As the end of 2013 approaches, donors are likely thinking about their
favorite charity or ministry and what they may be able to do in the way
I know I am. I am always encouraged when I think
about the important mission of these organizations and how lives are
being changed as a result of what they are doing. After all, that is
why we give. We give because we are taking part in something bigger
than we are. We give because we believe in the mission of these great
organizations. We give because we believe in the power of giving to
transform lives, maybe even our own.
So, after dwelling on the good stuff it is then time to consider how to give. Should I give cash? Should I donate stock? Should I do something else?
Having served in some nonprofits, I know we were always thankful for unrestricted
gifts in whatever form they came to us. This might be your first
consideration and I would recommend making your gifts unrestricted so
that the organization can put it to use in the best way possible.
Next, if your cash position is good you will certainly want to share the wealth. Here are a few reminders about cash gifts–
- Make sure you are donating to a qualified organization if you want a tax deduction.
- Make sure to get an official receipt for your gift, especially if it is over $250.
- For tax purposes, cash donations generally have a deductible limit of 50% of your AGI.
- You must make your gift before the end of the year or make sure it is postmarked December 31 if mailed.
If you want to make stock gifts at the end of 2012, this is a positive
time to do so. The stock market has performed well over the past couple
of years and you may have stocks that you feel have appreciated
significantly. Also, the fiscal cliff that has been the focus of the
post-election likely will see income tax rates and capital gains tax
rates rise after 2012. With this in thought, making a stock gift seems
like the right and prudent thing to do. Here are some reminders about
making stock gifts–
- You can take a tax deduction for the fair market value of the stock at the time of the gift.
- For tax purposes, stock gifts and other capital gain property gifts are limited to 30% of your AGI.
- Make sure to give the stock directly to the charity (don’t sell it yourself and then give the cash).
Of course, make sure you consult your professional advisor as you plan your year-end giving.
No matter what your situation, you have the ability to make a difference
through your giving to nonprofits. Keep that in mind as you move
forward into this holiday season.
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.
Accelerating Income and Deductions
Accelerating income into 2013 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare tax or NIIT (see below).
Here are several examples of what a taxpayer might do to accelerate deductions:
- Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
- Pay your entire property tax bill, including installments due in year 2014, by year-end. This does not apply to mortgage escrow accounts.
- Try to bunch “threshold” expenses, such as medical and dental expenses (10% of AGI starting in 2013) and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2013, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8% of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.
If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
Tax planning presents more challenges than usual this year due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), which was signed into law on January 2, 2013, as well as certain tax provisions of the Patient Protection and Affordable Care Act of 2010 taking effect in 2013 and 2014.
Tax planning strategies for individuals this year–and for the next several years–require careful consideration of taxable income in relation to threshold amounts that might bump a taxpayer into a higher or lower tax bracket, thus, subjecting him or her to additional taxes such as the Net Investment Income Tax (NIIT) or an additional Medicare tax.
Even so, there are several more general tax planning strategies taxpayers might consider such as:
- Selling any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
- If you anticipate an increase in taxable income in 2014 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2014.
- If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2014. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
- If you’re self employed, send invoices or bills to clients or customers this year in order to be paid in full by the end of December.
Caution: Keep an eye on the estimated tax requirements.
Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.
Definition of a Hobby vs. a Business
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.
The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.
Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.
Is Your Hobby Actually a Business?
If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)
October 1, 2013 marked the first day of the shutdown of the federal government–the first since 1995-1996. Without a clear idea of how long this “lapse in appropriations” is expected to continue, here’s a look at how taxpayers are affected.
During the shutdown, approximately 86,000 IRS employees have been furloughed and IRS operations are limited. Despite this, tax law remains in effect, and in that respect it’s “business as usual.”
Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.
Where’s My Refund?
Although the IRS will accept and process all tax returns with payments, it is unable to issue refunds during the shutdown. Tax refunds will not be issued until normal government operations resume. This includes the “Where’s my refund?” service.
October 15 Tax Filing Deadline
Individuals who requested an extension of time to file should file their returns by October 15, 2013. According to the IRS, more than 12 million taxpayers requested an automatic six-month extension this year, but have yet to file.
Members of the military and others serving in Afghanistan or other combat zone localities typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due. People with extensions in parts of Colorado affected by severe storms, flooding, landslides and mudslides also have more time, until Dec. 2, 2013, to file and pay.
Taxpayers are urged to file electronically, because most of these returns will be processed automatically. You can file your tax return electronically or on paper–although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
Tax software companies, tax practitioners and Free File will remain available to assist with taxes and continue to accept and file tax returns.
For taxpayers seeking assistance, only the automated applications on the regular 800-829-1040 telephone line will remain open.
The IRS website, http://www.IRS.gov, will remain available, although some interactive features may not be available.
IRS criminal law enforcement and undercover operations will continue.
During the shutdown, all IRS audits and examinations will stop. All non-automated collection activity will also stop.
During the shutdown, the IRS will take also steps to protect ongoing bankruptcy, lien, and seizure cases and to prevent lapses in the statute of limitation.
Tax Court closed at noon on Tuesday, October 1 and stopped accepting and serving documents such as petitions and motions, as well as electronic filings and hand deliveries. For those with deadlines that cannot be extended (i.e. set by statute), documents may be sent by US mail. The postmark serves as the filing date. If you have any questions relating to tax court, please contact us.
Social Security checks will continue to be issued and mailed out via US mail, which is not shut down as it is not funded by the federal government. Field offices are open, but assistance may be limited.
Here is a short statement I received from the IRS that may apply to you at this time:
Due to the current lapse in appropriations, IRS operations are limited. However, the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal.
From our colleagues at Presti & Naegele CPAs:
September is here and school is back in session. Your kids are one year older and hopefully one year closer to heading off to college. Whether that prospect excites you or terrifies you probably depends on the day, but the specter of college tuition is a constant. Regardless of whether your children are starting kindergarten or high school, college costs just got closer. Did you know there are tax advantaged savings plans that can help you build a larger education nest egg for your children?
The 529 College Savings Plan is designed to make it easier for families to save for college. The plan provides a tax incentive that makes earnings on these savings tax free when they are used to pay for qualified education expenses. Contributions are made after tax, so they don’t provide immediate federal tax benefit like a traditional IRA, but work more like a Roth IRA, where income on the investments can be exempt from tax if used for qualifying education expenses. In addition to the federal benefits, many states, including New York, provide a deduction for contributions into qualified 529 plans. New York provides up to a $5,000 per year deduction ($10,000 for married filing jointly) into New York’s 529 Direct Plan.
The earlier you start contributing to a 529 plan, the more benefit you are likely to receive. When the time comes to pay those costly college bills including tuition, fees, books, and supplies, you can use the earmarked funds that have been growing tax-free in your 529 plan. 529 plans aren’t just for parents either. They are a great way for grandparents to contribute to their grandchildren’s future in a tax advantage way.
529 college savings plans can also be used in combination with available education credits such as the Hope credit or the Lifetime Learning credit, though some limitations and requirements exist to retain the tax free treatment of 529-related income.
Regardless of the age of your children, it’s never a bad time to open a 529 plan. Think of it like your retirement. The sooner you get started, the better off you’ll be. Presti & Naegele can work with you to determine which plan is right for you, and to ensure that all requirements are met to establish and fund your plan. And when the time comes to send your kids off into the world to study, we will be there to help you utilize your 529 plan and other credits and incentives.
Here are 10 key facts from the IRS about mortgage debt forgiveness:
1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.
2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.
3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.
4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.
5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.
6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.
7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.
8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.
9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the following year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.
10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.
Here are 5 useful articles in the public domain today:
Time to Hire? Where Small Businesses Are Adding Jobs by Kathleen Davis in Entrepreneur
Why Better Mac Battery Life is a Big Deal for Apple by Marco Tabini on MacWorld
How to Get Your Groove Back by Pamela Slim
How Contests Provide a Creative Way to Crowdsource Projects by Stephanie Faris on SmallBiz Technology
How to Encrypt Your Email by Bridget Ayers on The Get Smart Blog
And here is a new song you have got to add to your playlist:
Belle Glade Missionaries by Of Montreal
Have a great weekend!