Wednesday, September 01, 2010
Donating a car is a great way to help out a charity of your choice while, at the same time, lowering your tax liability. However, over the past few years the IRS has cracked down on vehicle donations, after decades of abuse. This article explains how to claim a vehicle donation on tax returns without leading to IRS troubles.
Selecting an Organization
One of the most important steps in donating a vehicle is choosing a qualified charity. Although you might want to help a specific organization, in order to claim the charitable contribution deduction you will need to donate your vehicle to an organization that is qualified by the IRS. You can use IRS Publication 78 to find a qualified charity, or just ask the organization if they have proof of their tax-exempt status.
Fair Market Value
Before you donate the vehicle, you will need to determine the fair market value of your car for tax purposes. Be sure to document the condition of your vehicle, and get estimates from a handful of sources. Make sure you find substantial proof to support the value you assign to the car.
Deduction Amount
The deduction you can claim for your vehicle depends on what the charity does with it. If the organization auctions off the car, then you should claim the amount that the vehicle was sold for. However, in some cases charities will give away vehicles to low-income families, or sell it for significantly less than fair market value. In these instances, the IRS will allow you to deduct the fair market value of the vehicle, but you will need proof of both how you determined the value, and proof that the charity sold the vehicle for less than fair market value.
$500 Rule
If your vehicle is valued at under $500 then you can either take a deduction for the fair market value. However, if you intend to take a deduction for over $500 then you will want to be more cautious. IRS rules specifically say that the deduction is limited to the charity’s actual selling price if it exceeds $500. Therefore, even if your vehicle is valued at $2,000, if the charity only sells it for $1,500, you cannot claim a deduction for more than $1,500 on your tax return. Additionally, if the vehicle is valued at over $5,000 then you will need to get a private appraisal before you make the donation.
Charitable Deduction Limits
The same IRS rules that apply for other charitable deductions also apply to car donations. For example, your deduction cannot exceed 50% of your adjusted gross income. If you are unfamiliar with the IRS’ rules for charitable deductions then check out IRS Publication 526.
Itemizing
If you do decide to donate a vehicle, you must itemize your return to claim the deduction. Therefore, if you claim the standard deduction then you cannot claim a charitable contribution deduction for your donation. For those of you who are unsure whether you should itemize or not, check out the "Should I itemize or take the standard deduction?" tool at RDTC.com.
Donation Receipt
Due to mass abuse of the vehicle donation deduction, the IRS now requires you to include proof with your tax return. Charitable organizations are required to provide you with a receipt within thirty days after you make the donation, showing the amount you can claim on your return. If you do not receive any documentation within thirty days then you should contact the charity and request they resend the receipt.
Friday, August 20, 2010
Although the purpose of an IRA is to save for the future, it is not uncommon for taxpayers to ‘borrow’ money from their account. Unfortunately, there are severe tax penalties that are assessed when you make an early withdrawal. Here are some tax implications of IRA withdrawals:
What is Early?
Any withdrawal from your IRA before the age of 59½ is considered an early withdrawal, and will result in tax penalties. However, once you turn 59½, you may take as many withdrawals as you like penalty-free until the age of 70½. Once you turn 70½, you will be subject to penalties once again.
Taxes and Penalties
Unless you qualify for a special exemption, every early withdrawal will be subject to a 10% tax penalty. In addition to the flat penalty, you will also have to pay income taxes on the money you take out.
Qualified Distributions
Fortunately, there are tax laws in place that allow taxpayers who have IRAs to take penalty-free withdrawals in certain situations. These instances are known as qualified distributions, and are made to assist those in special financial situations. If you have a Roth IRA which has been open at least five years, distributions can be taken both penalty, and tax-free.
Listed below are the different options for taking a qualified distribution. However, before taking an early withdrawal you should always review you account with a qualified tax professional.
Most withdrawals made for medical expenses are subject to all penalties and fines, however there is an exception. If you pay medical expenses that exceed 7.5% of you adjusted gross income, your IRA withdrawals may be penalty free.
Higher education is a huge expense for any student. Fortunately, an early withdrawal from your IRA to help with higher education expenses may not be taxed.
Taxpayers who have been receiving unemployment payments for 12 weeks or more, and need money to cover health insurance premiums, may qualify for a special exemption as well.
If you are a military reservist who is called to active duty for 180 days or more, early withdrawals can be made without having to pay any IRS penalties.
Account holders who are mentally or physically disabled, and cannot attend to their normal job or business, can also take qualified distributions. However, the disability must be long term, and other IRS restrictions apply.
Withdrawals, made by an account holder’s beneficiary after their death, are exempt from the penalty tax.
If you are a first-time homebuyer, up to $10,000 can be withdrawn from your IRA penalty-free. Keep in mind that a first-time homebuyer as defined by the IRS is a homebuyer who has not owned a home in the past 3 years.
If the IRS needs to withdrawal money from your IRA in order to pay a tax levy, you will not be subject to the 10% penalty.
Substantially Equal Periodic Payments
Instead of searching for qualified distributions, you may want to consider starting Substantially Equal Periodic Payments (SEPPs), which allow you to take periodic payments from your IRA without having to pay any penalty.
In our deduction of the week series, we have covered a couple of tax incentives for self-employed taxpayers. Since you have to pay additional taxes when you work for yourself, there are a handful of special deductions designed for self-employed individuals. This week we are going to examine the deduction for self-employed taxpayers who purchase their own health insurance plans.
IRS Rules
According to the IRS, “you may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents if any of the following applies.”
- You were self-employed and had a net profit for the year.
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
- You received wages in 2005 from an S corporation in which you were a more-than-2% shareholder. Health insurance benefits paid for you may be shown in Form W-2, box 14."
Group Plan Eligibility Restrictions
Unfortunately, you cannot deduct any insurance costs for months you were eligible for a group insurance plan offered by an employer, or a spouse’s employer. Therefore, if you paid for health insurance coverage for an entire year, but were eligible to participate in a group plan for three months, then you can only deduct the premiums paid for the nine months you were not eligible.
Claiming the Deduction
You can claim the self-employed health insurance premium deduction on Line 29 of your IRS Form 1040.
Thursday, August 12, 2010
We usually only explain tax deductions in our deduction of the week series, but since we are in the middle of back-to-school season it seemed appropriate to explain the American Opportunity Tax Credit.
Credit vs. Deduction
Unlike a tax deduction, which lowers your taxable income, a credit lowers your tax bill (or increases your refund) dollar for dollar. The exact value of a deduction depends on your tax bracket, while credits are a set amount no matter what income bracket you are in.
Expanded Credit
The American Opportunity Credit is actually just an expansion of the Hope Scholarship tax credit, with a higher maximum and a longer life span.
Value of the Credit
The new credit has a maximum of $2,500 and can also be claimed for up to 4 years.
Eligibility Requirements
According to the IRS only qualifying full-time college students are eligible for the credit. Although it is available for 4 years, the actual amount you are eligible to receive will vary on your income level. Additionally, unlike past credits the American Opportunity Credit is 40% refundable, so even families who do not pay income taxes will be able to take advantage of the tax credit.
A series of tax cuts, commonly referred to as the Bush tax cuts, are due to expire at the end of this year. As the expiration date gets closer, these cuts are gaining more and more attention in the media. Unfortunately, there is a lot of confusion about the tax laws, and dozens of myths that are being spread. To clear up the air, William G. Gale of WashingtonPost.com put together a collection of the most common Bush tax cut myths. You can find two below. You can view the full list at WashingtonPost.com.
1. Extending the tax cuts would be a good way to stimulate the economy.
As a stimulus measure, a one- or two-year extension has one thing going for it -- it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.
Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don't spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax cuts separately, but the logic it used suggests that extending those cuts alone would have even less value.) The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.
2. Allowing the high-income tax cuts to expire would hurt small businesses.
One of the most common objections to letting the cuts expire for those in the highest tax brackets is that it would hurt small businesses. As Sen. Orrin Hatch (R-Utah) recently put it, allowing the cuts to lapse would amount to "a job-killing tax hike on small business during tough economic times."
This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.
From NBC Chicago.com:
When it comes to sales tax, Chicago has us all beat.
At 9.75 percent, the city of Chicago has the highest retail sales tax rates among the nation's largest cities, according to the Chicago Tribune. It's roughly equal to that of Los Angeles, which has a 9.5 percent sales tax rate, with an added quarter percentage point from the California State Board of Equalization bringing it to 9.75 percent.
While Chicago may be the highest, it’s not the only place taxes have gone up. In their annual survey, CCH Inc., found that consumer taxes for retail items, gas and cigarettes continued to climb in many states, reports the Tribune.
The company also found that sales tax went up in Arizona, Kansas, Massachusetts, New Mexico and North Carolina and gasoline taxes went up in California, Kentucky, Minnesota, Nebraska and North Dakota.
The only state to report a tax reduction was Florida, and according to the Tribune, it was a small one. The gas tax there went from 16.1 cents to 16 cents.
Saturday, August 07, 2010
Working for yourself , while incredibly rewarding, can be very stressful. Between estimated tax payments, accountants, and tax preparers, it is hard to keep a clear head. To make matters worse, there are dozens of business tax myths, which make tax planning even harder than it needs to be. To help our readers differentiate fact from fiction we have compiled and debunked the following list of common business tax myths.
1. My accountant is liable for any mistakes on my return
Although you may hire a professional to prepare your tax returns, you are still responsible for filing a correct return with the IRS. Even though an accountant or tax preparer may complete and file your return, they will not be held liable for any mistakes, you will be. To avoid any problems, you should at least have a basic understanding of business tax laws, and always review your return before you sign it.
2. Itemizing is only for the rich
Unfortunately, many taxpayers (both those that are self-employed and those who work for an employer) assume that only wealthy people should bother itemizing their deductions. The truth is that filing an itemized return can benefit all types of taxpayers, at many different income levels. Itemizing is especially helpful for self-employed taxpayers, as there are dozens of business-related deductions you can qualify for. If you are unsure about itemizing, then you can prepare one return itemized and one return using the standard deduction, and compare the results.
3. I know I saved because I prepared my own return
Although preparing your own return will save you from having to pay your accountant or tax professional, you might be putting yourself at risk. Tax laws are always changing, which can make it hard to keep up with new credits, deductions, and qualification rules. A tax professional spends their career studying tax law changes. Therefore, unless you are confident about your tax knowledge, you might want to consider seeking help from a professional.
4. Only big business needs to collect sales taxes
It is unfortunate that any business owners believe this myth. Studies show that a number of business owners have used this excuse in tax evasion cases. The exact amount of sales tax you will need to collect will depend on the state you live in, not on the size of the business you operate. If you unsure about your sales tax obligations, contact your local tax authority or a qualified tax professional.
5. I can write off all of my business equipment expenses
The IRS allows business owners to write off a certain amount of qualifying business expenses, but there are specific rules and restrictions that apply. You cannot deduct expenses before your doors are open, and you may be able to deduct more in your first year of business. There are also restrictions on business related meals and entertainment. For more information on qualifying business expenses you should check the IRS website or speak with a local tax professional.
6. As long as I do business in a room in my home I can deduct it as a home office
The home office deduction is one of the most misunderstood business deductions out there. Many taxpayers think that just because they have an office at home it allows them to take the home office deduction. This could not be further from the truth. Among the many qualifying factors, your home office must be the principal place of business, and must be used only for your business. That means, it can’t be your guest bedroom, or the kids’ playroom. Check out this updated IRS press release for more information on claiming the home office deduction.
Monday, August 02, 2010
In our new deduction of the week entry, we are going to take a look at the deduction available to taxpayers with significant gambling related losses.
Itemized Deduction
Like many federal tax deductions, you can only write off gambling losses on your tax return if you itemize. Therefore, if you claim the standard deduction, you will not be eligible to deduct gambling losses.
Calculating your Deduction
To calculate the amount you can claim, you will need to add up all of your gambling winnings and losses. If your winnings total more than your losses, then they will all qualify. However, if your losses are greater than your winnings, then you can only deduct the amount of losses equal to your winnings.
Additionally, you can only deduct losses that exceed 2% of your adjusted gross income (AGI). For example if your AGI is $50,000 and your qualifying gambling losses are $2,500 then you will only be able to claim a $1,500 deduction ($2,500 - $50,000 x 0.02).
Claiming the Deduction
You will need to claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A.
From Forbes.com:
The Internal Revenue Service is demanding $45 million in back 2002 and 2003 taxes from San Antonio billionaire Billy Joe “Red” McCombs for his use of a tax strategy similar to one a judge disallowed last week for billionaire Philip Anschutz.
In a previously unreported lawsuit filed in May in U.S. Tax Court, the 82- year-old McCombs is contesting the IRS' assertion that he should have reported $213.4 million in long-term capital gains in 2002 from the sale of 11.3 million shares of Clear Channel Communications Inc. ( CCU - news - people ), the company he cofounded in 1972. He's also disputing an additional $3.3 million in 2003 capital gains in connection with the same purported sale. In all, the IRS asserts, McCombs had $245 million in taxable income for 2002 and 2003, rather than the $18 million he reported and owed $53 million in income tax, not the $8 million he paid.
The case involves a complicated strategy, which was widely peddled by Wall Street as a way for rich folks like Anschutz and McCombs to raise cash from highly appreciated stock positions, while deferring capital gains tax. “It's like a who's who of business that entered into these things,'' observed Robert Willens, an independent tax analyst in New York who was a managing director in the equity research department at Lehman Brothers ( LEHMQ - news - people ) for 20 years. The Anschutz U.S. Tax Court decision was the first on the strategy, and the Anschutz Co. has already said it will “vigorously appeal” the adverse ruling.
Although the next tax season is still months away, as CEO Roni Deutch explains in a new blog entry, it is important to focus on tax planning throughout the year if you want to stay out of trouble with the IRS. In a new entry on the The Tax Lady Blog Roni explains a handful of summer themed ways to lower your tax liability. You can find part of the article below, or check out the full text here.
1. Upgrade your Air Conditioning
If you have an old air conditioning system, and looking to upgrade, not only will a new, energy efficient model reduce your electric bill but it can also lead to a federal tax credit. The American Recovery and Reinvestment Act of 2009 created a $1,500 tax credit for energy efficient home upgrades, and if you purchase a qualifying model it could result in significant tax savings.
2. Enroll in a Local College Class
Looking for a way to spend some of your free time on the weeknights or weekend? Consider enrolling in a local college class. Not only will you be able to pick up new skills that could help improve your career, but you can take a tax deduction for tuition and other mandatory school fees. This is called the Tuition and Fees Deduction, and is reported directly on Form 1040 or Form 1040A.
3. Dual Pane Windows
Single pane windows were common among houses built a few decades ago. If your home still has single pane windows, I highly recommend upgrading to dual pane. They will increase the value of your home, lower your energy bill, and can qualify for the $1,500 energy tax credit.