Will Gifts Now Using the Temporarily Increased Gift-Estate Exclusion Harm Estates after 2025?

Article Highlights:

  • Annual Gift Exclusion
  • Unified Gift-Estate Exclusion
  • Tax Reform’s Temporary Exclusion Increase
  • Taxpayer-Friendly Regulations

Individuals with large estates generally want to gift portions of their estate to beneficiaries while they are still living, to avoid or lessen the estate tax when they pass away. That can be done through annual gifts (up to the inflation-adjusted annual limit for each gift recipient each year – $15,000 for 2019) and/or by utilizing the unified gift-estate exclusion for gifts in excess of the annual exclusion amount. The tax reform virtually doubled the unified gift-estate exclusion for years 2018 through 2025, after which – unless further extended by Congress – it will return to its inflation-adjusted former amount. This has caused concerns related to what the tax consequences will be for post-2025 estates if the decedent, while alive, had made gifts during the 2018-through-2025 period utilizing the higher unified gift-estate exclusion. Would that cause a claw back due to the reduced exclusion?

The Treasury Department has proposed taxpayer-friendly regulations to implement changes made by the tax reform, the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level for those gifts once the exclusion decreases after 2025.

In general, gift and estate taxes are calculated using a unified rate schedule on taxable transfers of money, property, and other assets. Any tax due is determined after applying a credit based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount established in the statute plus other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax, and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the basic exclusion amount from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted basic exclusion amount is $11.18 million; for 2019, it is $11.4 million. In 2026, the basic exclusion amount will revert to the 2017 level of $5 million, adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax through the increased basic exclusion amount, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the basic exclusion amount applicable to gifts made during life or the basic exclusion amount applicable on the date of death.

If you have any questions related to gifting and estate planning, please give this office a call.

When To Claim a Disaster Loss

Article Highlights:

  • Disaster Losses
  • Elections
  • Net Operating Loss
  • AGI Limitations
  • Possible Gain

Tax reform eliminated the deduction for casualty losses but did retain a deduction for losses within a disaster area. With the wild fires in the west, hurricanes and flooding in the southeast and eastern seaboard we have had a number of presidentially declared disaster areas this year. If you were an unlucky victim and suffered a loss as a result of a disaster, you may be able to recoup a portion of that loss through a tax deduction. If the casualty occurred within a federally declared disaster area, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.

By taking the deduction for a 2018 disaster area loss on the prior year (2017) return, you may be able to get a refund from the IRS before you even file your tax return for 2018, the loss year. You have until the unextended due date of the 2018 return to file an amended 2017 return to claim the disaster loss. Before making the decision to claim the loss in 2017, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.

If you elect to claim the loss on either your 2017 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, and results in negative income, you may have what is referred to as a net operating loss (NOL). Because tax reform changed how NOLs are treated after 2017 your decision whether to claim the loss in the current year or the prior year will have significant tax ramifications.

  • Claimed in 2017 – If the loss is claimed in 2017 and results in an NOL, that NOL is carried back two years and the forward 20. Meaning if the loss results in a negative 2017 income the NOL can be carried back to your 2015 return before being carried forward.
  • Claimed in 2018 – Tax reform changed the treatment of NOLs and as a result no longer be carried back to prior years. In addition, NOL occurring in 2018 and subsequent years can only offset 80% of a subsequent years taxable income. Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.

Casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster.

As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.

If you need further information on disaster losses, your particular options for claiming the loss, or if you wish to amend your 2017 return to claim your loss, please give this office a call.

2019 Standard Mileage Rates Announced

Article Highlights:

  • Standard Mileage Rates for 2019
  • Business, Charitable, Medical and Moving Rates
  • Important Considerations for 2019
  • Switching between the Actual Expense and Standard Mileage Rate Methods
  • Employer Reimbursements
  • Employee Deductions Suspended
  • Special Allowances for SUVs

The Internal Revenue Service (IRS) computes standard mileage rates for business, medical and moving each year, based on a number of factors, to determine the standard mileage rates for the following year.

As it does annually around the end of the year, the IRS has announced the 2019 optional standard mileage rates. Thus, beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

  • 58 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is up from 54.5 cents in 2018;
  • 20 cents per mile driven for medical or moving* purposes. This is up from 18 cents in 2018; and
  • 14 cents per mile driven in service of charitable organizations.* For years 2018 through 2025, the deduction for moving is only allowed for members of the armed forces on active duty who move pursuant to a military order. 

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for 20 years).

Important Consideration: The 2019 rates are based on 2018 fuel costs. Based on the potential for substantially higher gas prices in 2019, it may be appropriate to consider switching to the actual expense method for 2019 or at least to keep track of the actual expenses, including fuel costs, repairs and maintenance, so that the option is available for 2019.

Taxpayers always have the choice of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension and expansion of the bonus depreciation as well as increased depreciation limitations for passenger autos in the Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year when a vehicle is placed into business service.

However, the standard mileage rates cannot be used if you used the actual method (using Section 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of the employment-connected business travel.

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, employees may no longer take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans. Members of a reserve component of the U.S. Armed Forces, state and local government officials paid on a fee basis and certain performing artists continue to be allowed to deduct unreimbursed employee travel expenses, including the business standard mileage rate, because they are deductible from gross income rather than as an itemized deduction.

Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation. Taxpayers who purchase a heavy SUV and put it into business use in 2019 can utilize both the Section 179 expense deduction (up to a maximum of $25,500) and the bonus depreciation (if the Section 179 deduction is claimed, it must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (self-employment income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.

Don’t Overlook Tax Credits

Article Highlights:

  • Non-refundable vs. Refundable Credit
  • Childcare Credit
  • Earned Income Tax Credit
  • Child & Dependent Tax Credit
  • Saver’s Credit
  • Vehicle Tax Credits
  • Adoption Credit
  • Residential Energy-Efficient Property Credit

Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons, including as a form of assistance for lower-income taxpayers, to stimulate employment, and to stimulate certain investments, among other things.

Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. The following is a summary of some of the tax credits available to individual taxpayers:

Childcare Credit – Parents who work or are looking for work often must arrange for care of their children during working hours or while searching for work. If this describes your situation and your children requiring care are under 13 years of age, you may qualify for a childcare tax credit.

The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower-income taxpayers and the lower percentages applying to higher-income taxpayers.

Applicable Percentage of AGI for the Childcare Credit

 

AGI OverBut Not OverApplicable PercentAGI OverBut Not OverApplicable Percent
015,0003529,00031,00027
15,00017,0003431,00033,00026
17,00019,0003333,00035,00025
19,00021,0003235,00037,00024
21,00023,0003137,00039,00023
23,00025,0003039,00041,00022
25,00027,0002941,00043,00021
27,00029,0002843,000No Limit20

The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.

As an example, say your adjusted gross income (AGI) is between $33,000 and $35,000. Your credit percentage would be 25%. If you paid childcare expenses of $4,000 for two children under the age of 13, your tax credit would be $1,000 ($4,000 x 25%). If your tax for the year was $5,000, the credit would reduce that tax to $4,000. On the other hand, if your tax for the year was $800, the credit would reduce your tax to zero, and the $200 excess credit would be lost.

This credit also applies when a taxpayer or spouse is disabled or a full-time student, in which case special “earned income” allowances are provided for months when the taxpayer or spouse is disabled or a full-time student. Please call this office for additional details if this situation applies in your case.

Earned Income Tax Credit (EITC) – Congress established the EITC as an income supplement for working individuals in lower-paying employment. If you qualify, it could be worth as much as $6,431 in 2018. It is a refundable credit.

The EITC is based on the amount of your earned income (income from work for wages and/or self-employment) and whether there are qualifying children in your household. Qualifying children are those who live with you for over half the year, are related, and are under the age of 19 or a full-time student under the age of 24. The credit increases as your earned income increases. The table below shows the earned income at which the maximum credit is achieved for 2018.

Qualifying ChildrenEarned Income Maximum Credit
None6,780$519
1$10,180$3,461
2$14,290$5,716
3 or more$14,290$6,431

The credit amount phases out after reaching the maximum based on filing status and number of qualifying children. The 2018 phase-out ranges are shown in the table below.

Qualifying Children

Filing StatusPhase-out Range
NoneMarried Filing Joint$14,170–20,950
Others$8,490–15,270
1Married Filing Joint$24,350–46,010
Others$18,660–40,320
2Married Filing Joint$24,350–51,492
Others$18,660–45,802
3 or moreMarried Filing Joint$24,350–54,884
Others$18,660–49,194

In addition, there are some qualification requirements: you, your spouse (if married and filing jointly), and each qualifying child must have a valid Social Security number, and you cannot use the filing status married filing separately. You cannot be a qualifying child of another person, your investment income for the year cannot exceed $3,500 (2018), and you cannot exclude earned income from working abroad. If you do not have a qualifying child, you must be at least age 25 but under 65 at the end of the year.

Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it, simply because they don’t understand the criteria. If you qualified for but failed to claim the credit on your return for 2015, 2016, and/or 2017, you can still claim it for those years by filing an amended return or an original return, if you have not previously filed. Please call for assistance.

Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include in their earned income all nontaxable combat pay they received for the year.

Child & Dependent Tax Credit – As an aid to families with children, the tax reform increased the child tax credit from $1,000 to $2,000 for each qualified child. A qualified child for this tax credit is one who is under age 17 at the end of the year, is related, is not self-supporting, lived with you over half the year, has a Social Security number, and is claimed as your dependent. The refundable portion of this credit is equal to 15% of your earned income but limited to $1,400.

Beginning in 2018, you are also able to claim a non-refundable credit of $500 for each of your dependents who do not qualify for the child credit.

For both the child and dependent credits, the credit begins to phase out for married taxpayers with an AGI of $400,000 ($200,000 for others).

Saver’s Credit – Congress created the non-refundable saver’s credit as a means of stimulating retirement savings among lower-income individuals. It helps to offset part of the first $2,000 that 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. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit is a percentage of the first $2,000 contributed to an eligible retirement plan. The following table illustrates the percentage based upon filing status and AGI for 2018.

Adjusted Gross Income Range Credit 
Married Filing JointHead of HouseholdOthersPercentage
$0–$38,000$0–$28,500$0–$19,00050
$38,001–$41,000$28,501–$30,750$19,001–$20,50020
$41,001–$63,000$30,751–$47,250$20,501–$31,50010
$63,001 & Over$47,251 & Over$31,501 & OverNo Credit

Example – Eric and Heather are married, both age 25, and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2018 was $28,000. The credit is computed as follows:

Eric’s 401(k) contribution was $3,000, but only the
first $2,000 can be used………………………………………………………………….. $2,000
Heather’s IRA contribution was $500, so it can all be used……………. 500
Total qualifying contributions…………………………………………………………… $2,500
Credit percentage for a MFJ AGI of $28,000 from the table……………. X .50
Non-refundable saver’s credit…………………………………………………………….$1,250

Vehicle Tax Credits – If you are considering purchasing a new car or light truck (less than 14,000 pounds), don’t overlook the fact that Congress included a substantial tax credit for the purchase of the many electric vehicles currently being offered for sale, providing a tax credit worth as much as $7,500.

To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the vehicle’s original use must commence with you, and you must use the vehicle predominantly in the United States.

Congress did include a phase-out provision for this credit that applies by vehicle manufacturer. The credit begins to phase out once the manufacturer sells 200,000 electric vehicles. To see if the make and model you are considering qualify, visit the IRS website.

The credit is available whether you use the vehicle for business, personally, or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years. The personal portion is non-refundable.

Adoption Credit – If you are an adoptive parent or are planning to adopt a child, you may qualify for the adoption credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care.

This is a 1:1 credit for each dollar of qualified expenses up to the maximum for the year, which is $13,810 for 2018. The credit is non-refundable, which means it can only reduce your tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be carried forward for up to five years to reduce your future tax liability.

Qualified expenses generally include adoption fees, court costs, attorney fees, and travel expenses that are reasonable, necessary and directly related to the child’s adoption, and they may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed, whether or not any qualified expenses were incurred.

The credit is phased out for higher-income taxpayers. For 2018, the AGI (computed without foreign-income exclusions) phase-out threshold is $207,140, and the credit is completely phased out at the AGI of $247,140. Unlike most phase-outs, this one is the same regardless of filing status. However, taxpayers filing as married filing separately cannot claim the credit.

Residential Energy Efficient Property Credit – This tax credit was created to reward individuals for investing in equipment that uses alternative energy sources to create electrical power for use in a taxpayer’s home or second home. It includes alternative power sources such as fuel cells, wind energy, and geothermal heat pumps, for which the credit expires after 2021.

However, the credit is most commonly associated with the home solar credit, which is equal to 30% of the cost of the solar electric system for an individual’s primary and second homes, with no limit on the cost of the solar system. Even though the credit is non-refundable, any amount not used in the first year carries over to subsequent years.

The credit percentage is phased-out as shown in the table.

Home Energy Credit Percentage
Year2018–2019202020212021
Percentage302622None

Before deciding to add a solar electric system to your home, you need to consider if you can actually afford the system and whether it is worth having one, after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit. You should make an objective analysis without pressure from a salesperson. These credits are substantial, but the one thing salespeople and contractors typically fail to mention is that the credit is not refundable, and even though it carries over through 2021, there is a good chance you will never use it all. It may be appropriate for you to consult with this office before entering into a contract for a home solar system.

If you have questions or would like additional details related to any of these credits, please give the office a call.

Wonder What a Tax Deduction Is Worth?

Article Highlights:

  • Non-business deductions
  • Tax bracket
  • Above-the-line deductions
  • Business deductions

Individuals are always looking for tax deductions that can reduce their tax liability. But what is the actual tax benefit derived from a tax deduction? There is no straightforward answer because some deductions are above the line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending on his or her particular situation and tax bracket.

For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 12% tax bracket, a $1,000 deduction would save you $120 in taxes. On the other hand, if you are in the 32% tax bracket, the $1,000 deduction will save you $320 in taxes. Even so, if your taxable income is close to transitioning into the next-lower tax bracket, the benefit will be lower. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings. Currently, the maximum federal tax bracket is 37%, meaning the most benefit that can be derived from a $1,000 income tax deduction is $370. Some individuals justify making discretionary purchases just because they are tax-deductible. Even in the highest tax bracket, you are still paying $630 out of pocket ($1,000 − $370), so it does not make sense to incur a tax-deductible expense just for the tax deduction.

Some deductions, such as IRA and self-employed retirement plan contributions, alimony, and student loan interest, are adjustments to income or what we call above-the-line deductions. These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit can be derived. In addition, medical deductions are reduced by 7.5% of your adjusted gross income (AGI) in 2018, and most cash charitable deductions are limited to a maximum of 60% of your AGI. Under the tax reform, the deduction for state and local taxes has been capped at $10,000.

The most beneficial deductions are business deductions that offset both income tax and, depending upon the circumstances, self-employment tax. For 2018, the self-employment tax rate is 12.4% of the first $128,400 of net self-employment income plus 2.9% for the Medicare tax, with no cap. Some high-income taxpayers may pay an additional 0.9% Medicare tax. For self-employed businesses with less than $128,400 of net income, the self-employment tax rate is 15.3%. Thus, for small businesses with profits of less than $128,400, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $806 or more, when the taxpayer’s state income tax bracket is included.

If you are planning an expenditure and expect the tax deduction to help cover the cost, please call in advance to ensure that the tax benefit will be what you anticipate.

Expecting Your Taxable Income to Be Low This Year? You Can Take Advantage of It

Article Highlights:

  • Adjusted Gross Income
  • Taxable Income
  • Graduated Individual Tax Rates
  • Take IRA Distributions
  • Redeem Government Bonds
  • Defer Deductions
  • Convert Traditional IRA Funds into a Roth IRA
  • Zero Capital Gains Rate
  • Business Expenses
  • Affordable Care Act

If your taxable income is exceptionally low this year, or even if you expect not to be required to file a tax return this year, a number of tax opportunities may be available to you. But time is running short, since these opportunities will require action on your part before year’s end.

However, before we consider actual strategies, let’s look at key elements that govern tax rates and taxable income.

Adjusted Gross Income (AGI) – This is the sum of all of your income that’s subject to tax, such as wages, interest, dividends, gains from sales, net self-employment income, retirement income, minus items that are specifically deductible without having to itemize your deductions, including contributions to traditional IRAs and self-employed retirement plans, interest paid on student loans, contributions to health savings plans, and a limited number of others.

Taxable Income – To be simplistic, taxable income is your AGI less the greater of the standard deduction for your filing status or your itemized deductions:

AGI
XXXX
Deductions– XXXX
Taxable Income
XXXX

If the deductions exceed your AGI, then you can end up with a negative taxable income, which means that to the extent it is negative, you can actually add income or reduce your deductions without incurring any tax.

Graduated Individual Tax Rates – Ordinary individual tax rates are graduated. So as your taxable income increases, so does your tax rate. Thus, the lower your taxable income, the lower your tax rate will be. Your income tax is the result of multiplying your tax rate by your taxable income (but to simplify the computation for those with taxable income up to $100,000, the IRS figures the tax by income range and provides look-up tables, so for most taxpayers, their tax rate is not apparent). Individual ordinary tax rates range from 10% to as high as 37%. For 2018, the taxable income amounts for the three lowest tax rates – 10%, 12%, and 22% – are:

Filing Status
Single
Married Filing Jointly
Head of Household
Married Filing Separate
10%
$0–9,525
$0–19,050
$0–13,600
$0–9,525
12%
$9,526–38,700
$19,051–77,400
$13,601–51,800
$9,526–38,700
22%
$38,701–82,500
$77,401–165,000
$51,801–82,500
$38,701–82,500

So for instance, if you are single, your first $9,525 of taxable income is taxed at 10%. The next $29,174 ($9,526 to $38,700) is taxed at 12%, and the next $43,799 ($38,701 to $82,500) is taxed at 22%.

Here are some strategies you can employ for your tax benefit. However, these strategies may be interdependent on one another and your particular tax circumstances.

Take IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if your projected taxable income is negative, then you can actually take a withdrawal of up to the negative amount without incurring any tax. Even if your projected taxable income is not negative and your normal taxable income would put you in the 22% or higher bracket, you might want to take out just enough to be taxed at the 10% or even the 12% tax rate. Of course, those are retirement dollars; consider moving them into a regular financial account set aside for your retirement. Also, be aware that distributions before age 59½ are subject to a 10% early-withdrawal penalty even if there is no tax liability, so this strategy isn’t recommended for those younger than 59½.

Redeem Government Bonds – If you have invested in U.S. government bonds, such as Series EE or I bonds, and you’ve been deferring paying tax on the interest from these bonds until they mature, you may want to cash in the bonds prior to the year when they mature, if that maturity date is within the next few years and to the extent that adding the bond interest to your other income for the year won’t push you out of the zero or 10% tax bracket and into a higher bracket. This strategy isn’t advisable if the interest you would earn on the bonds if you held them to maturity would be more than the tax you can save by cashing in the bonds during a low-income year.

Defer Deductions – When you itemize your deductions, you may claim only the deductions you actually pay during the tax year (the calendar year, for most folks). If your projected taxable income will be negative and you are planning on itemizing your deductions, you might consider putting off some of those year-end deductible payments until after the first of the year and preserving the deductions for next year. Such payments might include house of worship tithing, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, and medical expenses.

Convert Traditional IRA Funds into a Roth IRA – Roth IRAs provide tax-free accumulation and tax-free retirement distributions. So to the extent of any negative taxable income or even just for the lower tax rates, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which will provide you with an opportunity to convert to a Roth IRA at a lower tax amount.

Zero Capital Gains Rate – There are three capital gains rates depending upon your taxable income. When your taxable income is in the lowest range, as shown in the table below, you will actually pay no tax on your long-term capital gains. Thus, if your taxable income is within the zero percent long-term capital gains rate bracket, this is an opportunity for you to sell some appreciated securities that you have owned for more than a year and pay no tax on the gains.

Long-Term Capital Gains Rates (2018)
Filing Status
0%
15%
20%
Single
$0–38,600
$38,601–425,800
$425,801 & Above
Head of Household
$0–51,700
$51,701–452,400
$452,401 & Above
Married Joint
$0–77,200
$77,201–479,000
$479,001 & Above
Married Separate
$0–38,600
$38,601–239,500
$239,501 & Above

Business Expenses – The tax code has some very liberal provisions that allow a business to currently expense, rather than capitalize and slowly depreciate, the purchase costs of certain property. In a low-income year, it may be appropriate to capitalize rather than expense these current-year purchases and preserve the depreciation deduction for higher-income years. This is especially true when taxable income is negative in the current year.

Affordable Care Act – On the negative side, if you have obtained your medical insurance through a government marketplace, employing any of the strategies mentioned above will increase your taxable income and could impact the amount of your allowable premium tax credit. As a result, you would likely have to repay some or all of any advance premium tax credit that was used to reduce your health insurance premiums; the credit is reconciled on your tax return.

If you would like to discuss how these strategies might provide you with tax benefits based upon your particular tax circumstances or would like to schedule a tax-planning appointment, please give the office a call.

Legitimate Tax-Deductible Charity or Scam?

Articles Highlights:

  • Holiday Giving
  • Scammers and How to Avoid Them
  • Verifying Legitimate Charities
  • Substantiation
  • Special Situations

With the holiday season approaching, and with the great need for aid in the wake of the recent hurricanes and wildfires, you no doubt are being solicited for donations. However, do not be fooled by the scammers who come out from hiding whenever there is a disaster and during the holiday season. The last thing you want to do is get ripped off; not only will your charitable dollars go to waste, but you will also lose your tax deduction, as contributions are only tax-deductible if they are to qualified charities.

Soon, your physical and electronic mailboxes – not to mention your voicemail box – will be filled with charitable solicitations. Before you break out your checkbook, however, be sure to do your homework, especially if you are contemplating a donation to an organization that you are not already familiar with. The Federal Trade Commission suggests avoiding any charity or fundraiser that

  • refuses to provide detailed information about its identity, mission, and costs, as well as how your donation will be used;
  • will not provide proof that your contribution would be tax-deductible;
  • uses a name that closely resembles that of a better-known (more reputable) organization;
  • thanks you for a pledge that you do not remember making;
  • uses high-pressure tactics to get you to donate immediately;
  • asks for donations in cash or asks you to wire money; or
  • offers to send a courier or overnight delivery service to collect a donation immediately.

Numerous websites can help you to check the validity of a charity. The IRS provides one, but it is rather cumbersome to use. Charity Navigator allows you to search for a charity name and provides details about that charity’s function. When in doubt, take the time to verify a charity’s legitimacy.

If you plan to itemize your deductions – after you have determined that you are not contributing to a scam operation – ensure that your charitable donations meet the requirements for being tax-deductible. The recipient organization must be one or more of the following:

  • a church, synagogue, mosque, or other place of worship;
  • a tax-exempt educational institution or hospital;
  • a federal, state, or local governmental unit, if the contribution is used for public purposes;
  • a publicly supported corporation, trust, fund, foundation, or community chest that is organized and operated only for charitable, religious, educational, scientific, or literary purposes; to prevent cruelty to children or animals; or to foster certain national or international amateur sports competitions; or
  • a certain type of private operating foundation or agricultural research organization.

Substantiation – First and foremost, you must receive substantiation of your cash gift in order to deduct it on your tax return; you also must itemize your deductions rather than use the standard deduction. Cash contributions include those paid by cash, check, electronic fund transfer, and credit card. However, you cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways:

  1. A bank record that shows the qualified organization’s name, as well as the date and amount of the contribution. Eligible bank records include a. a canceled check, b. a bank or credit union statement, or c. a credit card statement.
  2. A receipt (or a letter or other written communication) from the qualified organization showing the organization’s name, as well as the date and amount of the contribution.

Cash contributions of $250 or more – To claim a deduction for a contribution of $250 or more, you must provide a written acknowledgment of the contribution from the qualified organization. This acknowledgment must include the following details:

  1. The amount of cash contributed
  2. Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, including a description and good-faith estimate of the value of those goods or services (not counting intangible religious benefits)
  3. A statement that you received no benefit (other than an intangible religious benefit)

The value of any goods or services received in exchange for a donation must be subtracted from the amount claimed as a contribution. If the acknowledgment does not show the date of the contribution, then you must also supply one of the bank records described above to verify the contribution date. If this acknowledgement includes the contribution date and meets the other requirements, it is not necessary to provide other records.

The acknowledgment must be in your hands before the date you file your tax return but not later than the April due date for return (or the extended due date of October if you filed an extension).

Christmas Kettles – It is quite common for charitable organizations to collect cash donations at malls during the holiday shopping season. Consider writing a check to place in these kettles rather than using cash so that you will have the substantiation required for a tax-deductible contribution.

Needy Individuals – You may wish to help out a needy family; although that is a very kind thing to do, no charitable deduction is allowed for such gifts to private individuals (either directly or as through a charitable organization).

GoFundMe – Through this website (and others like it), people raise funds for good causes such as starting a business, paying medical bills or funeral costs, replacing damaged or destroyed homes. However, these websites are not qualified charities for the purposes of claiming a charitable contribution on your tax return.

Special Contribution Rule for Taxpayers Age 70½ and Over – The tax code includes a special provision that allows taxpayers who are at least 70½ years old to directly transfer up to $100,000 from an IRA account to a qualified charity. Instead of receiving a charitable deduction, that person instead gets the benefit of the IRA distribution being nontaxable and counting toward the required minimum distribution for the year. This is especially beneficial for people who receive Social Security benefits and those who take the standard deduction. Although this is generally considered a good tax-saving strategy for those who can afford to make large donations, there is actually no minimum for this rule, so it will likely even benefit individuals in lower tax brackets.

Bunching – When taxpayers’ itemized deductions are only marginally different from the standard deduction, they can consider the method known as bunching. In this technique, the taxpayer make two years’ worth of donations in a single year and then skips making donations in the next year. For example, if you annually contribute $5,000 to a house of worship but have total itemized deductions that are consistently a few hundred dollars less than the standard deduction, you can instead double up by donating $10,000 in a single year. That way, you will be able to claim itemized deductions for the year when you make the donation and can then take the standard deduction in the following year.

For large donations, there are limitations based on adjusted gross income, and there are other available techniques, such as donor-advised funds. This article also did not covered donations of noncash items, such as used furniture or household goods; these have additional substantiation requirements. Please call if you have questions or if you would like to set up an appointment to strategize about maximizing the tax benefits of your charitable contributions.