QuickBooks Online.
To create a product or service record, just fill in the blanks on the form and save it. Some fields are optional. In fact, only three are required: Name, Initial quantity on hand, and As of date. Of course, your inventory tracking and the use of product and service records in transactions and reports will be much more effective if you complete as many of the fields as possible. We recommend that you at least provide answers in some additional fields (some of which aren’t shown here), including:

Category (will be useful in reports, for example)
Reorder point (will keep you from running out of items)
Inventory asset account (you can leave the default, Inventory Asset)
Description (for sales forms)
Sales price/rate (what the customer will be charged)
Description (for purchase forms)
Cost (what you pay to buy it)
Expense account (often Cost of Good Sold, but you can ask us to be sure)

Please let us know if you have other questions we can answer that would help you use QuickBooks more effectively.

August 2022 Business Due Dates

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August 1 – Social Security, Medicare, and Withheld Income Tax File Form 941 for the second quarter of 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
August 1 – Self-Employed Individuals with Pension PlansIf you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2021.August 1 – All Employers If you maintain an employee benefit plan, such as a pension, profit sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2021. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.August 1 – Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2022 but less than $2,500 for the second quarter..August 1 – Federal Unemployment Tax Deposit the tax owed through June if more than $500.
August 10 – Social Security, Medicare, and Withheld Income Tax File Form 941 for the second quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.August 15 – Social Security, Medicare, and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July.August 15 – Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in July.

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August 2022 Individual Due Dates

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August 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

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Ways to Maximize Business Deductions

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Article Highlights

New Business
Legal and professional fees
Spousal Joint Ventures
Self-employed Health Insurance
Home Office
Deducting the Cost of Business Equipment
Advertising Expenses
Website Costs
Financing
Vehicle Expenses
Business Meals

As a small business owner, you should always be on the lookout for legitimate ways to minimize your taxes. Waiting for year-end to do your tax planning can be too late and you may miss many possible opportunities. The following are valuable tips that help you maximize your business deductions. New Business – Normally the costs of starting a business must be amortized (deducted) over 15 years. But taxpayers can elect to deduct up to $5,000 of start-up expenses and $5,000 of organizational expenses on the return for the first year of the business. A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Examples of qualified start-up costs include:

Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
Wages paid to employees, and their instructors, while they are being trained;
Advertisements related to opening the business;
Fees and salaries paid to consultants or others for professional services; and
Travel and related costs to secure prospective customers, distributors and suppliers.

Each of the $5,000 amounts is reduced by the amount by which the total start-up expenses or organizational expenses exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years. Legal and Professional Fees – incurred in setting up the business would fall under the organizational expense first year deduction of $5,000 and the balance would be amortized over 15 years. However, legal, and professional fees incurred after the business is up and running can be expensed. Spousal Joint Ventures – When both spouses in a married couple are involved in the operation of an unincorporated business, it is common – but incorrect – for all that business’s income to be reported as one spouse’s income as a sole proprietorship on IRS Schedule C. In which case, the spouse not filing a Schedule C loses out on the chance to accumulate his or her own eligibility for Social Security benefits and the ability to fund a retirement account. In addition, to claim a childcare credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the non-Schedule C spouse has another source of earned income, the couple will not be allowed a childcare credit. There are two ways to remedy this situation, either: (1) by establishing a partnership or (2) a joint venture (each spouse files a Schedule C with their share of the income, deductions, and credits). Self-employed Health Insurance – If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the health insurance premiums without itemizing your deductions. This above-the-line deduction is limited to net profits from self-employment. Home Office – Small business owners may qualify for a home-office deduction, which will help them save money on their taxes and benefit their bottom line. Taxpayers can generally take this deduction if they use a portion of their home exclusively for their business and on a regular basis. Plus, this deduction is available to both homeowners and renters. There are actually two methods to determine the amount of a home-office deduction: the actual-expense method and the simplified method.
Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business is not limited to 300 square feet. Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year.
Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible as non-business expenses if the taxpayer itemizes deductions. Deducting the Cost of Business Equipment – From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are several options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.
Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment. Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated. De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses. Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.

Depreciable Item
Class Life
Depreciable Life

Office Furnishings
10
7

Information Systems
6
5

Computers
6
5

Autos & Taxis
3
5

Light Trucks
4
5

Heavy Trucks
6
5

Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 100% of the cost of most new tangible property if it is placed in service during 2022. The remaining cost is deducted over the asset’s depreciable life. This provides a larger first-year depreciation deduction for the item. Bonus depreciation is a temporary provision and for eligible business property bought after 2022, the rates drop to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and nothing after 2026. Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $1,080,000 for 2022. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,700,000 for 2022), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded. An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition. Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.
Advertising Expenses – Once the business is operating, all forms of advertising are generally currently deductible expenses, including promotional materials such as business cards, digital or print advertisements, and other forms of advertising. However any adverting expense incurred before a business begins functioning would be treated as a start-up expense. Trade shows are a form of advertising, and if a business purchases their own custom trade show booth, that booth can generally be expensed in the year purchased using bonus depreciation or Sec 179 expensing. Website Costs – Although the IRS has not issued guidance on when Internet website costs can be deducted, the costs should generally be treated under the same principles as other business expenses. Generally, website costs will be either a software expense or an advertising expense, but if they are paid or incurred before a business begins, they would be treated as start-up expenses. Financing – Interest expenses incurred to finance your business operation are deductible as a business expense. But be careful not to mix personal and business interest expenses. Banks are usually reluctant to lend money on a startup business. However, an equity loan on your home will generally achieve a lower interest rate anyway and the interest can be traced to and deductible as business interest. Vehicle Expenses – If you use your car for business purposes you can deduct its business use by using either the standard mileage method, which allows a per mile amount, or the actual expense method. However, both methods require that you track your business and total mileage for the year. If using the standard mileage method you need to know the number of business miles driven, and if using the actual method you will need to prorate the actual operating expenses including fuel, insurance, repairs, and depreciation by the percentage of business miles to total miles. You can also deduct tolls and parking fees with either method. Business Meals – Generally business entertainment is not deductible although business meals are 50% deductible, or 100% if the business meals are provided by restaurants during 2021 through 2022. The 100% deductibility provision is to encourage spending at restaurants, which generally were hard-hit by the COVID-19 pandemic emergency lockdowns. Record keeping for business meals is especially important. Each meal expense must be substantiated by not only the amount, date, time, and place, which are usually included on the receipt, but also the business purpose and the names of the guests and their business relationship. Of course, the list of potential expenses goes on and is too extensive to include all possibilities here. If you are just starting a business or are already in business and have questions related to the business, please give this office a call.

Posted in Tax

Tax and Personal Finance Tips for New Parents

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Expanding your family? Whether you’re in the planning stages or your bundle of joy has already arrived, raising a child is one of life’s greatest joys — and biggest expenses. And we’re not just talking about the costs of college. From diapers to daycare, from braces to bicycles, parents are often shocked by the constant outflow of cash that starts days after bringing baby home. While there’s nothing you can do to avoid incurring these expenses, you can definitely soften their impact by educating yourself about what to expect and planning ahead. Below you’ll find a helpful list of mistakes to avoid, resources not to miss, and steps you can take to boost the chances that bringing up baby will be less of a drain, and more of a pleasure.

Start with a Realistic Budget Has anybody ever told you that all you need for a baby is a drawer for a bed, a bottle, and a bunch of cloth diapers? There are plenty of people who sing that song, and we have news for you — they’re wrong. If you’ve already given birth then you’re already familiar with some of the bills, but if you’re still in the planning stages, make sure that you include these expenses as you prepare:

Prenatal and postnatal doctor visits for both mom and baby
Birth and delivery costs
Baby clothes, nursery furniture, car seats, playpen, glider, highchair, strollers, baby bath, etc.
Childcare
Diapers and wipes, baby medications and ointments, shampoos, etc.
Formula and bottle-feeding supplies or breast pumps and milk-storage bags, or both

And that’s just for the first year or two of parenting. As your child gets older you will need to add on the costs of toys, clothing, bicycles, braces, summer camps, birthday parties , . And if one of the two of you plan to stay home with your child – even part-time – that will significantly impact your disposable household income.

While the government reports that the average cost of raising a child from birth through adulthood is $233,610, those averages include the people who spend the very most, as well as those who spend the very least. To get a realistic sense of how much you can expect to pay, talk to your friends, and ask them to share what they’re spending, especially when it comes to childcare. Those figures can be truly eye-popping. Take Advantage of Tax Breaks Plenty of people kid around about their child representing a tax break, but there is truth behind the joke. The government has created several credits and deductions to help alleviate some of the financial burdens of raising a child, but these breaks are not automatic. You have to fill out your tax forms properly and claim the advantages to which you are entitled. Make sure that you are familiar with everything that is available to you. These may include:

Child tax credit – if you have a dependent child and your annual household income falls within the government’s guidelines, you can cut the taxes that you owe significantly
Child and dependent care credit – if you and your partner or spouse file your taxes jointly and pay to have your child cared for by a daycare, nanny, or babysitter, or even to have them attend a summer camp or a before-or-after school program so that you can work or look for work, you can claim a significant portion of these expenses on your income tax.
Earned income tax credit – depending upon income, parents with one or more dependent children may be eligible for the earned income tax credit (EITC), which cuts tax liability

Most Important of All is to Start Thinking Ahead Perhaps the most essential advice any new parent can be given is to start planning for the future now – and maybe even yesterday. There are plenty of people who spend the early years of their child’s life saying that they don’t know how they’re going to pay for college – and not doing anything about it. The people who start putting small amounts of money away on a regular basiswhen their kids are small – and who keep doing so throughout their child’s life – are the ones who sleep soundly as college grows nearer. It is never too soon to create a financial plan for your own retirement as well as to address your child’s education, as well as to cushion against an emergency. Your comprehensive financial plan should include:

A retirement fund, whether it’s an employer-sponsored 401(k) or an IRA that you set up for yourself
An emergency fund to help you through anything from a job loss to auto repairs or unexpected medical expenses. Most people suggest having at least three months’ worth of living expenses available, and some say saving enough for six months without an income.
A college fund. Opening a 529 college savings account and making consistent deposits is something you’ll thank yourself for later.
A life insurance policy and a will. It’s nice to run on the assumption that you’ll always be around to support your family. But accidents and unexpected illnesses happen, and far too many people who don’t include life insurance in their economic plans leave behind families that have to deal with their grief and economic situation. It’s also a good idea to take care of basic legal documents like a will, an advance healthcare directive, and power of attorney.

The Basics If you’re in the planning stages, it’s a very good idea to start saving now, ahead of the costs you’re about to incur for doctor’s bills, hospital fees, and anything not covered by insurance, as well as for income not earned during last weeks of pregnancy/post-partum. You’ll also want to investigate the benefits and family leave policy that your employer offers. Preparing for a new family member can be overwhelming. For assistance with putting yourself on the right financial path, contact us today. We can help you review your current situation and create a plan that will work for today as well as for the future.

Don’t Overlook Your Charitable Contributions

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Article Highlights:

Charitable Itemized Deductions
Bunching Deductions
Qualified Charitable Distributions
Donor-Advised Funds
Volunteer Expenses
Misconceptions
Household Goods and Used Clothing
Documenting Charitable Contributions

Your charitable contributions include a wide variety of tax-saving opportunities, some you may not be aware of and some that are frequently overlooked. And there are some contributions that you may believe are deductible that really are not. Being knowledgeable of what is and is not a qualified charity, a qualified charitable contribution, and charitable giving strategies can go a long way towards maximizing your charitable tax deduction. To be deductible the contributions must be made to qualified charitable organizations, which generally only include U.S. nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. You can ask any organization whether it is a qualified organization, and most will be able to tell you. You can also check by going to IRS.gov/TEOS. This online tool will enable you to search for qualified organizations. Also, to be able to deduct charitable contributions, one must itemize their deductions. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction, which for example is $12,950 for those filing single, $19,400 filing head of household and $25,900 for married individuals filing jointly for 2022. The standard deduction is adjusted annually for inflation. If the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions. Congress did revise the law to allow limited amounts of cash contributions made in 2020 and 2021 to be deducted without itemizing, but this was only a temporary provision and doesn’t apply in other years. Bunching – If your charitable deductions are not enough to bring your itemized deductions greater than your standard deduction, the bunching strategy may work for you. When employing the bunching strategy, a taxpayer essentially doubles up on as many deductions as possible in one year, with the goal of itemizing deductions in one year and then taking the standard deduction in the following year. Because charitable contributions are entirely payable at your discretion, they fit right into the bunching strategy. For example, if you normally tithe at your church, you could make your normal contributions throughout the current year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution in one year and having no charity deduction for church in the next year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to decide whether to make contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows the year when the contribution was made. As a rule, most taxpayers just wait until tax time to add up their potential deductions and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, here are some strategies that might work for you. Qualified Charitable Distribution – If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. The tax rules don’t set a minimum amount that needs to be transferred but your IRA trustee may do so. The maximum of all such transfers is $100,000 per year, per taxpayer. Also note that distributions to private foundations and donor-advised funds don’t qualify for the QCD. Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers. Caution: Any IRA contributions made after reaching age 70.5 can diminish the tax benefits of this strategy. If any post-age 70.5 IRA contributions have been made, consult with this office before employing this strategy. If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD and be sure to give the IRA custodian ample time to complete the process if you are making the request toward the end of the year. Always get a written acknowledgment from the charity, for tax-reporting purposes. Donor-Advised Funds – Contributing to a donor-advised fund is a way to make a large (and generally deductible) charitable contribution in one year and put funds aside to satisfy the donor’s social obligations to make charitable contributions in future years, without incurring the expenses of setting up a private foundation and satisfying annual filing and other private foundation requirements. While generally considered a tax strategy for those with an unusually high income for the year, donor-advised funds are available to everyone, although most such funds set up through brokerages have minimum donation requirements, often $5,000–$25,000. Although they may bear the donor’s name, donor-advised funds are not separate entities but are mere bookkeeping entries. They are components of a qualified charitable organization. A contribution to a charity’s donor-advised fund may be deductible in the year when it is made if it isn’t considered earmarked for a particular distributee. The charity must fully own the funds and have ultimate control over their distribution. To document the contribution, the taxpayer must get written acknowledgement from the fund’s sponsoring organization that it has exclusive legal control over the contributed assets. Although the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are arm’s length and do not directly or indirectly benefit the donor. Example: Don and Shirley donate $25,000 to a donor-advised fund in one year. The $25,000 can be in the form of cash or even appreciated stock. Don and Shirley get a deduction for the full $25,000 as a charitable contribution on their return for the year of the contribution and can suggest the amounts of distributions from the donor-advised fund that should be made to various charities over a number of years. Thus, Don and Shirley achieve a large charitable contribution in one year that can be used to fund their charitable obligations over several years and can claim the $25,000 as an itemized deduction on their return for the year when they made the donation. They do not get a charitable contribution deduction when the funds are paid out from the fund to the various charities. Volunteer Expenses – If you volunteered your time for a charity or governmental entity, you probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if your services for a charity do not involve lobbying activities.
The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the costs of your own entertainment and meals are not deductible).
If you use your car or other vehicle while performing services for a charitable organization, you may deduct your actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

Misconceptions – There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:

No deduction is allowed for contributions of cash or property to the extent the donor received a personal benefit from the donation. Often, the IRS attributes at least some (if not total) personal benefit to amounts spent for items like dinner tickets, church school tuition, YMCA dues, raffles, etc. To determine the allowed contribution amount, subtract the FMV of the ‘personal benefit’ item from the cost and deduct the remainder. Most charities now allocate the deductible, nondeductible portions.
Taxpayers who have purchased tickets for benefit football games, youth-group car washes, parish pancake breakfasts, school plays, etc., with no intention of attending these events, may think they can deduct the expense as a direct contribution to the sponsoring institution. The IRS does not allow such deductions. On the other hand, if the taxpayer returns the ticket to the organization for resale and does not receive a refund of the cost of the ticket, the entire amount paid for the ticket is deductible.
No deduction is allowed for the depreciation of vehicles, computers or other capital assets as a charitable deduction. Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work. However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).
A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:

Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Household Goods and Used Clothing – One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser. Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items. The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that ‘these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.’ Documenting Charitable Contributions – The IRS provides requirements for documenting both cash and non-cash contributions. Cash Contributions – Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:
A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a. A canceled check, b. A bank or credit union statement, or c. A credit card statement.
A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
Payroll deduction records.
Cash Contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization that includes the following details:

The amount of cash contributed;
Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, and a description and good faith estimate of the value of any goods or services that were provided (other than intangible religious benefits); and
A statement that the only benefit received was an intangible religious benefit, if that was the case.

If the acknowledgment does not show the date of the contribution, then the taxpayer must have one of the bank records described above that does show the contribution date. If the acknowledgment includes the contribution date and meets the other tests, it is not necessary to also have other records. The acknowledgment must be in the taxpayer’s hands before the earlier of the date the return for the year the contribution was made is filed, or the due date, including extensions, for filing the return.Noncash Contributions Deductions of Less Than $250 – A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:
The name of the charitable organization,
The date and location of the charitable contribution, and
A reasonably detailed description of the property. The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).
Noncash Contributions Deductions of At Least $250 But Not More Than $500 – If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:
The name of the charitable organization,
The date and location of the charitable contribution,
A reasonably detailed description of any property contributed (but not necessarily its value), and
Whether the qualified organization gave the taxpayer any goods or services because of the contribution (other than certain token items and membership benefits).
Noncash Contributions Deductions Over $500 But Not Over $5,000 – If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgement and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:
How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities).
If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return. Deductions Over $5,000 – These donations require time-sensitive appraisals by a ‘qualified appraiser’ in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed. Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, privately traded stock, land, and buildings. For example, say you donated $5,300 of used furniture to 3 different charitable organizations during the year (a bedroom set valued at $800, a dining set worth $1,000, and living room furniture worth $3,500). Because the value of the donations of similar property (furniture) exceeds $5,000, you would need to obtain an appraisal of the furniture to satisfy the substantiation requirements—even if you donated the furniture to different organizations and at different times during the year. The IRS has strict rules as to who is considered a qualified appraiser. Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed. Please give this office a call if you have questions or would like to develop a charitable contribution strategy.

RMDs and IRA-to-Charity Distribution Provisions

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Article Highlights

Required Minimum Distributions
Qualified Charitable Distribution
QCD Benefits
Fly In the Ointment

Tax law requires individuals who have reached age 72 to begin taking minimum distributions from their traditional IRA accounts. These are referred to as a required minimum distribution or RMD. The RMD amount is the value of the IRA account on the last day of the prior year divided by the distribution period from the Uniform Lifetime Table, corresponding to the taxpayer’s attained age. For example, if an individual had their 75th birthday in the current year, the distribution period from the table is 24.6. If the balance in the IRA was $500,000 on the last day of the prior year, then the individual’s RMD for the current year would be $20,325 ($500,000/24.6). (The IRS develops the Table using mortality rate data and updated it effective with 2022 distributions.) Qualified Charitable Distributions – The tax law also permits individuals aged 70½ or over to transfer funds from their IRA accounts to charities in what is referred to as Qualified Charitable Distributions (QCDs). These QCDs are not taxable and where a taxpayer is also required to make required minimum distributions (RMDs), the QCDs count toward the RMD requirement. Thus, in our prior example, if the individual had transferred the $20,325 to a qualified charity in a QCD, the $20,325 would not have been taxable. QCDs are not limited to the RMDs. For those with large IRA balances QCDs can total up $100,000 per year. Neither are QCDs limited to a single transfer in a tax year so long as the total distributed does not exceed the $100,000 annual limit.
Example: Anne wants to contribute to her church’s building fund, the American Cancer Society, and the American Red Cross in the same year. She can do that by having her IRA make separate direct transfers to each charity.
It is important to remember that all individual’s Traditional IRAs are treated as one for purposes of determining an RMD and that all QCDs must be direct transfers by the IRA trustee to the charity. QCD Benefits – QCDs can provide significant tax benefits. Here is how this provision, if utilized, plays out on a tax return:
(1) The IRA distribution is excluded from income. (2) The distribution counts toward the taxpayer’s RMD for the year; and (3) The distribution does NOT count as a charitable contribution deduction.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, taxable Social Security income, and so on. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution. Fly In the Ointment – In the past the tax code did not permit contributions to IRAs by individuals once they reached age 70½, which coordinated with the prior age requirement to begin RMDs and the ability to make QCDs. The age restriction to contribute to IRAs has been eliminated, so now individuals may make IRA contributions at any age provided they have earned income. Whether intentional or an oversight by Congress, the tax changes did not modify the age at which a taxpayer can begin making QCDs and left it at age 70½ – no longer in synchronization with the revised RMD age of 72. Unfortunately that has created a situation that can be detrimental for individuals who have earned income and wish to utilize the QCD provisions and continue to contribute to an IRA after age 70½. The problem being that a QCD must be reduced by the sum of IRA deductions made after age 70½ even if they are not in the same year, causing unexpected tax results for taxpayers that are not aware of this complication. This is best explained by a couple of examples.
Example #1 – Jack makes a deductible IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72. He claims an IRA deduction of $7,000 on his tax return for each year. Then later when he is 74, he makes a QCD of $10,000 to his church’s building fund. Since Jack had made the IRA contributions after age 70½, his QCD must be reduced by the post-70½ contributions that were deducted, and as a result, the $10,000 is a taxable IRA distribution ($10,000 – 14,000 = ). However, he can claim $10,000 to the church building fund as a charitable contribution on Schedule A if he itemizes his deductions. In the next year, Jack makes a $5,000 QCD to the university where he got his degree. The excludable amount of the QCD is $1,000 ($5,000 – $4,000 = $1,000). The $4,000 is the amount that remained from post-age 70½ IRA contributions that didn’t previously offset QCDs. Jack includes $4,000 as taxable IRA income and can deduct $4,000 as a charitable contribution if he itemizes. No amount of post-age 70½ IRA contributions remains to reduce the excludable amount of QCDs for subsequent taxable years. Example #2 – Bob makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72 and deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution, $6,000 is nontaxable, and Bob can claim a $14,000 charitable contribution
All this can become quite complicated. If you are considering making a QCD and made IRA contributions after age 70½ and don’t understand the tax ramifications, you should consider consulting with this office before you make the distribution.