When you purchase assets and use them in your business, you have several options for deducting the cost. For example, you may choose to write off the full cost using Section 179, an alternative that lets you expense up to $500,000 of new and used equipment purchases. You can also use “bonus” depreciation to write off up to 50% of the cost of new assets with a life of 20 years or less. In both cases, you apply regular depreciation methods to the remaining value of the assets. The best way may not be a single choice, but rather a combination that optimizes your tax benefit.
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Are you planning to itemize on your 2015 federal income tax return? If so, you can claim a deduction for taxes paid. According to IRS statistics, taxes are the most frequently claimed itemized deduction, as well as the largest. But what kind of taxes can you deduct on your personal return?
State and local income taxes or general sales tax. You can choose whichever gives you the most benefit.
Real estate taxes. Deductions include taxes you pay on your home or other real property you own (including property owned in a foreign country). Remember to check closing statements when you buy or sell property. You can claim the portion of current real estate taxes you’re responsible for. However, if you agree to pay delinquent taxes the seller owed at the time of closing, that expense is considered part of your basis in the property.
Personal property taxes. These taxes are imposed annually on the value of property other than real estate. Certain motor vehicle registration fees fit this description.
Foreign income taxes. Caution: Instead of deducting these taxes, you have the option of taking a credit, which will reduce your tax bill dollar-for-dollar and may offer more benefit.
Federal estate tax. If you inherit certain assets and are required to report the income from those assets on your personal return, you may be able to deduct a portion of the federal estate tax paid.
Some taxes, such as self-employment taxes, are deductible elsewhere on your return. Other taxes are not deductible at all. Examples include marriage licenses, gift taxes, and Medicare taxes (including the 3.8% net investment income tax). Feel free to contact us if you have questions about the deductibility of a tax you paid during the year, or if you received a refund of a tax you deducted in a prior year.
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When it comes to deducting charitable gifts, all donations are not created equal. As you file your 2015 return and plan your charitable giving for 2016, it’s important to keep in mind the available deduction:
Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.
Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held more than one year.
Tangible personal property. Your deduction depends on the situation:
• If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis.
• If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), you can deduct the fair market value.
Vehicle. Unless it’s being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.
Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.
Finally, be aware that your annual charitable donation deductions may be reduced if they exceed certain income-based limits. If you receive some benefit from the charity, your deduction must be reduced by the benefit’s value. Various substantiation requirements also apply.
If you have questions about how much you can deduct, let us know.