Author Archives: support33

Shift Tax Gears on Car Donation

Are you thinking about donating a car or other vehicle to charity? If you give away the car without any strings attached, you might forfeit some extra-tax saving mileage.

Specify that the charity must use your vehicle in furtherance of its tax exempt-purpose. As a result, you can deduct an amount equal to the vehicle’s fair market value (FMV), subject to all the usual rules for deducting charitable donations.

Conversely, if you make no specific provisions and the charity sells the vehicle and collects the proceeds, your deduction is generally limited to the resale price. And, if the charity is inclined to simply “get what it can” for the vehicle, it’s likely to fetch a bargain-basement price. Therefore, you lose tax dollars on the deal.

At one time, you could deduct the full FMB of a vehicle you donated to a qualified charitable organization, even without imposing any special conditions. But not anymore. Under current law, if the vehicle’s value exceeds $500 and the charitable organization sells it, your deduction is limited to the amount received in the sale. (For a car valued at $500 or less, the deduction is equal to the lesser of $500 or the FMV.)

For example, if you donate a car with a Kelly Blue Book value of $10,000 and the charity subsequently sells it for $8,000, you can deduct just $8,000 not $10,000.

Note: If the charity materially improves the vehicle – such as repairing dents or installing new features like a nav system – or significantly uses the vehicle and certifies its use, you can still deduct the FMV.

In any event, be aware of these requirements when you donate a vehicle to charity:

  • The charity that received the donated car must be an IRS approved charitable organization qualified to receive deductible contributions.
  • The deduction is strictly limited to the vehicle’s FMV. That doesn’t mean the highest value listed in a used car buyer’s guide for the make and model without regard to other factors such as the vehicle’s condition.
  • The donation and the FMV must be properly documented. The recordkeeping requirements depend on the value claimed and the total amount of your annual charitable donations.

Where can you donate a car to charity? There are many organizations that advertise car donation programs. But it can’t hurt to do a little more research to find one that meets your needs. Above all, make sure that the organization qualifies as an IRS approved 501(c)(3) organization for tax deduction purposes.

Remember: You can only claim a charitable deduction for the donation of a vehicle if you itemize deductions on your personal tax return. Thus, you won’t get a deduction if you claim the standard deduction. (For 2020, a limited deduction of up to $300 in monetary contribution is available to non-itemizers.)

Finally, you must observe the usual record keeping requirements for charitable donations. Obtain a contemporaneous written acknowledgement from the charity.

If you’re claiming a deduction for property donations above $5,000, you will also need an independent appraisal.

Small Business Tax Strategies
October 2020

Rescue Tax Loss for Worthless Stock

Do you own stock that has become worthless in these uncertain times? At least you may be able to salvage some tax relief on your 2020 return.

Prepare to claim a capital loss for the worthless stock. The loss can offset capital gains racked up this year plus up to $3,000 of highly taxed ordinary income.

However, you must be able to establish that the stock is truly “worthless” in the year it’s claimed as such on a return.

To claim a deduction for worthless stock, you must show that the stock had value in the previous year and that an identifiable event – such as filing for bankruptcy – caused its value to drop to zero. A steep decline in the value of the stock, by itself, isn’t sufficient. The stock must have no recognizable value.

A worthless stock is treated as if it had been sold on the last day of the tax year. Thus, the resulting loss is either short-term or long-term for stock held longer than one year. You can claim the loss for worthless stock for the year it becomes worthless even if you sell it for a nominal amount the following year. If you can’t determine that the stock has become worthless until a subsequent year, file an amended return for the year it actually becomes worthless. Claim the loss in the earliest year it’s reasonable to do so.

If you currently own stock that is on the verge of becoming worthless, you can sell it now to trigger a tax loss without having to worry about the worthlessness issue.

Caution: Don’t sell the stock to a “related party” like a child or a corporation in which you own stock. If you do, the loss will be disallowed.

If you are stuck with trying to establish a loss due to worthlessness, keep all relevant records in case the IRS ever challenges your loss deduction. This includes financial statements indicating the date when the stock became worthless. Depending on your situation, you may have to go back in time.

Tip: The usual three-year period for filing an amended return is extended to seven years for worthless stock losses.

Small Business Tax Strategies
October 2020

New Form Used to Report COVID-19

Filers get a new form to report a COVID-19 retirement-related easing. The 10% fine on pre-age 59 ½ payouts from retirement accounts in 2020 is waived on up to $100,000 of Coronavirus-related distributions from 401(k)’s, 403(b)’s and IRA’s. Tax on these distributions can be paid over three years, beginning with the payout year, unless the individual elects to pay the tax all at once. Amounts recontributed within the three-year time span won’t be taxable all at once. They will be treated as rollovers.

Individuals use Form 8915-E to spread the tax on these payouts. Income tax paid on distribution that is later rolled over within three years of the payout can be recovered by filing an amended return on Form 1040-X.

Small Business Tax Strategies
October 2020

Combine Benefits with Roth 401(k)

With a 401(k) plan, you can accumulate a tidy nest egg for retirement without any current tax erosion. Another retirement planning option, the Roth IRA, provides tax-free distributions in the future. But you can combine the best of both worlds.

Strategy: Switch your regular 401(k) account to a Roth 401(k). If your company doesn’t offer this option, ask them to get the ball rolling.

Assuming you meet all the tax law requirements, the distributions you receive in retirement will be completely exempt from tax.

This doesn’t have to be an all-or-nothing proposition. For instance, you can keep some of the funds in a regular 401(k) account. Alternatively, you might move all the funds to a Roth 401(k) over several years, thereby reducing the overall tax bite.

As with a regular 401(k) plan, contributions to a Roth 401(k) account grow on a tax-deferred basis. However, unlike a regular 401(k) elective deferrals aren’t made with a pre-tax dollars. The amounts contributed to the plan are subject to current tax.

With a Roth 401(k) plan, the tax-saving benefits come on the back end: Qualified distributions are 100% federal-income-tax-free. This includes distributions made five years after setting up the Roth 401(k) are taxable at ordinary income rates, now reaching as high as 37%.

The contribution limits for traditional 401(k) and Roth 401(k) plans are the same. For 2020, you can contribute up to $19,500 to either type of account ($26,000 if age 50 or over).

Note that Roth 401(k)s have an edge over Roth IRAs because there are no income limits on eligibility to make contributions. For 2020, availability to make Roth IRA contributions is phased out for single filers with modified adjusted gross income (MAGI) between $124,000 and $139,000 and between $196,000 to $206,000 of MAGI for joint filers. But you can contribute to a Roth 401(k) regardless of your income level!

Another point: Under a recent tax law change, you can convert 401(k) funds to a Roth 401(k) account at any time. Previously, you had to be eligible for a distribution, usually upon attaining a certain age or leaving the company. Thus, you have additional opportunities for inservice conversions.

Of course, you still must pay income tax in the year you convert, but it could be well worth it if you expect to be in a higher tax bracket in retirement. Factor in state income taxes, too.

Example: Suppose you are age 40, you’re in a combined 25% tax bracket and you have $200,000 in your regular 401(k). For simplicity, say you convert the entire $200,000to a Roth 401(k) in 2020 and you pay an effective tax rate of 28%. (The actual amount will depend on other variables.) Thus, you owe tax of $56,000 on the conversion. Assume that the Roth 401(k) grows to $1 million by the time you’re ready to retire in your sixties. No matter how much you withdraw from the Roth 401(k) during retirement, you’ll pay zero federal income tax on the distributions.

Now compare that to the outcome if you accumulate $1 million in regular 401(k) and you end up in a combined 35% tax bracket in retirement. In the unlikely event you pull out the entire amount in lifetime distributions, you would pay a whopping $350,000 in tax.  A more likely scenario: You might withdraw half and pay tax of $175,000 – still $119,000 more than tax triggered by the conversion. Also, consider the possibility that tax rates will be even higher by the time you’re ready to start taking withdrawals in retirement.

On the flip side, switching to a Roth 401(k) may not make sense if you’ll be retiring soon and you expect to be in a lower tax bracket in the future.

You can avoid mandatory annual distributions after age 72 with a Roth 401(k), but not with a regular 401(k).

Small Business Tax Strategies
October 2020

4 Ways to Max Out Biz Gifts

As a small business owner, you may give gifts to clients and customers to show your appreciation. Unfortunately, however the deduction for business gifts is limited to a paltry $25 per recipient per year.

Learn all the tax angles. Then, by planning ahead, you can get the most bang for your bucks.

Here are four ways to maximize the tax benefits.

  1. Give gifts to a business entity. The $25 limit only applies to gits made, either directly or indirectly, to a person. It doesn’t apply to gifts made to a corporate entity for the use of its employees.
  2. Reward a married couple. If you have a business relationship with both spouses, you can double up on the gift. In this case, the allowable limit is $50.
  3. Don’t sweat the small stuff. Normally, strictly incidental costs don’t figure into the $25 limit. For example, the costs of custom engraving jewelry or packing, shipping or insuring a gift are deductible without taking the $25 limit into account.
  4. Be generous to employees. Although gifts to employees may be limited by certain other rules, an employer is generally allowed to deduct the full cost of gifts made to its employees. Note: Such gifts may be treated as taxable compensation to employees.

In the past, a business may have been able to boost deductions by treating certain business gifts, such as tickets to an event, as deductible entertainment expenses rather than business gifts (subject to the 50% deduction limit for business entertainment expenses). But the Tax Cuts and Jobs Act (TCJA) eliminated deductions for most business entertainment expenses, beginning in 2018.

This isn’t a big-ticket item, but it adds up at the end of the year.

Small Business Tax Strategies
October 2020

Study the New Breaks for Student Loans

The tax law provides a limited deduction for interest paid on student loans. But some borrowers may get special treatment this year.

The Coronavirus Aid, Relief and Economic Security (CARES) Act grants more leeway to certain taxpayers. They don’t even have to make any payments on qualified student loans until October 1, 2020.

Generally, the CARES Act provisions for student loans apply to direct loans and Federal the U.S Department of Education (ED).

The annual deduction for student loan interest is limited to the first $2,500 of interest paid for qualified expenses. This includes tuition and fees; room and board; books, supplies and equipment; and other necessary expenses, such as transportation.

Certain requirements must be met. Notably, the deduction for student loan interest is phased out, based on income levels. But now the CARES Act provides the following benefits:

  • Payments on non-defaulted direct loans and FFEL loans currently owned by the ED are suspended from March 13, 2020 through September 30, 2020.
  • There is no interest accrual while the loan payments are suspended.
  • For credit reporting purposes, any payment that has been suspended under the new law is treated as if the borrower had made a regularly scheduled payment.
  • Involuntary collection of defaulted direct loans and FFEL loans is suspended until September 30, 2020.
  • If a borrower is forced to withdraw from school due to the COVID-19 pandemic, the Secretary of Education must cancel the direct loan associated with the payment period.

Finally, the CARES Act also includes a new variation of a popular employee fringe benefit. With a regular “educational assistance plan” (EAP), the first $5,250 of benefits paid to an employee is exempt from tax. The new law extends this EAP rule to payments on student loans through the end of 2020.

Small Business Tax Strategies

July 2020

Required Minimum Distributions for 2020

IRS provides welcome relief on required minimum distributions for 2020. Since we wrote that the stimulus law enacted on March 27 waived RMDs from IRAs and workplace retirement plans for 2020, we have received many questions. The most common query involves IRA and plan distributions already taken out in 2020.

People have until August 31 to return January through June payouts to the IRA or plan, such as a 401 (k) and treat the contributed funds as a tax-free rollover, IRS says in new guidance. It also waives the one-rollover-every-12-months trap for IRA owners who took RMD monthly installments in 2020. And rollovers of RMDs from inherited IRAs are permitted for this purpose.

More people qualify for a COVID-19 retirement-account-related easing. The 10% penalty on pre-age 59 ½ payouts from retirement accounts is waived on up to $100,000 of coronavirus-related distributions in 2020 from 401(k)s, 403(b)s and IRAs. Federal income tax on these distributions can be paid over three years, beginning twitch the payout year, unless the individual elects to pay the tax all at once. Additionally, amounts contributed to the account within the three-year time will not be taxable. They will be treated as rollovers, and any income tax that was paid will not be taxable. They will be treated as rollovers, and any income tax that was paid on the distribution can be recovered by filing an amended return on Form 1040X.

New IRS rules expand the definition of a corona-virus-related distribution. It covers payouts to account owners if they or their spouses were laid off or furloughed, saw work hours cut or less pay, had a job offer rescinded or work start date delayed, or had child care issues, all because of COVID-19. Also qualifying are distributions to people who own or operate a business that closed or reduced hours in the pandemic.

Remy Would Like You to Know

A client asked him this question: Can I deduct my dog’s veterinarian expenses as medical expenses? The answer is a resounding “no.” But that does not mean that you cannot derive some tax benefits from costs associated with your pooch.

Scour your records to find pet-related expenses that may qualify for tax breaks. It might be more common than you think.

Here are four prime examples:

  1. Unleash a deduction. Although you can’t deduct vet expense as medical expenses, you may write off costs, subject to the usual limits based on adjusted gross income, if you (or a family member) need a guide dog to help with your vision or hearing. This may include grooming expenses and veterinary care that is necessary to ensure the dog can perform its duties. Similarly, if you have been diagnosed with a physical or mental condition that benefits from a trained therapy animal, those costs may also count as medical expenses. The pet must be certified as treatment for a specific diagnosed illness or medical condition.
  2. Keep taxes at bay. Does your business have a sign warning visitors to beware of the dog? You may have found that keeping an intimidating breed at the place of business overnight is a successful deterrent to theft. In this case, you may deduct certain costs as “ordinary and necessary” business expenses, including items like food, training, and veterinary bills. Keep good records of business activities.
  3. Seek tax shelter. Perhaps you volunteer to spend time at an animal shelter and have even adopted a dog or a cat that would have otherwise been euthanized. As a result, you may be able to deduct unreimbursed charitable-related expenses if you itemize. For instance, if you foster a pet, you can write off costs for food, supplies and vet visits. And do not forget to add travel cost to and from the animal shelter. In lieu of actual vehicle expenses, you can deduct 14 cents per mile.
  4. Show some trust. A pet Trust is one way you may be able to ensure your pet is cared for after you are gone. Typically, the owner sets up a trust and designates a trustee (e.g., a family member or friend) to hold assets for the benefit of the pet. Then the Trustee makes payments from the trust as needed. If handled properly, it should not create any adverse estate tax consequences. Check into the applicable state laws relating to this issue. 

Small Business Tax Strategies
June 2020

Did You File a Paper Tax Return?

Checking on the status of a paper return you filed? You need lots of patience. Because of limited IRS staffing, there are significant delays in the processing of paper returns requesting refunds that were filed in March or later, the Service says. IRS is advising taxpayers not to call about the status of filed return or refund and is warning them not to file a second return. Essentially, it is a waiting game.

There is some good news. IRS will pay interest on delayed tax refunds. For returns filed by July 15, the interest will run from April 15 through the refund date. The Service says that it may send out refunds and interest payments separately.

The Kiplinger Tax Letter
June 2020

529 College Savings Plans

It’s summer, the weather’s getting hotter. And many families are thinking about college. Some have kids or grandkids who just graduated from high school and are on their way to college in August or September. Others have younger children or grandchildren and want to stash away a nest egg to help fund their future higher education expenses.  529 plans are a great college saving option. And surprise…they are not just for college.  Let’s focus on the ins and outs of these plans.

Contributions to 529 plans are treated as gifts to the beneficiary, but with a special twist. You can shelter from gift tax up to $75,000 in contributions per beneficiary this year ($150,000 if your spouse joins in). If you contribute the maximum, you will be treated as gifting $15,000 (or $30,000) to that beneficiary in 2020 and in each of the next four years…2021 through 2024.

You can’t deduct contributions to 529 plans on your federal tax return. But many states give residents a deduction or credit on state tax returns for payments made to their state’s 529. Maximum deductions and credits vary by state.

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers, and internet access. Funds can be withdrawn tax-free to cover off-campus housing, food, and utilities, but the payout can’t exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this from the school’s website.

What if the beneficiary decides not to go to college? There are options for the unused 529 funds. Distributions can be taken tax-free to pay for fees, books, and supplies for certain apprenticeship programs. Or you can roll over the money in the child’s account to a 529 college savings plan for another family member.

529 plans can help pay for K-12 education as well. Tax-free payouts of up to $10,000 per student per year can be taken from the 529 accounts to pay tuition for elementary and secondary private and parochial schools.  Note that the $10,000 cap doesn’t apply to 529 plan withdrawals to pay for college. The state tax treatment of distributions from 529 plans for K-12 education doesn’t always follow federal law.  Nonconforming states include California, Minnesota, Montana, New York, Oregon, and Vermont. Make sure to check the tax implications in your state.

You can also use up to $10,000 total in 529 funds to pay off college debt.

Keep this rule in mind if you use 529 funds for your kids’ education. And the money is refunded because the school closes for COVID-19 concerns.

The tax law waives tax and penalties if after a distribution is made from a 529 account, the student gets a refund from the school. To get relief, you must redeposit the funds into a 529 account with the same beneficiary within 60 days of receiving the refund.

The Kiplinger Tax Letter
June 2020