IRS Offers Tips for Year-End Giving

Individuals and businesses making contributions to charity should keep in mind some key tax provisions that have taken effect in recent years, especially those affecting donations of clothing and household items and monetary donations.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, 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.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer 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.
Reminders
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2012 count for 2012. This is true even if the credit card bill isn’t paid until 2013. Also, checks count for 2012 as long as they are mailed in 2012.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A 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). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2012 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• 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.
• The deduction for a motor vehicle, 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.
• 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.
• And, as always it’s important to keep good records and receipts.

IRS Offers Tax Tips for “The Season of Giving”

December is traditionally a month for giving generously to charities, friends and family. But it’s also a time that can have a major impact on the tax return you’ll file in the New Year. Here are some “Season of Giving” tips from the IRS covering everything from charity donations to refund planning:

• Contribute to Qualified Charities.  If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations Select Check tool to check if your favorite charity is a qualified charity. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 as long as you mail it in December. Gifts given to individuals, whether to friends, family or strangers, are not deductible.
• What You Can Deduct.  You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
• Keep Records of All Donations.  You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a cancelled check, bank or credit card statement or payroll deduction record. You can also ask the charity for a written statement that shows the charity’s name, contribution date and amount.
• Gather Records in a Safe Place.  As long as you’re gathering those records for your charitable contributions, it’s a good time to start rounding up documents you will need to file your tax return in 2013. This includes receipts, canceled checks and other documents that support income or deductions you will claim on your tax return. Be sure to store them in a safe place so you can easily access them later when you file your tax return.
• Plan Ahead for Major Purchases.  If you are making major purchases during the holiday season, don’t base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can impact the timing of a tax refund. The IRS issues most refunds in less than 21 days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive your refund.

For more information about contributions, check out Publication 526, Charitable Contributions. The booklet is available on IRS.gov or order by mail at 800-TAX-FORM (800-829-3676).
Links:

• Exempt Organizations Select Check
• Publication 526, Charitable Contributions

Don't Fall for Phony IRS Websites

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers and payers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, 'Suspicious website'.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.
The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing.”

Links:

• Suspicious e-Mails and Identity Theft
• Reporting Phishing
• Identity Theft resource page
• Publication 4523, Beware of Phishing Schemes (PDF)

IRS YouTube Videos:

• Phishing-Malware - English | Spanish | ASL

IRS Podcasts:

• Protect Yourself From Identity Theft - English | Spanish

2012 Tax Policies Of The Major Presidential Candidates

Important information to review before the election:

Tax Planning

Dramatic tax increases scheduled to go into effect in 2013 make 2012 tax planning imperative. The following taxes may be impacted:

·         Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.

·         Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.

·         Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.

This letter will suggest some ways to avoid or minimize the adverse effects of these changes. Planning for these likely tax changes is a major undertaking and many clients are beginning the process now rather than waiting for the fall elections. This is prudent because the additional time will allow you to become comfortable with the gifting process and provide time to custom design trusts for your family.

Gain Harvesting

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.

Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.

In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.

At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.

If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain harvesting would make sense. We have software that enables us to do this analysis quickly, easily and economically. Please contact us to find out which of your assets should be harvested in 2012.

Planning for the 3.8 Percent Medicare Surtax

For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1, Form 1040.

The applicable threshold amounts are shown below.

Married taxpayers filing jointly                             $250,000

Married taxpayers filing separately                       $125,000

All other individual taxpayers                               $200,000

A simple example will illustrate how the tax is calculated.

Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.

Accelerating Ordinary Income into 2012

A final opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.

Estate Tax Provisions

The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1^st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).

We are prepared to assist you in modeling scenarios to determine which strategies are right for you. Please don’t hesitate to call us at 801.269.1818 to schedule an appointment to begin discussing your options.

Back-to-School Tips for Students and Parents Paying College Expenses

Whether you’re a recent high school graduate going to college for the first time or a returning student, it will soon be time to head to campus, and payment deadlines for tuition and other fees are not far behind.
The IRS offers some tips about education tax benefits that can help offset some college costs for students and parents. Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.

• American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education at an eligible institution. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you don't owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.
• Lifetime Learning Credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student.

You can claim only one type of education credit per student in the same tax year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

• Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

These education benefits are subject to income limitations, and may be reduced or eliminated depending on your income. For more information, visit the Tax Benefits for Education Information Center at IRS.gov or check out Publication 970, Tax Benefits for Education, which can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Links:

• American Opportunity Tax Credit
• Tax Benefits for Education: Information Center
• Publication 970, Tax Benefits for Education
• The American Recovery and Reinvestment Act of 2009: Information Center
• Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)