May 20, 2013

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Itemized or Standard Tax Deductions-The Tough Choice

April 24, 2013 By

Tax deductions and credits enable taxpayers to lower their tax liabilities if claimed appropriately. Many taxpayers are usually torn between claiming standard or itemized deductions. The standard deduction amount varies from one year to another, age and physical disabilities like blindness.  The choice between the two will entirely depend on individual circumstances, but there are situations when itemizing is more beneficial than claiming standard deductions.

Medical: Medical costs can only be deducted if they go above 7.5% of your Adjusted Gross Income (AGI). Some taxpayers see this threshold as a deliberate attempt by the IRS to bar them from taking medical costs off the tax bill; it appears insurmountable. In reality, any regular employee who pays personal insurance can surpass this threshold. Medical expenses are broad, and cover child and dependent costs, all sorts of therapies, assisted care facility expenses, and special schools for kids with disabilities, amongst others.

Taxes: Unlike low income earners, high income taxpayers shouldn’t find it hard to itemize because of the equally high withholding taxes. Some of the deductable expenses include disability insurance expenses and automobile registration fees, which are often overlooked even though they are deductable. Property taxes can be deducted on particular cases, but they cannot be deducted if they include other assessments. If you reside in a state without income tax, use sales tax instead. Doing this excludes your tax refunds from the taxable income the following year. 

Mortgage Interests Deductions: These deductions are restricted to the interest on acquisition debt in addition to $100,000. Interest deductions drop with a drop in rates. You cannot deduct points when refinancing and the deduction must be stretched over the loan’s life.

Charitable Donations: If you are one of the taxpayers who donate ten percent of your income, then you definitely have sufficient expenses to claim sizeable itemized deductions. Any donation claims amounting to or exceeding $250 must be supported by relevant documents and receipts. You also have to present detailed schedules or non-cash donations amounting to $500 or more.

Casualty and Theft: To claim personal losses, they must be more than 10% of your annual gross income, plus $100. Be warned; the form is a bit complex and might amount to an appraisal and even an IRS audit.

Finally, there are miscellaneous itemized deductions you can claim. They cover all other deductions, but most of the costs are cut by about 2% of the AGI. This is best suited for taxpayers who pay high union dues and have a lot of non refundable business expenses, especially work travels and mileage.

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Five Important, but Often Overlooked, Tax Deductions & Credits

April 4, 2013 By

When filing taxes, 99.9% of taxpayers closely pay attention to deductions lest they let an opportunity to ease their tax burden slip through their fingers. However, compared to tax credits, deductions are less attractive, since tax credits actually cut your tax liability. Deductions and credits or any other tax breaks available will go a long way in trimming your tax bill, but there are several tax breaks that are overlooked by most taxpayers when filing. Discussed below are the top four tax such credits and deductions:

1. Job Search Deductions: Job searching is a job in its own right and incurs expenses that range from transport to interview sites, résumé consultations, preparing your résumé and even mailing it to potential employers, long distance telephone calls, amongst other. The IRS accepts deductions of job search costs on Schedule A as miscellaneous expenses. Go ahead and search for that job claim a deduction, so long as it is in the same line of work as your former job.

2. Work-Related Relocation: Assuming that you have secured a job and have to relocate, go ahead and pack your up your things and move. Moving expenses are deductable and the beauty of it is that you actually don’t have to itemize to deduct. Just be sure that the move passes the IRS test before you deduct.

3. Charitable Donations: As some hunt for jobs, there are some taxpayers who had an amazing financial year, and earned more than enough or they just feel philanthropic and ready, to share the little or much they have earned with the less fortunate. Charitable donations, be it cash, a car, some items, etc., are deductable.

4. Aging Parents and Medical Expenses: Baby boomers have a lot of responsibilities, especially in ensuring that their aging parents are taken good care of. Sometimes, your parents can be claimed as a dependent resulting in some additional exemptions during filing. Your folks don’t necessarily have to qualify as your tax dependents, but if you spend money on medicine and healthcare, then you can write these expenses off your own Schedule A.

You might be losing lots of tax savings if you keep claiming the same tax breaks every year without researching on other tax breaks you might be eligible for. Just ensure that you are not missing out on valuable tax deductions and credits that could help you save an extra dollar. However, to avoid any IRS problems, understand the requirements of all deductions and credits before claiming them on your return.

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Donate to Tax-Exempt Charity to Deduct

January 25, 2013 By

Before donating to any charity, if hope to deduct the charitable donation on your tax return, it is very important that you find out whether the organization you have in mind is on the IRS’s acceptable organizations. This is not only important to the donating taxpayers, but also to nonprofits. If the charitable organization is not on the IRS’s eligibility list, then the contribution you make is not tax deductible.

Charities that don’t meet the IRS’s tax requirements usually have their tax-exempt statuses revoked. It has however, been reported that Uncle Sam has issues with keeping an eye on all the organizations in operation.

Determined to implement in full the new provision that form part of the Pension Protection Act 2006, the IRS sought to assess its readiness. According to the health care reform, famously known as Obamacare, all tax-exempt organizations that were not previously required to file annual information returns, mainly because of their gross receipts were below a specific amount, must now file to the IRS electronically. Even though those organizations that fail to file are not threatened with hefty monetary penalties, those that will not provide the required information or refuse to file annual return for three successive years will have their tax-exempt status revoked automatically.

Even though the hawk-eyed IRS was successful in spotting most organizations that have failed to comply for three successive years, over 15,000 organizations that did not file for three successive years were spared. According to TIGTA, the 15,000 organization were not communicated to appropriately over the revocation of their tax-exempt statuses. Furthermore, those whose statuses were revoked were not sufficiently informed on how to have their revoked statuses reinstated.

It is the responsibility of the IRS to make the correct call when dealing with all issues related to taxes. As the taxman works out his records and cleans the house, taxpayers/donors are encouraged to double-check whether the organizations they would like to donate to are still on the IRS approved list. Donating to the right charity is definitely one the best ways to lower your tax liability, but you must donate to an approved charity.

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Important Tips for Claiming Charitable Donations Tax Breaks

December 27, 2012 By

Though Christmas has past, it’s still not too late to donate to a charity for the 2012 year! You can save on your tax bill by deducting these charitable donations. Taxpayers are encouraged to contribute money or non-cash items to charities, but for the donation to be deductible, it must meet the set IRS requirements.

Organization’s Tax Status: Only contributions made to eligible charitable organizations are deductible. The IRS is constantly revising its list of qualified organizations, revoking some that fail to comply with its set regulations, and you have to check its website to find the compliant institutions to channel your donations to. If unsure, simply ask the organization you intend to donate to whether it is tax-exempt or not.

Itemized Deduction: To deduct charitable contributions, you must itemize them on Schedule A of Form 1040.

The Fair Market Value: Donors are free to contribute either cash or non-cash items. For all non-cash goods, their fair market value must be established. There are some special rules that apply to property donations like cars, clothing as well as household goods. In case the charitable organization gives something in return like merchandise, any goods or services, free admission to a charity banquet or even a sports fun day, then only the value that exceeds the fair market value of the of received benefits are deductible.

Record Keeping: Keeping of tax records is significant but many taxpayers find it hectic. Any cash contribution, irrespective of the value, has to be documented for it to be deductible. Any cancelled check, bank or credit card statement or payroll deduction records or even a written and signed statement from the organization may be required.

Large Donations: Any contribution exceeding $250 must be supported by more documents for it to be deductible. The charity organization must acknowledge receipt of the donation in writing, with the cash amount donated or the fair market value of the donated items clearly specified for property donations. It must also be stated whether the charity provided any goods or services in return. Form 8283-Noncash Charitable Contributions must be completed for donations exceeding $500 while claims for non cash property contributions exceeding $5,000 must be appraised by a qualified appraiser and attached to Form 8283.

Timing: Donations made to charity are only deductible within the tax year they are made. Please note that pledges don’t apply, if you pledge to donate $1,000 but by the end of the year you only manage to contribute $500, it is the $500 that you can claim and not $1,000 pledged. However, end-of-year donations via credit card or checks can still be deducted for the very tax year even if the credit card bill is paid or bank account debited after December 31st.

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Evading Taxes by Turning Down Pay Doesn’t Work.

April 26, 2012 By

Many people think that tax law only follows cash, meaning with no income, you have no tax burden. People even go to the extent of turning down pay and bonuses just to evade taxes. Well, this could only make sense in the layman’s world but in the world of tax law, it is a different ball game. Even if a bonus is announced in December, and you choose to turn it down before it is paid, the taxman notes it as a constructive receipt taxable.

Executives have tried to navigate this tricky topic by repaying their bonuses. Some are motivated by pressure from shareholders or the public or even as a result of regulatory concerns. Sometimes they are even required by law to do so but there’s a tax effect.

There are certain options one can consider in trying to pay back bonuses in order to lower tax burden. However, there are a number of critical factors you must consider before making that step.

  1. Understand the reason for repayment

Before starting the repayment, inquire if it is a voluntary step or it is motivated by other underlying factors. A repayment fuelled by shame, altruism, or patriotism could seem admirable, but may only give you an uncertain tax outlook. Better an executive repaying a bonus as a consequent of a court order, or for any regulatory reasons though he or she is not guaranteed a “good” tax position.

With a tax professional by your side however, you ought to consider tough issues like whether or not the giveback occurs in the same year as the pay. Other questions you must answer include: Do you only repay your net check with the payroll deductions already made when you return a bonus?

  1. Amend Previous Year Tax Returns

This is only allowed if you are correcting a mistake, and often a pay back is no “mistake”.

  1. Business Expense Deduction

If your repay is motivated by regulatory concerns, you can claim a business expense deduction but only as a miscellaneous itemized deduction.

  1. Salary Reduction an Option?

The company could agree to lower the executive’s present salary to effect the repay.

  1. Section 1341 Provision

This section, though tricky, allows you to claim a deduction if you included the income in the previous year since you had an unrestricted right to it, but realized a year later you did not and you have to give it back.

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4 Tax Deductions of Which You May Not be Fully Aware

April 11, 2012 By

Tax deductions reduce the amount of income to be taxed and by extension, reduce the amount of taxes payable. There are many tax deductions that one can claim and these deductions can be found on the IRS website. One needs to ensure that they claim all deductions that they qualify for so as to save as much on their taxes as they possibly can. Below is information about 4 tax deductions that you can easily claim in your returns:

Donations to Charity

Most taxpayers are aware that donations to charity are tax deductible. However, many people are not fully aware about the rules appertaining to donations of non-cash items. You can donate food stuff, clothes, bedding, cars, toys, stocks, mutual funds, retirement funds, artifacts and many more items and receive a tax deduction against such donations. However, there are various rules that apply to non-cash donations for qualification as a tax deduction:

  • To claim the deduction, you must itemize your deductions as opposed to going for the standard deduction.
  • Secondly, the value of all donations you are claiming must not exceed 30-50% of your Adjusted Gross Income (AGI). The cap ranges between 30% and 50% depending on the charity that you are donating to.
  • Another requirement for the qualification of non cash donations for tax deduction is that such donations must be made to a qualifying institution. The IRS maintains a database of the qualified charities on their website and you can check whether an organization that you are seeking to donate to is qualified.
  • For non-cash donations exceeding a value of $250, you will need an acknowledgment from the charity organization indicating the value of the items donated.
  • Non-cash donations above $500 will require the taxpayer to file Form 8283 “Non-cash Charity Contribution Form”.
  • Non-Cash donations above $50,000 will require a valuation of the items by a qualified appraiser before claiming the deduction.

Job Search Costs

Expenses relating to a job hunt are generally tax deductible. These expenses include communication costs, costs of sending CVs to prospective companies and travel expenses to a new state or town in search of a job of for a job interview. However, if you relocate to a new town in search of a job, you cannot deduct the cost of relocation as part of the job-hunt expenses. When claiming travel expenses relating to a job hunt, various rules apply for accommodation and meals and one needs to verify the qualification of various costs before claiming.

Medical Expenses

Various medical expenses are tax deductible for taxpayers who itemize their deductions. There are some specific medical related expenses that are tax deductible and that you may not be aware of:

  • You can deduct contributions made to a Health Savings Account (HSA) even if you are not itemizing your tax deductions.
  • Medical costs for a sex change may be tax deductible if the sex change is due to “Gender Identity Disorder” or other recognized disorders.
  • Costs of rehabilitation from addictions are generally tax deductible. This includes alcoholism and drug addiction. However, only the medical aspects of the rehabilitation expense are tax deductible.
  • In 1999, the IRS approved tax deduction of medication costs for treating smoking addictions. Prior to this, medication to control smoking habits was not deductible as it was considered a lifestyle choice.
  • Treatment of diseases and conditions using drugs that are illegal such as Marijuana and Heroin is not tax deductible even if such drugs are prescribed by a qualified medical practitioner.
  • Costs of attending a conference about a chronic disease that you, your spouse or your dependent suffers from is tax deductible.
  • Some medical costs for alternative treatment such as acupuncture are tax deductible

Casualty and Theft Losses

Losses caused by sudden events such as a disaster, break and entry of your home, car accidents, home fires, terrorist attacks, staff embezzlement, losses due to identity and information theft, ransom, credit card theft, black mail, and extortion are tax deductible. For the loss to qualify, the event must happen suddenly and unexpectedly. The event that led to the loss must be illegal according to U.S law. Therefore, losses due to a court order eviction and losses from wear and tear of assets will not qualify under this deduction. Misplacement of items does not also qualify for this deduction. To claim the deduction, you will need to subtract any insurance compensation or financial help you receive in relation to the loss. You also need to subtract $100 from the amount of loss before claiming.

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