Charitable Deductions

In our family, it has become a tradition of sorts to watch Christmas Vacation starring Chevy Chase immediately following Thanksgiving. It marks the start of the Christmas season for us. It serves as a hilarious reminder that in a season full of love and family and high expectations, it is so important to embrace the true essence of Christmas.

Besides all the holiday celebrations, December is also the last month of the year which means it’s the final time of the year to make charitable donations for the 2014 year. In the newsletter this month you’ll find a great article talking about several tax rules you should know before you give. I’ll cover just a bit of that in this blog so be sure to read the newsletter for the other tax rules.

One really important tax rule is that you will need to get an acknowledgement from each charity for your deductible donations if you want to deduct any gift of monies on your tax return. Most charities are on top of this – if you donated to the ALS Ice Bucket Challenge, for example, you also received an email thanking you for your donation and providing the documentation needed to print and provide to your CPA to mark this donation as a tax deduction.

Please note that if you donate household/clothing items to a charity such as Goodwill or a similar charitable organization, you will also need a donation receipt. Take sure the value of the items donated is listed on that paper receipt and be sure to keep all receipts/documentation in the same spot so you know where to find them when it’s time to gather your tax documents. If you donate clothing and/or household items to charity they generally must be in good used condition to claim a tax deduction.

As for whom you can donate to and claim it as a tax deduction, you must donate to a qualified charity. This includes churches, synagogues, temples, mosques and specific government agencies as well as certain charities. If you are not sure if the group you give to is a qualified charity, ask us.
Be sure to read the Watson CPA newsletter for additional information. We hope you are enjoying a month full of celebrations and family and friends. Between all the hustle and bustle, we wish you a Merry Christmas and a happy, jolly holiday season.

Tips for Taxpayers Who Travel for Charity Work

Do you travel while doing charity work? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips you should know about travel while serving a charity.

  1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status or call us if you have questions about whether a charity you volunteer for is tax-exempt.

  2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.

  3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.

  4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

  5. Deductible travel expenses may include:
    • Air, rail and bus transportation
    • Car expenses
    • Lodging costs
    • The cost of meals
    • Taxi fares or other transportation costs between the airport or station and your hotel



Questions? Don’t hesitate to call us. We’re here to help!

Tips for Safeguarding Financial Records

With the 2013 hurricane season now under way and memories of tornadoes and other natural disasters fresh in our collective minds, now is the time for individuals and businesses to safeguard their tax records by taking a few simple steps.


Take Inventory. Gather all of your documents and make an inventory list. You may find everything in a single location, but more likely than not, you’ll have to hunt around to find all of your documents. Don’t forget to check computer files, storage boxes, file cabinets, old and new computers and laptops, thumb drives, and external hard drives and backup disks.


Depending on how complex your finances are, you may opt for a single list or choose to make two separate lists. The first list might include items such as insurance policies, mortgages and deeds, car titles, wills, pension and retirement-plan documents, powers of attorney, medical directives, and so on. The second list might contain a list of less essential documents such as brokerage accounts, loans that have been paid off, end-of-year bank statements, and copies of old tax returns and supporting documentation.


Create a Backup Set of Records and Store Them Electronically. Keeping a backup set of records — including, for example, bank statements, tax returns, insurance policies, etc. — is easier than ever now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet.


Even if the original records are provided only on paper, they can be scanned and converted to a digital format. Once the documents are in electronic form, taxpayers can download them to a backup storage device, such as an external hard drive, or burn them onto a CD or DVD (don’t forget to label it).


You might also consider online backup, which is the only way to ensure that data is fully protected. With online backup, files are stored in another region of the country, so that if a hurricane or other natural disaster occurs, documents remain safe. Contact us if you need assistance with this.


Visually Document Valuables. Another step you can take to prepare for disaster is to photograph or videotape the contents of your home, especially items of higher value. Call us for more help compiling a room-by-room list of belongings.


A photographic or video record can help prove the fair market value of items for insurance and casualty loss claims. Store the photos or video with a friend or family member who lives outside the area, or as part of your online document backup.


Update Emergency Plans. Emergency plans should be reviewed annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.


Check on Fiduciary Bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.


If disaster strikes, call us right away. We can help you get back copies of tax returns and all attachments, including your Form W-2. We’re here to help.

Eight Ways Children Save You on Taxes

  

Got kids? They may have an impact on your tax situation. Here are eight tax credits and deductions that can help lower your tax burden.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we'll take a look at whether you can claim the child as a dependent this year.

  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.

  3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.

  4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.

  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.

  6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.

  7. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.

  8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

As you can see, having children can make a big impact on your tax profile. If you're a parent, we'll go over your situation with you to make sure you're getting the appropriate credits and deductions.

Financial Troubles? 5 Ways to Improve Your Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble here are some steps to take to avoid financial ruin in the future. If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action–before the bill collectors start calling.

  1. Review each debt. Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

  2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble-perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.


    Tip: Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

  3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

  4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.

  5. Pay down and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage.


    Tip: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.
  6. Caution: Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
    Caution: Second mortgages greatly increase the risk that you may lose your home.


    You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, don’t hesitate to call us. We can help you get back on your feet.

What do you do when you haven’t filed your tax return

In my newsletter today, I posted an article about what you do when you haven’t filed your tax returns. I’ve run into this question a lot in the past couple of weeks from various people. Its important to remember when you haven’t filed, ignoring the problem doesn’t make it go away. Find a professional that can talk to the state and federal authorities and work on getting the problem fixed. There are ways to resolve the issue of non-filing, regardless of how many years you’ve put off filing your returns. In the end, you just need to keep in mind that the taxing authorities are easier to deal with the more proactive you are in addressing the problem. Ultimately, you’ll feel much better when the issue is resolved and its all behind you. I’ve attached a copy of the article below:

Filing a past due return may not be as difficult as you think.

Taxpayers should file all tax returns that are due, regardless of whether full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. It is important, however, to know that full payment of taxes upfront saves you money.

Here’s What to Do When Your Return Is Late


Gather Past Due Return Information
Gather return information and come see us. You should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.

Payment Options – Ways to Make a Payment
There are several different ways to make a payment on your taxes. Payments can be made by credit card, electronic funds transfer, check, money order, cashier’s check, or cash.

Payment Options – For Those Who Can’t Pay in Full
Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be lessened. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, a temporary delay, or an offer in compromise.

Taxpayers who need more time to pay can set up either a short-term payment extension or a monthly payment plan.

  • A short-term extension gives a taxpayer up to 120 days to pay. No fee is charged, but the late-payment penalty plus interest will apply.
  • A monthly payment plan or installment agreement gives a taxpayer more time to pay. However, penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan. In terms of how to pay your tax bill, it is important to review all your options; the interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. You should pay as much as possible before entering into an installment agreement.
  • A user fee will also be charged if the installment agreement is approved. The fee, normally $105, is reduced to $52 if taxpayers agree to make their monthly payments electronically through electronic funds withdrawal. The fee is $43 for eligible low-and-moderate-income taxpayers.


What Will Happen If You Don’t File Your Past Due Return or Contact the IRS
It’s important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.

If you haven’t filed a tax return yet, please contact us. We’re here to help!

What do you do when you owe the IRS on April 15?

The vast majority of Americans get a tax refund from the IRS each spring. But what if you’re not one of them? What if you owe money to the IRS?
Here are five tips for individuals who still need to pay their taxes.

  1. If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. You can pay the balance owed by electronic funds transfer, check, money order, cashier’s check, or cash. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.
    You can also pay the bill with your credit card. In either case, the interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

  2. If you cannot pay the liability in full you may request an installment agreement. This is an agreement between you and the IRS for the collection of the amount due and is payable in monthly installment payments. To be eligible for an installment agreement, you must first file all required returns and be current with estimated tax payments.

  3. You can also use an installment agreement if you owe $25,000 or less in combined tax, penalties, and interest. The IRS will inform you usually within 30 days whether your request is approved or denied or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. At a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement is an amount that will fully pay the total balance owed within 60 months.

  4. You may still qualify for an installment agreement if you owe more than $25,000, but a Collection Information Statement must be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount (based on your financial information).

  5. If an installment agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged. This is automatically figured and is based on your income.


  6. If you owe the IRS money, give our office a call. We can help you set up installment agreements and other payment options.

Passthrough Penalties

With the due date for filing S-Corp returns only a month away (March 15), it seems like a good time to remind ourselves why we go through the trouble of filing these returns on time in the first place.

Penalties for S-Corps, Partnerships, and Fiduciaries failing to file returns have been steadily rising, but starting in tax year 2010 penalties for S-Corp, Partnership, and Fiduciary filing late returns increased to $195.

The IRS states that for returns on which no tax is due, the penalty is $195 for each month or part of a month (up to 12 months) the return is late multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due. The penalty may also be charged if the return does not show all the information required.

For example, if a S-Corporation fails to file its 2011 return (including a Schedule K-1 to each shareholder) on time the penalty could be as much as $2,340 per shareholder per year ($195 per shareholder for the maximum of 12 months).

These failure-to-file penalties do not include tax that is due or penalties for tax that is due, but not paid on time. Add in the fact that the penalty isn’t tax deductible on your tax returns the following year and you’ve got yourself a double whammy.

If the partnership or S-corporation can show that the failure to file on time was due to “reasonable cause”, the IRS might provide relief. Be advised however, that if the partnership or S-corporation has established a pattern of failing to file in the past, it’s unlikely that the IRS will be sympathetic.

Why take a chance? If you need assistance filing your S-Corp, Partnership, or Fiduciary return, call us today!

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