Last week the IRS issued a new "year end tax tips" document reminding taxpayers making year-end gifts to charity that there have been some tax law changes affecting their deductions.
For charitable contributions of clothing and household items, taxpayers must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed.
For cash contributions, a taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
In addition, a taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
Additional reminders from the IRS:
- Only give to qualified charities. Only donations to eligible organizations are tax-deductible. You can use Select Check, a searchable online tool available on IRS.gov to make sure the organizations you give to are eligible to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are also eligible to receive deductible donations. These is true even if they are not listed in the IRS's database.
- Contributions are deductible in the year made. Donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn’t paid until 2015. Also, checks count for 2014 as long as they are mailed in 2014.
- You must itemize your deductions. Individual taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). Most taxpayers don't itemize deductions, so for most taxpayers, there is no tax benefit to making charitable contributions.
- Recordkeeping: for all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
- Special Rules. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
- Form 8283: If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
IRS Publication 526 covers almost everything there is to know about tax deductions for charitable contributions.
- Mark S Gleason CPA
www.lakes-cpa.com
As the year draws to a close, many of my clients are looking for ideas on end-of-year tax saving strategies.
For taxpayers wishing to shift taxable income from 2014 into 2015, saving dollars on their 2014 tax obligations, the idea of prepaying deductible business expenses often comes up.
This strategy usually works to provide a deferral of the taxes from one year to the next. Whatever taxes are saved in 2014 will have to be paid for 2015. But this is a particularly beneficial strategy if there is a bump-up in income in 2014 that is unlikely to repeat in 2015.
If a taxpayer is in a lower tax rate bracket in 2015 than in 2014, this results in a tax savings as well as a tax deferral.
There is no overall dollar limit on a taxpayer's ability to prepay business expenses but it is important not to waste money prepaying for things that might not be needed.
I have reviewed the rules for deducting prepaid expenses with three different clients in the past week, so I thought this would make a good topic for my blog.
Most taxpayers file their returns using the cash method, where income is taxed when received in cash and deductions are permitted when paid in cash. Almost all individual taxpayers and almost all small and medium size businesses are cash basis taxpayers.
Larger businesses are accrual basis taxpayers. They report their taxable income when it is earned and deduct their expenses when they are incurred. The distinction between cash and accrual basis is important and accountants study the rules for accrual basis accounting, known as Generally Accepted Accounting Principles in their college accounting courses.
The ability to deduct a prepayment is only permitted for cash basis taxpayers. If you are an accrual basis taxpayer this idea will not work for you.
For cash basis taxpayers, IRS regulations prohibit deductions for prepaid interest which is not deductible until incurred. Payments that create an asset (tangible or intangible) are not deductible either.
Since prepaid expenses are all considered to be assets, an exception to the rule, known as the 12-month rule is most useful. The exception that is almost as big as the rule itself. Under the 12-month rule, prepayments for expense items that create benefits for a relatively brief period of time, such as insurance, security, rent, and warranty service contracts may be immediately deducted when paid if the contract period to which the prepayment applies is not more than a year and the contract period does not extend beyond the end of the taxable year following the tax year in which the payment is made.
Other expenses that fit into this 12-month rule would be advertising, marketing, postage (stocking up on postage stamps), business travel expenses (buy those airline tickets before the end of the year), conference registrations and business education. Professional fees for legal and accounting advice will often fit within this rule, but not always.
A cash basis taxpayer receiving prepayments must include the prepayments in taxable income in the year received, so your plan to shift taxable income from 2014 to 2015 by prepaying your expenses may be foiled by your customers who prepay you.
- Mark S Gleason CPA
www.lakes-cpa.com
John Koskinen, Commissioner of Internal Revenue, addressed the American Institute of CPAs' (AICPA) National Tax Conference earlier this month. He talked about the upcoming 2015 tax filing season. “We believe it may be one of the most complicated filing seasons we’ve ever had, for a number of reasons".
“Continuing uncertainty about the extender legislation imposes stress, not only on the IRS, but on the entire tax community,” he said, and “if the uncertainty over extenders continues into December, the IRS could be forced to postpone the opening of the 2015 filing season.” With Congress now on Thanksgiving break, this seems to be a certainty.
I have written about the "extender legislation" in previous posts on this blog.
Reductions to the IRS's budget “will pose serious challenges to our customer service, enforcement efforts and information technology projects,” he said. Telephone service could drop from the 2014 service level of 71 percent to 53 percent in 2015, because the IRS has not been given the funds to hire sufficient staff to handle incoming calls.
Poor customer service at the IRS has been getting worse and worse every year because a hostile Congress has not given the IRS the funds they need to do the job. Because of long waits, I never even attempt to call the IRS on the phone. Rather, I write them a letter and send it in the mail. It takes months to get a response. Thanks, Congress.
- Mark S Gleason CPA
www.lakes-cpa.com
The IRS has announced the annual inflation adjustments for 43 different tax provisions including the rate thresholds for the tax rate schedules. These go into effect on Jan 1, 2015.
Here are some of the adjustments:
- The top federal tax rate of 39.6 percent affects single taxpayers whose income exceeds $413,200 ($464,850 for marrieds), up from $406,750 and $457,600, respectively.
- The standard deduction rises to $6,300 for singles and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively. The standard deduction for heads of household rises to $9,250, up from $9,100.
- The income threshhold where itemized deductions begin to be phased out begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
- The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. The exemption phase-out begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly) and phases out completely at $380,750 ($432,400 for marrieds).
- The 2015 maximum Earned Income Credit amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014.
- The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
- This amount of the basic exclusion (exemption) from federal estate taxes for decedents who die during 2015 is $5,430,000, up from a total of $5,340,000.
- The annual exclusion for gifts remains at $14,000 for 2015.
- For 2015, the foreign earned income exclusion is $100,800, up from $99,200 for 2014.
Here's one I hadn't previously imagined. The tax on arrow shafts for 2015 (to be paid by the manufacturer or importer of certain arrows) is going up to $0.49 per shaft. To avoid this tax, it looks like you want your arrows to be less than 18 inches long and less than 5/16 of an inch in diameter, unless of course your arrows are suitable for use with a bow having a peak draw weight of 30 pounds or more, in which case all your arrow shafts are taxable.
Complete details can be found in Rev. Proc. 2014-61.
- Mark S Gleason CPA
www.lakes-cpa.com
