Tax Strategies

When Do You Donate A Car?

November 8, 2017 By Twila VanLeer

Car Donation — Remember that you must itemize deductions if you want to claim a tax benefit.

There are several reasons why you want to donate a car to charity when it has outlived its usefulness to you. But to maximize the tax benefit, you need to discuss issues before calling the charity to which you intend to donate.

Remember that you must itemize deductions if you want to claim a tax benefit. You could itemize even if the donation is your only deduction, but that may not be the best choice.

Consider the math: If you are in the 28 percent tax bracket and the allowable deduction for the vehicle, you will save $280 in taxes. If you are in the 15 percent bracket, the same allowance will net you just a $150 reduction in your taxes.

If the car donation is your only deduction, you would fare better claiming the standard deduction. The only way in which a car donation improves your deductions is if you have a number and their total, including the car, exceeds the standard deduction.

The donation must be to a charity that qualifies. It must be recognized by the IRS as a 501c3 or a religious organization. To determine if the organization you want to donate to meets these specifications, call the IRS toll-free number, 877-829-5500.

Fair market value is defined by the IRS as “the price a willing buyer would pay and a willing seller accept for the vehicle.” Under current IRS rules, there are very specific conditions under which you can claim a deduction at fair market value: If the charity auctions the vehicle for $500 or less, you claim either the fair market value or $500,whichever is less; If the charity plans to make “significant intervening use of the vehicle” you can claim fair market value; If the charity says it intends to make a “material improvement,” rather than just routine maintenance before disposing of it , you can claim fair market value; or if the charity gives or sells the vehicle to a needy person at a price significantly below fair market value, you can claim the whole amount.

Automotive website Edmunds offers an “Appraise Your Car” calculator to help you determine fair market value. IRS Publication 4303 also offers a vehicle pricing guide.

Only about 5 percent of donated vehicles meet the stringent requirements for use by a charity. About a third are junked and the rest are auctioned to benefit the charity.

You may be able to give a more substantial amount to the charity if you sell the vehicle and donate the cash. The goal is to maximize your tax deduction, so consider the possibilities and then make the move.

Ways to Save On Taxes

November 3, 2017 By Twila VanLeer

There are some entirely legitimate tax maneuvers that can save you money when it is tax time.

The first involves state-based college savings plans. Those plans are best if you have a long time to let your contributions grow. But even if your student is about to head off to college, you may be able to wring a last-minute benefit. Most states offer deductions or credits on your taxes if you are saving for higher education, and they don’t limit the amount of time you have to build your fund. You can put money in and take it out again shortly to reap the benefit. A few states require that you have the money in the education account for at least a year before qualify for the deduction. Contact your plan or go to SavingForCollege to get the specifics.

Health Savings Accounts, designed to help pay the consumer’s share of medical costs, also have a built-in tax break. The contributions are deductible as you pay them and stay tax-deferred as the account builds; withdrawals are tax-free as long as they are used for the qualified medical expenses. Some experts suggest a health savings account even if contributions to a 401(k) fall short of the full amount matched by the employer. The trick, though, it to leave the health savings account alone so it can grow the maximum amount possible. That leaves you to pay deductibles and copays out of pocket. Do the math and see where the break-even point comes.

Roth IRAs give you the ability to withdraw money tax-free in your retirement. That’s a huge advantage if you have kept your IRA intact and let it grow through compounding. There is a limit, however, on IRAs. The limit is $133,000 for an individual (as of 2017) and $196,000 for married couples filing jointly. Taxpayers can get around those limits by contributing first to a traditional IRA and then converting to Roth IRAs, since there is no limit on Roth conversions. Income taxes generally apply to conversions, but the bill could be low, even zero, if you don’t take a deduction and don’t have much money in IRAs outside the one being converted. The IRS bases the tax on a conversion on the proportion of the taxpayer’s IRA holdings that have not yet been taxed.

There are additional IRA manipulations you can do to maximize your tax advantage, but the maneuvering becomes more complex. A visit with a tax accountant might be advisable when he being to contemplate “mega backdoor Roths.”

On-Demand Workers: Be Aware of Tax Issues

May 1, 2016 By Twila VanLeer

Tax issues with on demand workers. — Uber workers are considered self-employed and have to set aside money for taxes.

If you make your living doing on-demand jobs, defined by the Internal Revenue Service as an “online marketplace or application that connects free lance providers with customers,” you need to be aware that Uncle Sam will tax your income.

About 10 percent of the U.S. workforce falls into this category – some 14.6 million people. It’s a business and is regulated by the same tax requirements that apply to more usual businesses.

Set Aside A Portion Of Your Income

The smart thing to do is set aside a portion of your income through the year so the April l5 deadline doesn’t catch you by surprise. For instance, people who drive for Uber or Airbnb or otherwise routinely do jobs that are on-demand, may be considered independent contractors. They are likely to receive a 1099 form reporting their income, rather than a W-2. And since there is no automatic withdrawal of taxes, the individual is responsible for keeping track and anticipating tax charges.

Self-Employment Tax

Not only are these self-employed persons responsible for routine taxes, they also may be required to pay a self-employment tax, which has been imposed by the IRS as payment for Social Security and Medicare.

Keep Track Of Possible Deductibles

Anticipating taxes should prompt on-demand workers to keep track of possible deductibles. Drivers, for instance, can deduct the costs of car washes, providing water or snacks for passengers, etc. Accurate records will be invaluable when you sit down to fill out the tax forms.

Schedule C

Schedule C is the form you need to report profit and loss from business income. SE is used to compute the self-employment tax.

Rental Income

Some people add to their income by renting out their home for special occasions. Think Super Bowl. They may realize big bucks for their efforts, but the income is taxable. A one-shot rental is not taxable, but two or more triggers taxes. If you rent your home out for 15 days or longer, you must start to report the rental income and the particulars associated with the rental, such as deductions for utility expenses, etc. That means you have to separate your own expenses from those associated with the rental.

Making estimated tax payments through the year will help fend off the shock you might experience when it comes time to file.

More information is available through Publication 334, the IRS Tax Guide for Small Businesses. Publication 527 focuses on rental income and expenses and Publication 463 offers guidelines on the use of your vehicle for business purposes.

Make The Tax Return Count: Save It

April 24, 2016 By Twila VanLeer

A higher percentage of people are choosing to put their refund into savings.

For a short time each spring, millions of Americans have a fleeting sensation of being rich. They have their tax return in hand and must decide how best to use it. More than ever, according to Prosper Insights, they are opting to put it in the bank.

Refunds Used To Improve Financial Health

“Americans this year see refund season as a time to improve their financial health. Money saved is spending potential down the road,” said Matthew Shay, president of the National Retail Federation, which sponsors the survey.

Plans For Return

The NRF’s annual Tax Returns Survey indicated that 65.5 percent of those contacted expected a return and some 49.2 percent of those had plans to tuck the return into their savings as a means to improve their overall financial health. That is the highest percentage who are of that mindset since the NRF began conducting the survey. Other options include paying down debt or making large necessary purchases. Some 22.4 percent said they would use the return for everyday expenses and 8.3 percent looked forward to an annual splurge that they have had to bypass for the major part of the year.

Young Adults More Likely To Save

In the 18-24-year age group, the percentage of those wanting to save the return is even higher at 57.3 percent. The percentage dips to 52.3 percent in the 25-34-year age group, but that’s still more than half. These younger workers apparently see the tax windfall as a chance to build savings without diminishing their usual income.

Plans For Filing

With the mid-April deadline fast approaching, it is evident that the majority of Americans, 66.9 percent, are filing online. Almost 40 percent are preparing their own with the help of computer software. Only 14.2 percent said they have filed manually or plan to do so. Only 21.4 percent have hired or will hire a professional to get the job done, while 16.1 percent have called on a friend or relative to help with the job.

Handling Tax Audits Successfully

April 27, 2015 By Sherry Tingley

Don't ignore tax audit notifications. Be prepared to face an audit. — Don’t ignore tax audit notifications. Be prepared to face an audit.

Tax Audit? Don’t Panic

Well, the annual tax mania is over once again. Now you can sit back and relax. Unless, of course, you are one of those that the IRS singles out for an audit. Less than 1 percent of the tax-paying public gets that experience, but it can be unnerving.

Audits are what have given the tax agency its ogre-ish reputation and generated visions of torture and merciless browbeating by suit-clad agents.

Here’s how to address an audit if it happens:

To begin with, an innocent looking letter from the IRS, arriving by U.S. mail, should be taken seriously. Don’t ignore it. Failure to respond almost always triggers escalating pressure from the taxing agency. Better to have your tax accountant respond, if possible. Experts in such matters suggest you never try to deal with an audit on your own. Not many run-of-the-mill taxpayers have the expertise to deal with the figures and the myriad laws that surround them.

Often, the experienced tax experts can spot the difficulty in a return at a glance and resolve it without a hassle. Simply determining which office within the IRS has initiated the audit will reveal the problem.

The experts advise that you never speak to the IRS representatives yourself.

Be prepared to provide whatever substantiating information is necessary to resolve issues. Keeping detailed records throughout the year is the starting point. Small businesses, in particular, need to be certain that personal and business finances are not intertwined.

The statute of limitations on an audit is three years, although the IRS can request an audit up to six years if there is reason to believe there have been substantial misrepresentations on the return. That means you must keep the relevant materials for at least that long. Receipts, pay stubs and other items used in preparing your return should be safely filed away until there is no longer reason to believe you might be audited. Most experts suggest a seven-year period before you toss the information.

The information you provide in response to an audit is filed via Form 4564. It can be delivered to a tax agency in person or mailed. Ask for a face-to-face meeting between your representative and an agent if you feel it is necessary to explain particular items in your return. Mail audits can be time-consuming.

How long an audit takes depends on the complexity of your tax situation – and how many other taxpayers the auditor is dealing with. Generally, a taxpayer has 30 days in which to respond after receipt of an audit notice, and the process then proceeds depending on the particulars. If the conclusion is that you did not pay enough taxes, payment plans can be set up, if necessary. If you don’t feel satisfied with the result of your audit, you can ask for a review.

And there is always the possibility that the audit will find that the government has overcharged you. A little sweetening of the return is ample payment for the consternation you may feel when the word “audit” pops up.