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2013 tax year

Charitable Donations

Donations

This time of year many people find it in their hearts to give. They’ll give to friends, family, loved ones and charitable organizations that can help maximize the gift such as a church, charity, or foundation.

Last week I had written about the law of reciprocity and giving, and this week I’d like to mention how you can make your giving work in favor when tax season rolls around. As of this writing there are about 11 days left in 2013. Some individuals will be looking to see how much they can give or how much more they can give in order to receive the biggest tax deduction they can for charitable giving.

Of course, gifts to friends and family are not deductible, but there are times when gifts or donations are completely deductible and may be to the tax advantage of the person giving or donating the gift.

According to IRS Publication 526 there are some of the organizations that can receive and therefor qualify the giver for a potential tax deduction:

  • Churches, synagogues, temples, mosques, and other religious organizations
  • Federal, state, and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt or maintain a public park)

Author’s note: I get a kick out of “reduce the public debt”

  • Nonprofit schools and hospitals
  • The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.
  • War veterans’ groups

Source: http://www.irs.gov/pub/irs-pdf/p526.pdf

One great way to give this Holidays season is to make a donation to your favorite charity. Another great way (and something my wife and I practice) is when new gifts come in to either us or our children, we make a list (or stockpile – thank you grandparents!) of items our children no longer play with or my wife and I no longer need such as clothes, games (it was tough giving up Hungry, Hungry Hippos), or household items and donate them to our local Goodwill.

Many of the items donated are tax deductible and here at the BFP World Headquarters Jim and I have some excellent resources to put a true dollar amount on the items donated. Generally, the charitable deduction is going to be limited to 50% of AGI and in some cases 20% or 30% – depending on the type of organization or type of property given.

Should you want to make a donation of money there are many organizations such as your church, Goodwill, The Red Cross and others that will gladly accept the needed funds and happily issue a receipt for your records. The Red Cross has been busy with the typhoon relief in the Philippines and locally (just an hour or so up the road) with the efforts to help the town of Washington, IL recover from the devastating aftermath of an F4 tornado.

Finally, as the saying goes, “I’m not against paying taxes; just not more than my fair share” may also be in the thoughts of taxpayers this coming tax season. Many tax payers are happy to donate money and items to help reduce their tax burden and or give the money to an organization they feel may be more efficient and astute and allocating their hard earned money – rather than paying the money directly to Uncle Sam via a higher tax rate.

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Flex Spending “Use it or Lose it” is a Thing of the Past

Prescription frappuccino

Prescription (Photo credit: quinn.anya)

If you have a Flex Spending Account (FSA) for healthcare expenses through your employer, you are familiar with the “use it or lose it” concept.  Each year during December, it’s a mad dash to get that last-minute eye exam, or fill prescriptions, or what-have-you to use up the Flex Spending money before the end of the year.  That tradition will, for many folks, be a thing of the past if their employers adopt the carryover rule now allowed by IRS.

Traditionally, with a Flex Spending Account (FSA) for healthcare expenses you arrange with your employer to withhold a certain amount of money out of each paycheck and then as you incur expenses for healthcare throughout the year, you can be reimbursed for those expenses up to the amount of your annual withholding for FSA.  The money withheld for the FSA is pre-tax, so it’s to your advantage to take part in such a plan if you know you’ll have medical expenses. Social Security and Medicare tax is taken out before FSA money is deducted, however.

And then, if you haven’t used all of your FSA money by the end of the year, you forfeit access to the money.  Some, in fact many, employers have a 2½ month grace period, allowing participants to claim healthcare expenditures against the FSA up to March 15 of the following year.

Recently the IRS made a change to the “use it or lose it” rule, allowing a participant in a FSA to carryover up to $500 of unused funds to the following year.  Employers must make an amendment to their FSA plan in order to allow this – it’s not automatically available.  But if your employer does amend their plan by the end of 2013, you could carryover unused funds up to $500 into 2014.  The carryover is not accumulative – meaning, if you carryover $500 from 2013 to 2014, you can’t carryover an additional $500 (for a total of $1,000) into 2015.

The ease of rules for FSA does not apply to Flex Spending Accounts for family care expenses, however.  This is a similar account where the pre-tax money is used to pay for childcare or adult-dependent care expenses that are not health-related.

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… And now that they’re back?

Logo of the Internal Revenue Service

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

Now that the government is back “in action”, the IRS has issued some notices about how the shutdown is affecting operations.

All of the systems that we mentioned that were not working during the shutdown are back up and running, so you can once again call in and get a live person, order transcripts, and the like.

On the other hand, IRS is pointing out that the shutdown came during the time when they were working on testing systems for return processing for the 2013 filing season – and the testing is running behind as a result.  Given that the systems are running behind in testing, the IRS says that the beginning of the filing season will be delayed by a couple of weeks.  This will only impact those folks that file ASAP in mid-January – you’ll have to wait until early February to file.  The final filing date of April 15 and extension date of October 15 will remain the same, as these dates are set by law.

At the same time, the IRS points out that the new anti-identity-theft protocols that are being put into place will slow the delivery of refunds this year versus years’ past.

So – if you’re someone who always files right off the bat in January in order to get a big refund in early February, don’t count on the timing of prior years.  Filing itself will be delayed, and refunds will be delayed as well.

One way to get your money quicker is to change your withholding – your refund won’t be as large, but you’ll be receiving more in your paycheck each week.  I realize many folks use their tax refund as a windfall or forced savings, but there’s no reason you can’t divert the extra pay into a savings account.  This way you can reveal it to yourself in mid-February and have a party!

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You’re Running Out of Time If You Want to Use These 13 Tax Provisions

An assortment of United States coins, includin...

An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Every year we say goodbye to certain things that we’ve come to know and love, and certain provisions of the tax law are not excluded from this treatment.  Portions of the tax law are intentionally added with short life-spans, and others are retired from time to time as their intended use has either changed or been eliminated.

Listed below are the tax provisions (according to the Joint Committee on Taxation) that will be expiring at the end of the year – some we’ll be glad to see go, others we’ll wish would stay around a while.  Some will be extended by Congress, either at the last moment or on into the new year, as has happened in the past.

Note: This article is aimed toward individual taxpayers rather than businesses, so I’ve only listed those provisions that will have impact on individuals.  There are quite a few provisions expiring that will impact businesses and employers as well – see the link above for the complete list.

Tax Provisions Expiring at the End of 2013

  1. Credit for certain nonbusiness energy property – this provision allows individual taxpayers with a credit for the cost of “building envelope components”, which include windows, doors, insulation, some roofing, and heating and air conditioning units.  The credit has expired in the past (2011) and was extended.
  2. Credit for two- or three-wheeled plug-in electric vehicles – pretty self-explanatory, a credit that applies to the purchase of these vehicles is also expiring.  The four-wheeled variety continues to be in play.
  3. Credit for health insurance costs of eligible individuals – I believe this one is supplanted by the credits available via the Affordable Care Act.
  4. Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings – this is a credit amount that is set annually, presently at 9%, but will change in 2014.
  5. Credit for construction of new energy-efficient homes
  6. Deduction for certain expenses of elementary and secondary school teachers – this credit has been available “above the line” for educators to help reduce the costs of self-provided (out of pocket) materials and supplies for the classroom.
  7. Discharge of indebtedness on principal residence excluded from gross income of individuals – dating from the Great Recession, a qualified cancellation of indebtedness for a taxpayer’s primary home was excluded from income.  After the end of 2013, this exclusion from income provision expires.
  8. Commuter credit – extended before, this credit provides train commuters a parity with car commuters, allowing a pre-tax deferral of income to help pay the expense of transit commuting.
  9. Deductibility of mortgage insurance premiums – through the end of 2013, it is allowable to deduct these premiums along with your interest on your primary or secondary qualified residence.
  10. Deduction for state and local general sales tax – This credit is allowed to replace the state and local income tax paid by the individual if the sales taxes are greater.  Word is that this one will likely be extended, but who knows?
  11. Charitable contribution of conservation easements or property – for the rest of 2013, if a taxpayer contributes property or easement to a conservation organization, such as a local land trust, special enhanced tax breaks will be available.
  12. Deduction for qualified tuition and related expenses – This credit allows for the reduction in income, above the line, for qualified tuition payments within limits.  It has always been coordinated with the other education credits – the Lifetime Learning Credit and the American Opportunity Credit.  This one has been extended in the past as well, so maybe it will again?
  13. IRA Qualified Charitable Distributions – for individuals over age 70½ this credit allows for individuals to contribute up to $100,000 directly from an IRA to a qualified charity, and exclude the distribution from income.  This one has expired a few times in the past and has limited impact due to limited usage by taxpayers, so it’s hard to predict whether it will be extended again.

Stay tuned as we finish out the tax year, to hear which of these credits may or may not be extended.  I for one am going to be on the edge of my seat.

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So, What’s Going on at the IRS During the Shutdown?

English: Anti-United States Internal Revenue S...

(Photo credit: Wikipedia)

While the government is in hiatus, what’s going on at the IRS?

Well, not a lot.  As I understand it, none of the phone lines are being manned, so if you call in for any reason you wind up with the automatons handling your questions.  The website is still in operation as well (at least partly).  So, you may be able to do a few things, but you’re limited.

For example, if you need a transcript of a prior year’s return, I understand that you can request this for yourself – but you can’t ask your accountant or anyone else operating as POA for you to request a transcript.  I’ve experienced this myself in attempting to get a transcript for a client – I was shut down.  (The same individual had trouble getting a transcript for himself, as the IRS records of his address didn’t match what he was entering into the system – aren’t computers great?)

In addition, even though there’s no one working there, you’re still required to complete your necessary filings on time.  For folks that filed an extension of time to file their returns in April, that means by October 15 you need to file your final return, unless you’re in a combat zone or have been affected by the flooding in Colorado (no other exceptions!).

On the other hand, don’t expect for your refund to come right away: refunds are frozen until the funding issues are sorted out.  Your payments will be processed right away though, even though the returns themselves will not be processed until later.

Payroll tax deposits and quarterly filings normally due by the end of October must be done on time as well, regardless of whether the government is back in business by that time (let’s hope it is!).

Audits in progress are on hold, but the systems that generate automatic correspondence, such as delinquency notices, are still on-line and churning away.  So don’t be surprised if you receive mail from your friends at the IRS.

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Same-Sex Joint Filing

Joint

Joint (Photo credit: Chris KWM)

One result of the strike-down of DOMA is that legally-married same-sex couples will now be required to file federal tax returns as marrieds – either married-filing-jointly or married-filing-separately.  This ruling takes effect on September 16, 2013.  This means that, regardless of how the members of the couple filed their returns in the past, they only have the MFJ or MFS filing statuses to choose from for returns filed on or after September 16, 2013.

For couples who have not filed a return for 2012, now is the time to review whether filing as Single status provides a superior result (lower overall taxes) versus the MFS or MFJ option.  If filing Single or Head of Household works out better for the couple, the (presumably) extended 2012 tax return must be filed before September 16, 2013 in order to utilize a Single or Head of Household filing status.  After that date, the Single and Head of Household filing statuses will no longer be available.

State tax return filing status will still rely on the state’s law: if same-sex marriages are not recognized as “legal”, then the couple will still not be allowed to use a “married” status, regardless of whether the marriage was performed in another state where same-sex marriages are recognized.

In addition, couples in civil unions or domestic partnerships are still not allowed to use the “married” options – they must use either the Single or Head of Household filing status, whichever pertains to the situation.

A couple of technical notes:

  • Even though, since DOMA was invalidated, meaning that legally-married same-sex couples are retroactively considered to be legally married at the federal level, it is not expected that these couples will be required to re-file tax returns using one of the married statuses.
  • On the other hand, legally-married same-sex couples may benefit by filing using one of the married statuses, and it is my understanding that amended returns may be filed in those cases, within the statute of limitations for such filings.  If a refund is included, this means that most 2010 and later returns could be amended after the September 16, 2013 date.  The latest date for filing a 2010 amendment with a refund is October 15, 2013.
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3 Reasons to use the new safe harbor home office deduction and two reasons not to

home office

home office (Photo credit: Sean MacEntee)

Home office workers! In case you hadn’t heard about it, the IRS made some changes to the way the home office deduction works for 2013.  Essentially, you are now allowed to deduct a flat $5 per square foot of dedicated office space, with a maximum of 300 square feet.  But this new “safe harbor” option isn’t for everyone.  Listed below are three reasons this may be good for you, and a couple of reasons that you might want to use the old method.

3 Reasons It’s a Good Thing

Depreciation recapture not needed any longer – if you are just starting out taking the home office deduction, you can forget about this concept of “depreciation recapture”.  This is a required add-back (actually basis reduction) when you sell your home.  If you took the old-style home office deduction, including depreciation of your home office space, you’ll still need to keep records of the depreciation that you claimed in earlier years and recapture that depreciation when you sell your home.  (Note: you’ll also need to maintain these records even if you start taking the safe harbor amount, since you might switch back to the old method, as well.  More on that later.)

Less record keeping – In the past when calculating the home office deduction, you needed to gather together your utility bills, mortgage interest, real estate taxes, repair bills, etc., in order to determine the amount that is attributable to the home office.  Under the safe harbor rule, this isn’t necessary.

No loss of mortgage exp deduction - In addition to the above, under the old method, any amount for real estate taxes and mortgage interest that are claimed under the home office deduction had to be subtracted from those expenses for use on your Schedule A – this is no longer required if using the safe harbor $5 rule.

2 Reasons You May Want to Stick With the Old Rule

Office or dedicated space is larger than 300 square feet – You’re limited to 300 square feet under this new provision.  For many home office deducters, this will be plenty, but there are likely many exceptions.  If your office includes a dedicated waiting area, for example, this could easily go beyond the 300 square foot maximum.

Carry overs from prior years are lost/no carryover allowed – if your home office expenses are greater than your gross income less business expenses and you’re using the new safe harbor method, there is no carryover of the excess to future years.  Using the old method, the excess could be carried over.  In addition, if you switch to the safe harbor method, any prior year carryover is lost.

(Here’s a bonus, but it’s not for the faint of heart!) If you later switch to the old method you have to account for the prior depreciation (only as basis for depreciation). This over-complicates the depreciation calculation, as you must skip the years when depreciation isn’t charged to determine basis for the current year, but account for those years when determining which year’s depreciation to deduct.

General

Choice can be changed each year – Using the safe harbor rule in one year doesn’t lock you into that choice for the future.  You can switch back & forth every year if you wish… but keep in mind that this is going to complicate your depreciation calculations quite a bit.  Also, once you’ve filed a return with one choice or the other, you cannot go back and amend the return to change the method of home office deduction – it’s an irrevocable choice.

If you have more than one home and you intend to take the home office deduction for offices in each home, you are limited to using the safe harbor for only one of the offices in any particular year.  You can still use the old method on your other home offices in that year. You’re not required to use the safe harbor rule for any of the offices.

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Medicare Part B

English: image edited to hide card's owner nam...

English: image edited to hide card’s owner name. author: Arturo Portilla (Photo credit: Wikipedia)

The next letter in our Medicare alphabet soup is Part B. Part B is essentially medical insurance that covers doctor’s services, outpatient care, home health services, and durable medical equipment. It will also cover some other services as well as well as many preventative services.

As far as what doctors will and will not cover Part B depends on whether or not they have agreed to assignment. Assignment is simply your doctor or another health care provider agreeing to be paid directly by Medicare and be willing to accept the payment amount that Medicare decides is the value of the service. Agreement also means the doctor or health care provider cannot charge you any more than what the deductible and coinsurance amounts are.

The basic cost for Medicare Part B for 2013 is $104.90 monthly. Individuals with higher AGI may end up paying more. The table below, courtesy of Medicare.gov shows the increased amount based on AGI.

If your yearly income in 2011 was You pay (in 2013)
File individual tax return File joint tax return
$85,000 or less $170,000 or less $104.90
above $85,000 up to $107,000 above $170,000 up to $214,000 $146.90
above $107,000 up to $160,000 above $214,000 up to $320,000 $209.80
above $160,000 up to $214,000 above $320,000 up to $428,000 $272.70
above $214,000 above $428,000 $335.70

The standard deductible for Medicare Part B is $147 for 2103. Once the deductible is met, then any covered individual will pay 20% of any covered service. Medicare will pick up the other 80%. This is all that someone will pay out of pocket for services under a doctor or provider who has an agreement with Medicare. A person may end up paying more if their doctor is not in agreement.

Part B does not cover long term care nor does it cover custodial care. Other excluded services include routine dental and eye care, acupuncture, hearing aids and exams, and elective cosmetic surgery.

To enroll in Part B, you can ether choose to enroll or you may have been automatically enrolled. If you’re already receiving Social Security benefits then you’re automatically enrolled in Part A and B unless you decide to opt out of Part B. Possible reasons you may want to delay Part B coverage would be in the case of if you already have benefits through current employment or a union agreement.

Generally, should you choose to enroll in Part B, you’re allowed to do during the open enrollment periods. Usually you have 8 months to sign up for Part B coverage. Failure to sign up within the 8 month window may lead to you paying a penalty to sign up outside of the enrollment period.

Signing up for Part B also allows you and qualifies you to become eligible for a one-time 6 month open enrollment period for getting a Medigap policy. What does this mean? This means that you now have a guaranteed right to purchase a Medigap policy in your state regardless of your health status. We’ll talk about Medigap in a future article.

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Estimated Tax Payments

tax payments

When you have income from sources other than traditional employment, it often becomes necessary to make Estimated Tax payments since you don’t have withholding (as you would from traditional wages).  This income may be from self-employment, rents or royalties, or from interest and dividends from your investments.  Income of this variety may also be from pensions, Social Security, and IRAs or qualified retirement plans.

Sometimes you can set up the payments from various sources to withhold tax payments and the provider will then send the withheld tax to the IRS on your behalf.  These tax payments will be reported to you on your 1099R, SSA-1099, and/or other specific tax documents that you receive at the end of the year.  If you don’t have another form of withholding, you may need to make estimated tax payments throughout the year.

The IRS recently issued their Tax Tip 2013-49, which details Six Tips on Making Estimated Tax Payments.  The actual text of the Tip is listed below.

Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year.  The type of income you receive determines whether you must pay estimated taxes.  Here are six tips from the IRS about making estimated tax payments. 

  1. If you do not have taxes withheld from your income, you may need to make estimated tax payments.  This may apply if you have income such as self-employment, interest, dividends or capital gains.  It could also apply if you do not have enough taxes withheld from your wages.  If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.
  2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return.  Other rules apply, and special rules apply to farmers and fishermen.
  3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year.  You shold also include any tax deductions and credits that you will be eligible to claim.  Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes.  Try to make your estimaes as accurate as possible.
  4. You normally make estimated tax payments four times a year.  The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.
  5. You should use Form 1040-ES, Estimated Tax for individuals, to figure your estimated tax.
  6. You may pay online or by phone.  You may also pay by check or money order, or by credit or debit card.  You’ll find more information about your payment options in the Form 1040-ES instructions.  Also, check out the Electronic Payment Options Home Page at IRS.gov.  If you mail your payments to the RIS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax.  Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

jb Note: Another way to ensure that you have appropriate withholding for the tax year is by taking a distribution from an IRA and having tax withheld from the distribution.  This is a little-known option that you can use to avoid having to make quarterly estimated tax payments throughout the year – see the article “IRA Trick – Eliminate Quarterly Estimated Tax Payments” for more details.

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