• Proving Non-cash Charitable Contributions

    18 February 2016
    438 Views
    Comments are off for this post
    flea-market-804760_960_720

    Household goods and used clothing are some of the most common tax-deductible charitable contributions that are encountered. Establishing the dollar value is the major complication of this type of contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost-new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and become grossly out of style, the more extensively used piece of clothing could actually be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser.

    Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial non-cash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items.

    The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a recent United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”

    The IRS requires documentation for noncash contributions based on the total value of the donation. First, they require deductions of less than $250 – A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows: the name of the charitable organization, the date and location of the charitable contribution, and a reasonably detailed description of the property. Please note that the taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).

    Second, the IRS requires documentation for deductions of at least $250 but not more than $500 – If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include: the name of the charitable organization, the date and location of the charitable contribution, a reasonably detailed description of any property contributed (but not necessarily its value), and whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits). If the charitable organization provided goods and/or services to the taxpayer, the acknowledgement must include a description and a good-faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so, and in this case, the acknowledgment does not need to describe or estimate the value of the benefit.

    Third, the IRS requires documentation if deductions are over $500 but not over $5,000 – If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgement and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include: how the property was obtained. (for example, purchase, gift, bequest, inheritance, or exchange), the approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and the cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities). If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return.

    Last, the IRS requires documentation if deductions are over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.

    Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, privately traded stock, land, and buildings. For example, say you donated $5,300 of used furniture to 3 different charitable organizations during the year (a bedroom set valued at $800, a dining set worth $1,000, and living room furniture worth $3,500). Because the value of the donations of similar property (furniture) exceeds $5,000, you would need to obtain an appraisal of the furniture to satisfy the substantiation requirements—even if you donated the furniture to different organizations and at different times during the year. The IRS has strict rules as to who is considered a qualified appraiser.

    To help you document some of these noncash contributions, you can download a fillable Noncash Charitable Contribution statement (http://images.client-sites.com/NonCash_Contribution2010.pdf). The statement includes an area for the charity’s agent to verify the contribution and a check box denoting whether the qualified organization provided any goods or services as a result of the contribution. Although not specifically blessed by the IRS, this statement includes everything needed for noncash contributions of up to $500—provided, of course, that you and the charitable organization’s representative accurately complete the form.

    Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed.

    Please call Dagley & Co. with any questions about documenting or valuing your non-cash contributions.

    Image via. public domain

    Continue Reading
  • Better To Sell Or Trade A Business Vehicle?

    15 February 2016
    453 Views
    Comments are off for this post
    auto-788747_960_720

    Business owners often replace vehicles they have used in their business. When replacing a business vehicle, the tax ramifications are different when selling the old vehicle and when trading it in for a new vehicle. If the vehicle is sold, the result is reported on the taxpayer’s return as an above-the-line gain or loss. Since a trade-in is treated as an exchange, any gain or loss is absorbed into the replacement vehicle’s depreciable basis, thereby avoiding any current taxable gain or reportable loss.

    Thus, it is generally better to trade in a vehicle that would result in a gain if it were sold and to sell a vehicle if doing so would result in a loss.

    Let’s say a taxpayer sells a 100%-business-use vehicle for $12,000. The original purchase price was $32,000, and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better to sell the vehicle and deduct the loss rather than trade in the vehicle.

    Sale price                                                    $12,000

    Original Cost                        $32,000

    Depreciation Taken         <$17,000>

    Depreciated Basis               $15,000     <$15,000>

    Loss                                                             <$ 3,000>

    On the other hand, had the business owner sold the vehicle for $16,000, the sale would result in a $1,000 taxable gain, and trading it in would be a better option. Caution: Sales to the same dealer are treated as trade-ins.

    If a vehicle is used for both business and personal purposes, the loss or gain must be prorated for the proportion of business use, as the personal portion of any loss is not deductible.

    If you are considering trading a vehicle in, determine whether the tax benefits exceed the additional money received from selling the old business vehicle, as trade-in values are generally less than actual sales values. You should also consider the time and energy it will take to sell the vehicle on your own.

    This concept can also be used when selling or disposing of other business assets. If you have questions about how this tax strategy might apply to your specific tax situation, please give Dagley & Co. a call.

    Image via. public domain

    Continue Reading
  • Not All Home Mortgage Interest Is Deductible; The IRS is Watching

    10 February 2016
    441 Views
    Comments are off for this post
    houses-202151_960_720

    The IRS is watching and currently they are checking to see if taxpayers are deducting too much home equity debt interest. But you need to know that not all home-mortgage interest is deductible. Generally, taxpayers are allowed to deduct the interest on up to $1 million of home acquisition debt (includes subsequent debt incurred to make improvements, but not repairs) and the interest on up to $100,000 of home equity debt. Equity debt is debt not incurred to acquire or improve the home. Taxpayers frequently exceed the equity debt limit and fail to adjust their interest deduction accordingly.

    The best way to explain this interest deduction limitation is by example. Let’s assume you have never refinanced the original loan that was used to purchase your home, and the current principal balance of that acquisition debt is less than $1 million. However, you also have a line of credit on the home, and the debt on that line of credit is treated as equity debt. If the balance on that line of credit is $120,000, then you have exceeded the equity debt limitation and only 83.33% ($100,000/$120,000) of the equity line interest is deductible as home mortgage interest on Schedule A. The balance is not deductible unless you can trace the use of the excess debt to either investment or business use. If traceable to investments, the interest you pay on the amount traceable would be deductible as investment interest, which is also deducted on Schedule A but is limited to an amount equal to your net investment income (investment income less investment expenses). If the excess debt was used for business, you could deduct the interest on that excess debt on the appropriate business schedule.

    Alternatively, the IRS allows you to elect to treat the equity line debt as “not secured” by the home, which would allow the interest on the entire equity debt to be traced to its use and deducted on the appropriate schedule if deductible. For instance, you borrow from the equity line for a down payment on a rental. If you make the “not secured” election, the interest on the amount borrowed for the rental down payment would be deductible on the Schedule E rental income and expense schedule and not subject to the home equity debt limitations.

    However, one of the rules that allows home mortgage interest to be deductible is it must be secured by the home, and if the unsecured election is used, none of the interest can be traced back to the home itself. So, for example, if the equity line was used partly for the rental down payment and partially for personal reasons, the interest associated with the personal portion of the loan would not be deductible since you elected to treat it as not secured by your home.

    Using the unsecured election can have unexpected results in the current year and in the future. You should use that election only after consulting with this office.

    Generally, people not familiar with the sometimes complicated rules associated with home mortgage interest believe the interest shown on the Form 1098 issued by their lenders at the end of the year is fully deductible. In many cases when taxpayers have refinanced or have equity loans, that may be far from the truth and could result in an IRS inquiry and potential multi-year adjustments. In fact, for Forms 1098 issued after 2016 (thus effective for 2016 information), the IRS will be requiring lenders to include additional information, including the amount of the outstanding mortgage principal as of the beginning of the calendar year, the mortgage origination date and the address of the property securing the mortgage, which will provide the IRS with additional tools for audits.

    When in doubt about how much interest you can deduct or if you have questions about how refinancing or taking on additional home mortgage debt will impact your taxes, please Dagley & Co. for assistance.

    Image via. public domain

    Continue Reading
  • February 2016 Business Due Dates

    7 February 2016
    431 Views
    Comments are off for this post
    income-tax-491626_960_720

    February 1 – 1099s Due to Service Providers

    If you are a rental property or business owner read along. If paid $600 or more for the services of individuals (other than employees) during 2015, you are required to provide Form 1099 to those workers by February 1. “Services” can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 29, 2016 (March 31, 2016 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call Dagley & Co. for preparation assistance.

    Payments that may be covered include the following: Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, Compensation for workers who are not considered employees (including fishing boat proceeds to crew members), Dividends and other corporate distributions, Interest, Amounts paid in real estate transactions, Rent, Royalties, Amounts paid in broker and barter exchange transactions, Payments to attorneys, Payments of Indian gaming profits to tribal members, Profit-sharing distributions, Retirement plan distributions, Original issue discount, Prizes and awards, Medical and health care payments, Debt cancellation (treated as payment to debtor), and Cash payments over $10,000.

    February 1 – W-2 Due to All Employees

    All employers need to give copies of the W-2 form for 2015 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.

    February 1 – File Form 941 and Deposit Any Undeposited Tax

    File Form 941 for the fourth quarter of 2015. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

    February 1 – File Form 943

    All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2015. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

    February 1 – W-2G Due from Payers of Gambling Winnings

    If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2015.

    February 1  – File Form 940 – Federal Unemployment Tax

    File Form 940 (or 940-EZ) for 2015. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

    February 1 – File Form 945

    File Form 945 to report income tax withheld for 2015 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

    February 10 – Non-Payroll Taxes

    File Form 945 to report income tax withheld for 2015 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.

    February 10 – Social Security, Medicare and Withheld Income Tax

    File Form 941 for the fourth quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.

    February 10 – Certain Small Employers

    File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2015. This due date applies only if you deposited the tax for the year in full and on time.

    February 10 – Federal Unemployment Tax

    File Form 940 for 2015. This due date applies only if you deposited the tax for the year in full and on time.

    February 16 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in January.

    February 16 – Non-Payroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in January.

    February 29 – Payers of Gambling Winnings

    File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2015. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was February 1.

    February 29 – Informational Returns Filing Due

    File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2015. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see February 1.)

    February 29 – All Employers

    File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2015. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was February 1.

    February 29 – Large Food and Beverage Establishment Employers

    File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.

    February 29 – Farmers and Fishermen

    File your 2015 income tax return (Form 1040) and pay any tax due. However, you have until April 18 to file if you paid your 2015 estimated tax by January 15, 2016.

    Image via. Public Domain

    Continue Reading
  • February 2016 Individual Due Dates

    5 February 2016
    504 Views
    Comments are off for this post
    time-481450_960_720

    If you are uncertain of your tax due dates, here is a little help for you.

    February 1 – Tax Appointment

    If you don’t already have an appointment scheduled with Dagley & Co., you should call to make an appointment that is convenient for you.

    February 1 – File 2015 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment

    If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar).

    February 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10.

    Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    February 16 – Last Date to Claim Exemption from Withholding

    If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

    Image via. public domain

    Continue Reading
  • Household Help: Employee or Contractor?

    3 February 2016
    441 Views
    Comments are off for this post
    stove-338139_960_720

    A lot of the time, individuals or firms are hired to provide services at a taxpayer’s home. Because the IRS requires employers to withhold taxes for employees and issue them W-2s at the end of the year, the big question is whether or not that individual is a household employee.

    Whether a household worker is considered an employee depends a great deal on circumstances and the amount of control the person hiring has over the job and the hired person. Ordinarily, when someone has the last word about telling a worker what needs to be done and how the job should be done, then that worker is an employee. Having a right to discharge the worker and supplying tools and the place to perform a job are primary factors that show control.

    Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and others in the taxpayer’s neighborhood. The gardener supplies all tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee and the person hiring him/her isn’t responsible for paying employment taxes. The same would apply to the pool guy or to contractors making repairs or improvements on the home.

    Contrast the following example to the self-employed gardener described above: The Smith family hired Lynn to clean their home and care for their 3-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done, explained how the various tasks should be done, and provided the tools and supplies; Mrs. Smith, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her and issuing her a W-2 for the year.

    If an individual you hire is considered an employee, then you must withhold both Social Security and Medicare taxes from the household employee’s cash wages if they equal or exceed the $2,000 threshold for 2016.

    The employer must match from his/her own funds the FICA amounts withheld from the employee’s wages. Wages paid to a household employee who is under age 18 at any time during the year are exempt from Social Security and Medicare taxes unless household work is the employee’s principal occupation.

    Although the value of food, lodging, clothing or other noncash items given to household employees is generally treated as wages, it is not subject to FICA taxes. However, cash given in place of these items is subject to such taxes.

    A household employer doesn’t have to withhold income taxes on wages paid to a household employee, but if the employee requests such withholding, the employer can agree to it. If income taxes are to be withheld, the employer can have the employee complete Form W-4 and base the withholding amount upon the federal income tax and FICA withholding tables.

    The wage amount subject to income tax withholding includes salary, vacation and holiday pay, bonuses, clothing and other noncash items, meals and lodging. However, meals are not taxable, and therefore they are not subject to income tax withholding if they are furnished for the employer’s convenience and on the employer’s premises. The same goes for lodging if one additional requirement applies—that the employee lives on the employer’s premises. In lieu of withholding the employee’s share of FICA taxes from the employee’s wages, some employers prefer to pay the employee’s share themselves. In that case, the FICA taxes paid on behalf of the employee are treated as additional wages for income tax purposes.

    Although this may seem quite complicated, the IRS provides a single form (Schedule H) that generally allows a household employer to report and pay employment taxes on household employees’ wages as part of the employer’s Form 1040 filing. This includes Social Security, Medicare, and income tax withholdings and FUTA taxes.

    If the employer runs a sole proprietorship with employees, the household employees’ Social Security and Medicare taxes and income tax withholding may be included as part of the individual’s business employee payroll reporting but are not deductible as a business expense.

    Although the federal requirements can generally be handled on an individual’s 1040 tax return, there may also be state reporting requirements for your state that entail separate filings.

    If the individual providing household services is determined to be an independent contractor, there is currently no requirement that the person who hired the contractor file an information return such as Form 1099-MISC. This is so even if the services performed are eligible for a tax deduction or credit (such as for medical services or child care). The 1099-MISC is used only by businesses to report their payments of $600 or more to independent contractors. Most individuals who hire other individuals to provide services in or around their homes are not doing so as a business owner.

    Please call Dagley & Co. if you need assistance with your household employee reporting requirements or need information related to the reporting requirements for your state.

    Image via. public domain

    Continue Reading
  • Ways To Deduct Health Insurance

    1 February 2016
    410 Views
    Comments are off for this post
    sick-card-491715_960_720

    In the wake of the “Affordable Care Act,” one of the largest and most substantially rising expenses are health insurance premiums. Although the cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions, only the amount of total medical expenses that exceed 10% of the taxpayer’s adjusted gross income (AGI) is deductible. The 10% limitation is reduced to 7.5% through 2016 where a taxpayer or spouse (if any) is age 65 or over as of the end of the year. Prior to the increased limitation imposed by the “Affordable Care Act,” the limitation was 7.5% for everyone.

    The purpose of this article is twofold: first, to remind you what insurance can be included as a medical deduction, and second, to inform you of an alternate means of deducting health insurance for certain self-employed individuals—a means that avoids the AGI limitation and allows for deduction without itemizing.

    Let’s start by looking at what is treated as deductible health insurance. It includes the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans: Health Care and Hospitalization Insurance, Long-Term Care Insurance (but limited based upon age), Medicare-B, Medicare-C (aka Medicare Advantage Plans), Medicare-D, Dental Insurance, Vision Insurance, and Premiums Paid through a Government Marketplace net of the Premium Tax Credit.

    However, premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. Or, if you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars.

    If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the premiums without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in the capacity of a partner and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and are includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.

    No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. This rule is applied separately to plans that provide coverage for long-term care services. Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, as long as he isn’t eligible for employer-subsidized long-term care insurance. In addition, to be treated as subsidized, 50% or more of the premium must be paid by the employer.

    This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.

    If you have any questions related to deducting health insurance premiums, either as an itemized deduction or an above-the-line deduction for self-employed individuals, please give Dagley & Co. a call.

    Image via. public domain

    Continue Reading