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“Taxing” is a word synonymous with “onerous” and “wearing.” Bond Beebe, Accountants & Advisors, have created a user friendly blog called “It’s Taxing” to inform and educate our clients and business associates on timely topics related to tax, estates, accounting and finance. We hope our blog answers your questions and alleviates the heavy burden and anxiety related to understanding complicated tax laws and related matters.
Just in time for year-end tax planning, the Senate passed the tax extenders bill by vote of 76 to 16 on Tuesday, December 16. As discussed in our previous post, this bill includes many previously expired tax provisions that will be extended through December 31, 2014. The bill will be sent to the President for his signature and is expected to be signed into law quickly.
This time of year many individual taxpayers are seeking ways to reduce their 2014 tax bill with April right around the corner. It is no secret tax rates have increased beginning January 1, 2013 leaving some with an uncomfortable reality last April. Plus, many previous beneficial tax provisions have expired on December 31, 2013 and without an extension by Congress*, tax preparers and clients alike are left searching for alternatives to reduce their tax liabilities.
Rest easy, there is one tax planning strategy that can realize the appreciation, increase your itemized deductions and reduce your tax bill all at the same time. Taxpayers are eligible to take a charitable deduction for contributions of long term capital gain property to qualified charities.
Long term capital gain property would include stocks, mutual fund shares, real estate held for investment and a few other similar types of investments held longer than one year. Many people make cash contributions to their favorite charities throughout the year, but instead of cash, you could donate stock at its fair market value and accomplish a similar deduction. This planning tip is effective because it alleviates the need to sell the security in your portfolio and pay capital gains tax on the appreciation above your historical cost basis then to later make a cash contribution to the charity. In other words, you can skip the sale of the security and make the contribution of the security directly to the qualified charity. Many qualified charities are capable of receiving this type of property just as easily as the charity would receive a cash contribution.
The IRS has issued a news release (IR 2014-110) to remind taxpayers of the important tax law rules and documentation requirements that they should follow when making donations to charity.
Rules for donations of clothing and household items. To be deductible, clothing and household items donated to charity must be in good used condition or better. Clothing or household items (e.g., furniture, furnishings, electronics, appliances, and linens) 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. Be aware of this rule and the value you intend to claim before you make the donation. In practice, this is a burden that few taxpayers are willing to bear, which can result in them receiving no benefit at all. Donors must get a written acknowledgment from the charity for all gifts worth $250 or more that includes the name of the charity, date of the contribution and a description of the items contributed. In practice you should have this receipt for all donations of property. If a donation is left at a charity's unattended drop site, you should keep a written record of the donation that includes this information. It is good practice to take pictures of your items to substantiate their condition as well as their existence. Make an itemized list of your contribution and note the value of each item prior to making the donation. Receipts that have generic listings like “3 bags of clothes: $500” have been disallowed due to a lack of detail that is considered a lack of substantiation by IRS.
The IRS has issued the 2015 standard mileage rates. The new rates go into effect beginning January 1, 2015 and are as follows:
On Wednesday, the House overwhelmingly passed a bill that will extend, for one year, a package of tax provisions into 2014. Though the year is almost over, these breaks had all previously expired as of December 31, 2013, and under this bill they will be extended through December 31, 2014. There has been considerable debate over the content of this package, and whether to pass a one-year extension or two. Last week, President Obama threatened to veto a two-year extension, so there is hope that this one-year extension will work instead. If the House and the Senate pass the bill, it is likely that the President will sign it into law.
The bill covers a host of provisions typically referred to as “tax extenders” as they are temporary tax breaks that need to be renewed every year or so. Though the bill has not yet passed into law, it is worth listing out some of the major provisions. Some highlights of the bill are listed below:
Individual Provisions (many are subject to income limits)
• $250 above-the-line deduction for teacher’s classroom expenses
• employer-provided mass transit benefits are increased to equal employer-provided parking benefits
• mortgage insurance premiums allowed as a deduction
• state and local sales taxes can be deducted in lieu of state and local income taxes
• tuition and fees can be deducted above-the-line
• tax-free distributions from IRAs directly to charities for those over 70 ½ years old
As an S-Corporation shareholder there are certain items that should be reported on your W-2 as compensation. These items are commonly either reported incorrectly or not reported at all. The good news for this year is that you still have time to call your payroll company and have these items correctly reported on the W-2. The following are two items that are often not reported correctly.
Generally, you are not allowed to withdraw money from an IRA until you reach age 59 1/2. If you do, the cash is subject to a 10% penalty in addition to tax, making early distributions potentially very costly.
If a distribution from an IRA is paid directly to you, you can avoid the related tax and penalty as long as you deposit the distribution in an IRA or other retirement plan within 60 days. One key component of this rule is that this type of rollover can only be done once within the same 12-month period.
In the past, IRS took the position that the annual limit applied to each IRA account. Thus, taxpayers with several IRA accounts could roll each one over in the same 12-month period without penalty if it was properly done within the 60-day period.
However, earlier in 2014, as a result of the Tax Court opinion in “Bobrow v. Commissioner,” the IRS changed its position on this type of rollover. Now the one-rollover-per year rule will apply to each taxpayer, instead of each IRA. In essence, if you own several IRA accounts you will only be able to roll over one account each year and still avoid penalties. Furthermore, if you make more than one IRA rollover in the same year, depositing the funds into another IRA will be considered an excess contribution, which is assessed an additional 6% penalty on top of the initial tax and 10% penalty.
Over the past several months, the IRS has issued several consumer alerts in response to telephone scam artists claiming to represent IRS agents. Some of these callers use sophisticated and threatening tactics in an effort to persuade you to provide sensitive information. While receiving one of these phone calls can be frightening, it is important to remember a few things about how these intimidation tactics differ from common IRS procedures.
The IRS will never call to demand immediate payment of taxes, nor will they call without having first mailed you a bill. The IRS will never require you to use a specific method of payment (such as a prepaid debit card), nor will they request credit or debit card information over the phone. Last, they will never threaten to utilize local law enforcement in order to persuade you to provide information.
If you have received a phone call from someone claiming to represent the IRS and using any of the above tactics, there are two ways to report the incident. You may contact the Treasury Inspector General for Tax Administration at 1-800-366-4484 or at www.tigta.gov. You can also file a complaint with the Federal Trade Commission using the FTC Complaint Assistant. Choose “Other” and then “Imposter Scams,” and include the words “IRS Telephone Scam” in your complaint.
If you believe the phone call may be legitimate, it is important that you contact your tax advisor directly or the IRS at 1-800-829-1040 before providing any sensitive information over the phone.