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.
If there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 return. To max out your education-related breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return. Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.
Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction. How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however.
To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact us.
Are you part of the approximately 68% of taxpayers who IRS statistics say claim the standard deduction instead of itemizing? If so, you can still deduct some expenses on your 2015 federal income tax return.
● Individual retirement account (IRA) contributions – For 2015, you may qualify to deduct up to $5,500 in contributions to a traditional IRA. That increases to $6,500 if you’re age 50 or older. Income limitations may apply in some cases. The same limits apply to Roth IRA contributions, which are not deductible.
● Health Savings Account (HSA) contributions – HSAs are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you withdraw the money tax-free to pay unreimbursed medical expenses. The HSA contribution limit for 2015 is $3,350 for individuals and $6,650 for families. You can contribute an additional $1,000 when you’re age 55 and older.
● Student loan interest and tuition fees – Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents. For 2015, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
● Self-employment deductions – If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
● Other deductions – Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Educators can deduct up to $250 for classroom supplies purchased in 2015.
Contact our office for more information on these and other deductions you may be entitled to claim on your 2015 return.
Did you buy equipment or other business assets during 2015? Here are the current rules for maximizing your tax deduction.
● Section 179. Under code Section 179, you can expense many types of otherwise depreciable property used in your business. Both new and used assets qualify for Section 179.
For 2015, the maximum amount you can expense is $500,000 of the cost of qualifying property you began to use during the year. The $500,000 is reduced when the cost of the property you purchased during the year exceeds $2,000,000. Your deduction may also be limited by the amount of your business income.
Planning tip: The Section 179 amounts are now permanent. Beginning in 2016, both will be adjusted annually for inflation.
● Bonus depreciation. In addition to Section 179, you can benefit from the 50% bonus depreciation deduction for tangible personal property that you purchased and placed in service during 2015. Bonus depreciation is generally available for new assets that have a useful life of 20 years or less.
Planning tip: The December “extenders” tax law made bonus depreciation available through 2019, though the deductible amount will decrease in 2018 and 2019.
Please contact us about the latest depreciation breaks available to your business.
Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017.
The break had expired December 31, 2014, for most assets. So the PATH Act may give you a tax-saving opportunity for 2015 you wouldn’t otherwise have had. Many businesses will benefit from claiming this break on their 2015 returns. But you might save more tax in the long run if you forgo it. What assets are eligible
For 2015, new tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified leasehold-improvement property.
Acquiring the property in 2015 isn’t enough, however. You must also have placed the property in service in 2015. Should you or shouldn’t you?
If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.
But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2015, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re in a higher bracket. We can help
If you’re unsure whether you should take bonus depreciation on your 2015 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.
You might believe a “dependent” is a minor child who lives with you. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you. Here’s an overview of the dependency exemption. Exemptions and your taxable income Each dependent deduction is worth $4,000 on your 2015 federal income tax return, and reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2015, the phase-out begins at $309,900 when you’re married filing jointly and $258,250 when you’re single. Definition of a dependent A dependent is a qualifying child or a qualifying relative. While there are specific rules, very broadly speaking, a dependent is someone who lives with you and who meets several tests, including the support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply. Who can’t be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.
For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.
Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.
Today it’s becoming more common to work from home. But just because you have a home office space doesn’t mean you can deduct expenses associated with it.
If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.
Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space. A valuable break
If you are eligible, the home office deduction can be a valuable tax break. You may be able to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
Or you can take the simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.
For employees, home office expenses are a miscellaneous itemized deduction. This means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI).
If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income.
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact us for more information.
What supporting documentation do you need to claim charitable deductions on your federal income tax return?
In general, you can support monetary contributions of any amount with a cancelled check, credit card statement, proof of payroll deduction, or a receipt from the charity. The paperwork must show the organization’s name and the amount and date of your contribution.
When you contribute cash of $250 or more, get a written acknowledgement from the charity. The receipt must show the name of the charity, the date of your donation, and the amount donated, as well as a description and the estimated value of any nondeductible item (such as a book or dinner) provided to you.
For property donations, keep copies of support for the value you claimed. The allowable deduction for a property donation is generally limited to the lesser of cost (or other basis) or fair market value. That means you’ll need records showing what you paid for the item, as well as support for the current value. For example, you might use ads from second-hand stores or consignment shops to determine the fair market value of donated clothing and household items.
Be aware that the higher the value of a property donation, the more support you need. When you donate an item with a value under $250, ask for a receipt from the charity showing the organization’s name, the date and location of the contribution, and a description of the property. For items valued up to $500, the receipt also needs to include a statement indicating whether you were given any goods or services in exchange for your contribution. In addition, the receipt must provide a description and estimated value for those goods or services. If you donate property with a value between $500 and $5,000, your paperwork must show how and when you got the property and its cost or other basis. Items valued over $5,000 generally need a written appraisal from a qualified appraiser.
Additional requirements apply when you donate property that has appreciated in value. Call us for more information.
1. Check whether your children need to file a 2015 tax return. They’ll need to file if wages exceeded $6,300, self-employment income was over $400, or investment income exceeded $1,050. When income includes both wages and investment income, other thresholds apply.
2. Consider whether you’ll contribute to a Roth or traditional IRA. Since you have until April 18 to make a 2015 contribution (April 19 if you live in Maine or Massachusetts), you can schedule an amount to set aside from each paycheck for the next few months. The maximum contribution for 2015 is the lesser of your earned income for the year or $5,500 ($6,500 when you’re age 50 or older). Be sure to tell your bank or other trustee that these 2016 contributions are for 2015 until you reach the 2015 limit. You can then deduct these 2016 amounts on your 2015 tax return for a quicker tax benefit.
3. Do you need to file a gift tax return? For 2015, you may need to file a return if you gave gifts totaling more than $14,000 to someone other than your spouse. Some gifts, such as direct payments of medical bills or tuition, are not subject to gift tax. Gift tax returns are due at the same time as your federal income tax return.
Call us for more tips on getting ready for filing your 2015 income taxes.
For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.
So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.
Questions about this or other PATH Act breaks that might help you save taxes on your 2015 tax return? Contact us — we can help you identify which tax breaks will provide you the maximum benefit