Blog

Donations are Not Always Deductible

picture of someone in white sweather holding out crumbled euro dollars
Photo by Christian Dubovan on Unsplash

Under the new tax law, donations to a qualified charity are still deductible for taxpayers who itemize their deductions using IRS Schedule A. Taxpayers who take the standard deduction because it is higher than itemizing don’t get a tax benefit from their giving.

Based on the tax returns I’ve prepared so far this season, taxpayers have not changed their level of generosity, but they don’t always know when their giving could be deductible. There’s a lot of confusion about the meaning of terms like “qualified charity” and “donation”. To help clarify, this week’s blog is dedicated to charitable donations and when they are – or are not – deductible.

What is a Qualified Charity?

Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. Crowd funding, political contributions and association dues are not included. Except for religious organizations, qualified charities must apply for and be granted Tax Exempt Status by the IRS. Tax Exempt organizations have annual IRS reporting requirements. A list of qualified charities is posted in the IRS’ “Tax Exempt Organizations Search” tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

What is a Donation?

Donations can be financial or non-financial items such as clothing, household goods, vehicles, stock, or real estate. Financial donations to a qualified charity are a deductible, reduced by the value or anything received in exchange, such as a meal. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction amount is based on the “thrift shop” value. Donated vehicles, art work and other non-financial donations valued at more than $500 are subject to more rules and limits.

What Donations are Deductible?

Financial and non-financial donations must be acknowledged contemporaneously in writing by the charity. Acknowledgements reflect which organization received the donation and when to support any deduction taken. Donations of $250 or more must be supported by a letter from the charity stating the date and amount of the donation, the charity’s reduced by the value of anything in received by the donor in return, such as a fundraising dinner.

Many taxpayers continue to donate to charity, whether it’s deductible or not. Knowing what donations qualify for a deduction helps maximize those tax benefits that are still eligible under the new tax law.

Arlington Library Helps Businesses Learn About Tax Changes

Picture of a MacBook Pro displaying a pink screen on a desk. A silver cup of coffee on the left side with a pile of papers and a silver pen on the right. The background is a clutered desk with a wall full of notes.

Picture of a MacBook Pro displaying a pink screen on a desk. A silver cup of coffee on the left side with a pile of papers and a silver pen on the right. The background is a clutered desk with a wall full of notes.

Photo by rawpixel on Unsplash

The Arlington County Public Library showed its love and support for local business last week by hosting my workshop, “Your Business and the 2017 Tax Cuts and Jobs Act”. They really packed the house with business owners who had lots of fantastic questions. My job – provide equally fantastic answers.

The new tax law is jammed with changes that businesses need to be aware of. We only covered a few changes that impact “pass-through” businesses – sole proprietorships, partnerships, or Subchapter S corporations. We had to be pretty general. Based on the evening’s discussion, attendees left armed with even more detailed questions to ask their own tax preparers.

I can’t replicate the energy in that library conference room here, but I can share a few facts from the workshop that you can use for your business:

  • Qualified Business Income Deduction – Qualifying pass-through businesses may be eligible for a deduction of 20% of qualifying net business income (i.e., excluding interest and other income not derived from sales or fee revenue). For owner/employees with income over $315K (married filing joint) or $157.5K (all other filers), the deduction could be limited.
  • Higher Asset Depreciation Limits – For assets placed in service after 2017, businesses can elect to expense any section 179 property in the year the property is placed in service.  The maximum deduction is increased from $500K to $1 million, and the phase-out threshold is increased from $2 million to $2.5 million.
  • Employer Deduction for Fringe Benefits – A number of employer deductions are disallowed, including activities generally considered to be entertainment, amusement, or recreation; membership dues for clubs organized for business, pleasure, recreation, or other social purposes; and expenses associated with transportation fringe benefits or for commuting.
  • Pass-through Loss Limits – For some taxpayers, losses from pass-through businesses after 2017 cannot be used to offset other income, such as investments, Starting in 2018, the net operating loss deduction is limited to 80 percent of taxable income.

My evening at the Arlington County Public Library was a lot of fun for me. I hope that everyone else also had fun and felt more aware of business tax law changes. Thanks to the Library Staff and incredible Research Librarian for making this event happen for the community!

Your Refund is Not Your Tax Liability

Piece of paper that says "TAX" with hand holding pen
Photo by rawpixel on Unsplash

The Internal Revenue Service reports that so far this tax filing season, refunds are 9% down from last year. Reasons for this vary, but much of the change is attributed to the new tax law. Tax withholdings for federal taxes were reduced overall back in February 2018. If you didn’t do a “Paycheck Checkup” to compare your withholdings with your projected tax liability, the bottom line on your 2018 tax return could be a lot different than in the past.

Many taxpayers focus on whether they get a refund or owe more in taxes when it’s time to file. However, that is not the best indicator of your actual tax liability. Depending on a big refund to pay off bills or take a vacation also might not be the best way to manage your finances.

Think about it. Getting a tax refund means that you let the government use your money all year long before letting you have it. In other words, a refund is an interest-free loan to Uncle Sam. Does your bank lend you money for free? No! So why should you loan money to anyone – least of all the government – for free?

So how do you avoid making an interest-free loan or having to pay a lot at tax time? You’ve got to do two things – calculate your tax liability and withholdings, and compare the two amounts. Here are some tools to help you do it:

  • The IRS Withholding Calculator https://www.irs.gov/individuals/irs-withholding-calculator guides you through the steps to figure out your tax liability for 2019. Before using the calculator, make sure you understand how the IRS defines its terminology, know your pay frequency and note any life or work changes that impact your taxes (e.g., marital status).
  • If you owed additional tax for 2018, you may have to pay estimated tax for 2019. Estimated payments should be made if you expect to owe at least $1,000 in tax for 2019, and if you expect your total withholdings and refundable credits to be less than the smaller of 90% of your 2019 tax liability or 100% of your 2018 tax liability. More details are at https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Your refund is not an indicator of your tax liability. Potentially, it’s an interest-free loan to the government that prevents you from using your own money. Doing a “Paycheck Checkup” get control over your taxes for next year and avoid making an interest-free loan or having to pay a lot next tax filing season.

Library Workshop on Tax Changes for Individuals

Last week, I had a fabulous opportunity to speak to a very attentive audience at the Arlington County Public Library about individual tax changes due to the 2017 Tax Cuts and Jobs Act. Libraries are a tremendous community resource. I felt privileged to be part of their program to help our neighbors gain awareness of the new taxes law and its impact.

We covered a lot of ground in 90 minutes (plus questions). The material was pretty general, geared toward increasing awareness the many tax changes impacting individual taxpayers. The impact of those changes varies based on individual income, family size, geography and other factors.

Six of the factoids from my presentation could be valuable information for you:

  • Good news! Tax brackets are reduced for the top six of seven individual tax brackets. Most taxpayers benefit from the new, lower rates. However, some taxpayers in the 33% marginal tax bracket move up to 35% in 2018 (e.g., singles $200-400K).
  • The decision whether to itemize or take the standard deduction has completely changed. The standard deduction is doubled, and some taxpayers will get a higher deduction be taking it. Another benefit is preparing a simpler tax return, without Schedule A. For those who still itemize, the itemized deduction phase-out for high-income taxpayers is eliminated.
  • Personal exemptions are eliminated. As a “consolation prize” a credit of up to $500 per qualified dependent is available. Qualified dependent does not include your spouse.
  • Taxpayers who itemize deductions will see many changes. One big change is the new $10,000 deduction cap that was imposed on the total of all state and local taxes. If you don’t have that memorized, that total  includes state income taxes, real estate taxes and personal property taxes,
  • Qualified residence loan interest is limited to $750,000 of total indebtedness for first and second homes acquired after December 15, 2017 ($375K if married filing separately). Indebtedness that existed prior to that date is “grandfathered” and not subject to the new limit.
  • Miscellaneous itemized deductions are generally eliminated, including employee business expenses, tax preparation fees, investment advisory fees, and safe deposit box fees. Moving expense deductions are also eliminated other than for active duty military.

I thoroughly enjoyed my time at the Arlington County Public Library helping a very engaged group of interested taxpayers gain awareness of individual tax changes. This important information was enthusiastically received. Thanks to the Library and its incredible Research Librarian for making this event happen for the community!

Business Taxes for Start-ups

Workshops are great opportunities to share valuable information that business owners can use immediately. Last week, I was asked to talk about business taxes with a roomful of entrepreneurs in various stages of starting up their businesses. In spite of being at the start-up stage, they asked some pretty sophisticated questions. Quite impressive.

Entrepreneurs start their businesses because they have expertise in their profession, not because they know about business taxes. That’s why my workshop focused on some basics that every business owner should understand to make good choices. Here are three of the tax topics covered in last week’s workshop that might be valuable for you and your business:

Filing Requirements by Business Type

Many small businesses form an LLC, which allows for three options regarding business type. Each business type has different filing requirements:

  • Operating as a Sole Proprietor is the simplest form of business for one person. It requires no legal paperwork. Net business profits from the business are reported on a separate schedule on the owner’s IRS Form 1040 and taxed at the owner’s individual rate.
  • Two or more people can form a Partnership by executing an operating agreement and requesting a tax ID from the IRS. Partnerships are required to file IRS Form 1065, “U.S. Return of Partnership Income”. Partners receive an IRS Form K-1 to report the allocated portion of income and expenses on her or his individual return.
  • An option for one person or up to 100 domestic entities is to form a Subchapter S Corporation. Sub S Corporations are required to file an IRS Form 1120S, “U.S Income Tax Return for a Sub S Corporation”. Shareholders receive a K-1 to report the allocated portion of income and expenses on her or his individual return.

New Tax Law Highlights

The tax rules are complex and numerous. They can also change, like we saw with the Tax Cuts and jobs Act of 2017. There are more, but these are the “big three” changes that business owners need to be aware of:

  • Qualifying pass-through businesses get a deduction of 20% of qualifying net business income (IRS link to more info – https://bit.ly/2Mg97wK ). Special rules apply for services that depend on reputation or skill of high-income owner/employees.
  • Higher limits for business asset depreciation that generally result in higher deductions (IRS link to more info – https://bit.ly/2skk9FG).
  • Losses from pass-through businesses can no longer offset other income, such as wages, investments or another business (IRS link to more info – https://bit.ly/2M18MLR).

Other Tax Considerations

Businesses of any type are obligated to register in their state and local jurisdiction and pay the required taxes and fees. Depending on location, that could involve an annual business license and business property taxes.

Last week’s business start-up workshop was filled with valuable information that attendees could use immediately. These three basic topics are a great start for every business owner to make good choices about business taxes.

Are you Eligible for the EITC?

Everything you hear about the new tax law is bad news – state and local taxes capped at $10,000 and miscellaneous deductions eliminated. It seems like a lot of tax benefits are gone or reduced. Isn’t there any good news?

Yes, there is good news about taxes! Some tax benefits have been retained, including one that helps hard-working people who deserve a financial break. It’s called the Earned Income Tax Credit, or EITC, a valuable benefit for working people with low-to-moderate income. Eligibility for the credit and the credit amount depend on your earned income and number of children in your household.

A tax credit is even better than a tax deduction because it’s a dollar-for-dollar reduction of your tax liability, not a reduction of your taxable income. Even better, the EITC is a refundable credit. The EITC could take your tax liability to a “negative” amount, meaning that your refund is even more than just paying back all of your federal taxes due for the year.

To qualify for EITC, you must have earned income (e.g., wages or self-employment income). Your income cannot exceed a specified amount that is adjusted annually by the IRS. To get the credit, you must file an income tax return, even if you do not owe any tax or are not required to file.

Some people don’t know about this credit or do not know that they qualify. Not taking a credit you qualify for? That’s just like giving away money! Who wants to do that?

Don’t miss your EITC refund. Don’t let your friends and family miss their EITC refund. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it.

Need help? Get details about income limits and credit amounts at www.irs.gov/eitc. Made less than $55K in 2018? Check if you qualify for a larger federal tax refund at www.irs.gov/eitc.

Did you get the hint that you should look into the EITC on the IRS website? Great! Make sure you check it out and keep your friends, family and neighbors from missing a tax credit because they don’t know about EITC. They will thank you.

New Tax Law Still Requires Patience

Top down view of a cluttered desk with hands folded showing a watch.
Photo by rawpixel on Unsplash

In January 2018, less than a month after the Tax Cuts and Jobs Act was passed, I blogged that we all need patience. “Less than a month after passing a new law is too soon for all the details and unintended consequences to be fully explained,” I said.

Little did I know back then that we would need so much patience now, a year after the law was enacted.

Many new tax law provisions became effective in 2018, making the 2019 tax filing season the first time that many taxpayers will be aware of how the tax law impacts her or him. Getting clarity about those impacts may not be quick or easy, especially for businesses. Figuring it out will take some patience, whether you prepare your own taxes or pay a tax professional to do it.

Tax filing season officially opened this week. The deadline to file or extend an individual return is April 15, new law or not. During those 12 weeks of tax filing season, the following people will need to show and be shown lots of patience:

  • Self-Preparers – Reading instructions not your thing? You could be sorry if you rush into preparing your 2018 taxes without slowing down and understanding the new rules. Approach your tax software as though it were the first time you’ve used it. Everything will look so different, you will want to take each step with patience and care.
  • Tax Professionals and Their Clients – Your tax preparer may ask new questions and require more documentation to ensure your returns are accurate and comply with all the new rules. She or he will also need to explain the new rules and why you may not get your expected refund. Those conversations could be more stressful than usual, so a bit more patience will be needed by all parties.
  • IRS Employees – If you need to call an IRS representative, please remember that this mess is not her or his fault. Plus, as of this writing, the federal government is partially shut down. That IRS employee could be working without pay. Demonstrating patience on the phone makes the situation more pleasant for everyone.

The 2019 tax filing season is going to be more stressful than usual because of the new tax law and its impact. Approaching your software, your tax professional and the IRS with some patience will go a long way to making the 2019 tax filing season as painless as possible.

What to Expect from a Tax Preparer

Changes to the tax law enacted in December 2017 means we’ll be dealing with a lot of new rules this filing season. Tax filing “simplification” means that all the individual forms for 2018 look different than ever before. As a result, more taxpayers than ever before could be looking for a tax preparer, even people who have always filed their own tax returns. But just any tax preparer isn’t good enough, especially this year!

You are responsible for the contents of your tax return, even if you pay someone to prepare and file it for you. It’s essential that you engage a qualified tax preparer who has the right experience and knowledge of your tax situation. The tax industry is unregulated; anyone can hang up her or his “Tax Preparer” shingle. So how do you find a qualified tax preparer to meet your needs?

First, get referrals from colleagues, family and friends about who prepares their taxes. Ask them why they like their tax preparer. Briefly interview two or three of the tax preparers that sound like a good fit, including these three questions:

How Do You Keep Up with Changing Tax Laws?

Tax laws are constantly changing, as we know. It’s important to work with a tax professional who keeps up, so you don’t have to. Your tax preparer should describe attending conferences, webinars, or other methods she or he uses to stay current.

What are Your Experience and Credentials?

Working with a credentialed tax professional, like an Enrolled Agent or Certified Public Accountant, provides confidence that your taxes are being prepared accurately. Also ask for examples of tax situations and complex issues where she or he has experience. The answers will indicate whether your needs will be addressed.

How Do You Communicate with your Clients?

Discuss whether the tax preparer meet regularly with clients, how confidential documents are shared and stored, and whether the person is available for you if a tax-related question or issue comes up outside of “normal” tax season. Make sure you feel comfortable with the tax professional’s style, manner and process.

It’s important to have a qualified tax preparer that is prepared to meet your needs. Feeling confident and comfortable with the answers to these three questions is a good sign that your taxes will be prepared accurately and consider all the new tax rules.