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Three Tax-Friendly Strategies for Charitable Giving

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Photo credited to Justdial

Obtaining a significant tax benefit for charitable contributions may be a little harder than it used to be, but it’s not impossible. Here’s a look at how the tax landscape for charitable giving has changed and three strategies that could help taxpayers get better tax mileage from their donations.

What Has Changed?

Because the deduction for charitable contributions is an itemized deduction, taxpayers who claim the standard deduction receive no deduction for their contributions. That much hasn’t changed. What has changed is that taxpayers are less likely to benefit from itemizing due to higher standard deductions and other changes made by the 2017 tax law.* But if they do, cash contributions are generally deductible up to 60% of adjusted gross income (AGI), versus the previous limit of 50% of AGI.**

Timing Donations With a Donor-Advised Fund

With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Generally, the donor’s recommendations will be followed, but the sponsoring organization has the final say as to how the money is actually distributed.

Contributions to a donor-advised fund are generally tax deductible in the year they are made. So funding a donor-advised fund in a year you expect to itemize your deductions could provide a tax advantage. If desired, you could then put those dollars to use over several years by supporting your favorite charities through your donor-advised fund.

Donating Appreciated Securities

Many donor-advised funds and other public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold. Note that itemized deductions for contributions of appreciated securities are generally limited to 30% of AGI.2

Making QCDs After Age 70½

A qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD).

To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. (Contributions to donor-advised funds are not eligible.) Up to $100,000 may be transferred annually.

Before implementing any tax planning strategy, be sure to discuss it with your tax advisor. Each individual’s tax situation is different, and your tax advisor can help you analyze the impact on your personal situation.

*The Tax Cuts and Jobs Act of 2017.
**Technically, the percentage limit is applied to a taxpayer’s “contribution base.” Contribution base is AGI but without deducting any net operating loss carryback to that year.

“Extender” Legislation Impacts Individuals and Small Businesses

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Photo credited by NRA-ILA

 

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

 

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

 

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

 

 

Protect Your Tax Return From Criminals

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Photo credited to Fine Art America

Most people are familiar with identity theft. They understand that they have to take various measures to protect their financial information from being accessed and exploited by criminals. Unfortunately, many people are less familiar with tax return identity theft. Numerous taxpayers have found that criminals have pocketed their tax refunds after using false identities. How can you reduce the chances that you could become a victim of tax return identity theft? The following tips should help.

 

File Your Return ASAP

File your tax return as soon as possible, especially if you anticipate a tax refund. By filing early, you limit the time available to criminals to file a fraudulent return in your name.

 

Don’t Fall for “Phishing” Attempts

Criminals typically use email or a phone call to try and get taxpayers to reveal personal information. Very often, they pretend to be IRS officials attempting to verify the accuracy of your Social Security number or some other crucial piece of personal identifying data. This is known as “phishing.” The reality is that the IRS never asks for financial or other personal information online or by email or text and never calls to demand immediate payments of back taxes, interest, or fines — it simply mails a bill to taxpayers.

And remember to keep your computer secure. Use security software that updates automatically and includes a firewall, virus/malware protection, and file encryption for sensitive data.

 

Be Careful With Your Personal Information

Do not carry your Social Security card or any documents that list your Social Security number in a wallet or pocketbook. Keep old tax returns and tax records in a secure location and shred any tax documents before disposing of them. Regularly check your credit report and bank and credit card statements. And don’t share too much personal information on social media that can be used to impersonate you.

 

What to Do If You Are Scammed

If you are a victim of tax-related identity theft, respond immediately to any IRS notice and submit Form 14039, Identity Theft Affidavit. Be sure to file a complaint with the Federal Trade Commission at identitytheft.gov. Follow up and contact one of the three major credit bureaus to have a “fraud alert” placed on your credit records, and contact your financial institutions.

 

For more information on protecting yourself from identity thieves, visit https://www.irs.gov.

 

Will the SECURE Act Affect Your Retirement Planning?

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Photo credited to Prudential-Newsroom
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019. The Act will likely impact large numbers of working Americans as well those already retired. In general, the Act is intended to increase access to tax-advantaged retirement plans and to help prevent older Americans from outliving their assets.
Here are some of the changes that could affect your planning.

 

Delayed Deadline for Taking Required Minimum Distributions

Tax law has generally required individual retirement account (IRA) owners and retirement plan participants to begin taking required minimum distributions (RMDs) from their accounts once they reach age 70½. The new law pushes back the age at which these distributions must begin to age 72 for IRA owners and plan participants born on or after July 1, 1949. This change allows individuals to take advantage of their retirement account’s tax-deferred nature for a longer period.

No Age Limit for Making Traditional IRA Contributions

Beginning with the 2020 tax year, the new law eliminates the 70½ age limit for making annual contributions to traditional IRAs. This is a plus for those people who continue to work past age 70½ and want to keep saving for retirement on a tax-deferred basis.

Penalty-Free Birth and Adoption Distributions

The new law also expands the exceptions to the 10% penalty for early withdrawals from IRAs and other tax-deferred retirement plans by adding an exception for “qualified birth or adoption distributions” up to $5,000. The new law defines a “qualified” birth or adoption distribution as a withdrawal from an IRA or other eligible retirement plan made during the one-year period beginning on the date the IRA owner’s or the plan participant’s child is born or the adoptee’s adoption is finalized. If desired, parents may replenish their retirement savings by repaying the amount distributed.

Restrictions on Stretch IRAs

The new law places severe restrictions on the use of “stretch” IRAs. A stretch IRA generally permitted beneficiaries to take their RMDs from an inherited IRA over their life expectancy. Thus, beneficiaries were able to stretch payments from the inherited IRA over many years and potentially pass on the inherited IRA to their own beneficiaries. The SECURE Act changes the RMD rules for beneficiaries of IRA owners (and plan participants) who pass away in 2020 or later. Under the SECURE Act, the use of stretch IRAs is restricted to a limited group of IRA beneficiaries. The specific details on who is eligible to use stretch IRAs is complex, and IRA owners who base their estate plans on the use of a stretch IRA should consult with a financial professional to see how they might be impacted.

Small Business Retirement Plans

Good news if you own a small business — the SECURE Act provides incentives to make it easier for you to establish a retirement plan. Starting in 2020, eligible employers that establish a 401(k) or SIMPLE IRA plan with automatic enrollment may qualify for a new tax credit of $500 per year for up to three years. In addition, the existing credit for small employer plan startup costs has increased to as much as $5,000 per year for three years. Previously, the annual credit maximum was $500. Employers also have more time to establish a qualified retirement plan. Previously, a qualified plan, such as a profit sharing plan, had to be adopted by the last day of the employer’s tax year to be effective for that year. The SECURE Act allows a qualified plan to be adopted as late as the employer’s tax filing deadline (plus extensions).

 

Your financial and tax professionals can provide more details about these and other important SECURE Act changes and how they may affect your retirement planning.

 

Tips on Tax Planning

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Photo credited to Gold Gerstein Group

You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

 

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 17 at the end of the tax year and another for each qualifying dependent who isn’t a qualifying child. The latter category includes a dependent child age 17 or older, or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child. Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $75,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $150,000. (These 2020 limits may be inflation adjusted in the future.) Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

Selling securities with unrealized losses before year end to offset realized capital gains.
Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.
You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives — available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own — provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.
*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.
**You should consider a fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.
This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

Tax Season is Here!

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This Tax Return Checklist 2020 will assist you with gathering your tax documents for this year.

Once you have them all together, please send them to us in one of the following two ways.

  • Click here to upload your documents to the client portal.
  • Email. Please be sure to email us only 1 PDF that is encrypted with all your correspondence merged into that 1 PDF, not larger than 3 MB. This way we only print one file.

Schedule your tax appointment today! https://calendly.com/watsoncpapllc/15min

Filed Under: Tax