As you prepare for end-of-the year festivities, here are a few end-of-the-year tax tips to help with last-minute charitable contributions and preparation for filing your taxes.
“It’s not too late to act on some opportunities to legitimately reduce your taxes,” said Jennifer Jenkins, IRS spokesperson for Ohio. “Even just a little bit of tax planning now can save you time and money later.”
More information on all of these subjects can be found at www.irs.gov.
• Contribute to retirement savings. Most people have until year’s end to add to their 401(k) retirement plans, and until April 15 to contribute to traditional or Roth IRAs. “Workers with incomes up to $59,000 may qualify for the Saver’s Tax Credit — worth up to $2,000 — if contributions are made by Dec. 31,” Jenkins said.
• Contribute to charities. For many, the holiday season is the season of giving. “Donations — cash or noncash — made to qualified tax-exempt organizations by Dec. 31 may be deductible when you do your taxes in 2014. Make sure the charity you’re supporting is recognized by the IRS as tax-exempt or your contribution will not be deductible,” Jenkins said.
• Give someone a gift. “Cash and noncash gifts made to individuals do not qualify as charitable tax deductions, but you can gift up to $14,000 — or $28,000 if you’re married — to your children, grandchildren or others by Dec. 31 and avoid having to file a gift-tax return in 2014,” Jenkins said.
• Go green. Certain improvements that promote home energy efficiency may qualify for tax savings. Not all home improvements qualify, and payment for work done must be made by Dec. 31 to claim the tax credit for this year. “The Non-Business Energy Property Credit is for homeowners installing energy efficient improvements like insulation, new windows or furnaces. The 2013 credit rate is 10 percent of the cost of qualified energy efficiency improvements. That credit has a lifetime limit of $500. The Residential Energy Efficient Property Credit is for alternative energy equipment. It’s 30 percent of the amount spent on qualifying property, like solar electric systems and solar hot water heaters,” Jenkins said.
• Take your minimum distribution. Taxpayers age 70½ or older who have retirement accounts will want to take their required minimum distribution by Dec. 31. “If you don’t take your RMD [required minimum distribution] by year’s end, you risk a tax penalty of 50 percent of the amount you should have withdrawn,” Jenkins said.
• Flex it out. Although IRS rules were recently revised to allow for a $500 rollover of unused funds beginning in 2014, some Flexible Spending Arrangements (FSAs) may still be use-it-or-lose-it for 2013. “Unless your FSA allows you to carry funds over into 2014, now is the time to make those qualified purchases. Check with your plan administrators to see if you’re in the use-or-lose category,” Jenkins said.
• Buy classroom supplies. Many education professionals who work with K-12 students use some of their own money to buy educational material. “Educators should know that when they file their taxes in 2014, they can deduct up to $250 — or up to $500 for married educators filing jointly — of non-reimbursed expenses they paid by Dec. 31 for books, supplies, computer and other equipment, and supplementary materials that they use in the classroom,” Jenkins said.
• Hire a veteran. Employers who hire certain veterans by year’s end may qualify for the Work Opportunity Tax Credit. “This credit can be worth up to $9,600 per veteran hired,” Jenkins said. “The credit amount varies based on factors that include the hired veteran’s length of employment, the number of hours the hired veteran has worked and the wages paid to the hired veteran during his/her first year of employment.”
• Get organized. Taxpayers who itemize deductions or claim tax credits should be able to show they qualify for the tax breaks that they claim. Bank and credit card statements, mileage logs, phone bills and other paper and electronic records may document payments that lead to tax savings. “If you haven’t already created a filing system for your important tax documents, it’s never too late to start one,” Jenkins said. “For the average person, a shoebox or indexing folders will work. Keep the documents you’ll need to help you prepare your tax return.”
• Safeguard from audit. Each year, a number of tax returns are randomly selected for audit. “There’s no sure-fire way to avoid an audit for the return you file in 2014, but there are things you can do to guard against a negative audit outcome,” Jenkins said. “Report all your taxable income. Claim only those tax credits and deductions that you’re eligible to claim. Have proper documentation for tax credits and deductions that you claim. Last but not least, use e-file to help reduce the likelihood of math errors and unintentional missing data.”
• Adjust your withholding. “Adjusting your payroll tax withholding can help get things off to a good start in 2014,” Jenkins said. “Are you having too much or too little withheld in payroll taxes? Having too much withheld results in a tax refund; having too little withheld results in taxes due. Last year, most taxpayers received a refund, with the average refund just under $3,000. To get that money back, you have to wait until you can file your tax return and then wait for your refund. If you’ve had too little withheld, you may be hit with an underpayment penalty.” More information is online at www.irs.gov under the heading “Withholding Calculator.”
As you receive year-end requests from charitable organizations, the Ohio Society of CPAs is sharing these smart-giving strategies.
• Research first. Only donations to qualified charitable organizations are deductible. If you’re not sure whether an organization is qualified, ask to see its letter from the IRS. Many organizations will actually post their letters on their websites. You can search online using IRS Exempt Organizations Select Check (the site is www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check). Churches, synagogues, temples and mosques are considered de facto charitable organizations and are eligible to receive deductible donations, even if they’re not on the list. Guidestar (www.guidestar.org/Home.aspx) and Charity Navigator (www.charitynavigator.org) also allow you to learn more about a charitable organization’s tax exempt status.
• Get receipts. Cash deductions must be substantiated by a bank record (such as a canceled check or credit card receipt, clearly annotated with the name of the charity) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation. You don’t have to submit the receipt with your tax return, but you need to be prepared to show it if you are audited.
• Be an itemizer. To claim charitable deductions on your tax return, you must itemize your deductions on Schedule A of your Federal Form 1040.
• Do the math. If you receive something in exchange for your donation — no matter how big or small — the donation is deductible only for the amount the donation exceeds the value of any goods or services received.
• Document. Be sure to keep good records of all donations. If you donate non-cash items, you’ll need to be able to substantiate the value of your donation.
• Know your limits. There are limits on the amount of charitable contributions you can deduct. The specific limitations can be fairly complicated, so consult your Certified Public Accountant (CPA) if you contribute more than 20 percent of your adjusted gross income.
• Keep an eye on the calendar. Donations must be made by the end of the tax year for which you want to claim the deduction. If you put a check dated Dec. 31 in the mail by that day, you’re OK. The same goes for donations charged by year’s end to your credit card — even if you don’t pay the bill until next year.
• Keep pay stubs. If you have money taken directly out of your paycheck for charity, keep a pay stub, Form W-2 or other document showing the total amount withheld, along with the pledge card showing the name of the charity.
• Donate appreciated property. Taxpayers can donate appreciated property instead of cash to a charity, which yields double the bang for your buck because an individual can deduct the property’s fair market value on the date he or she gives the gift and avoid paying capital gains tax on the appreciation. The deduction of appreciated property is generally limited to 30 percent of adjusted gross income.