Header Right

Year-End Tax Tips for Charitable Donations

by

Charitable Deductions Strategies 

The deduction for charitable contributions is normally an itemized deduction. The standard deductions for every filing status are significantly higher under the Tax Cuts and Jobs Act of 2017. And since there are new limits on some itemized deductions — e.g., the deduction for state and local taxes — and others have been outright eliminated, many taxpayers are less likely to benefit from itemizing. Here are several strategies that could help taxpayers get better tax mileage from their donations.

Timing Donations With a Donor-Advised Fund

With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Contributions to a donor-advised fund are generally tax deductible in the year they are made. By funding a donor-advised fund in a year you expect to itemize your deductions could provide a tax advantage. If desired, you could then put those dollars to use over several years by supporting your favorite charities through your donor-advised fund. You can itemize in years in which you make the contribution to a donor-advised and take advantage of the high standard deductions in the years in which you don’t contribute.

Donating Appreciated Securities

Many donor-advised funds and other public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold. Note that itemized deductions for contributions of appreciated securities are generally limited to 30% of AGI.

Making Qualified Charitable Distributions After Age 70½

A qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD).

To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. (Contributions to donor-advised funds are not eligible.) Up to $100,000 may be transferred annually per spouse.

New for 2021!  Charitable Deduction for individuals who don’t itemize

The law now permits individuals who don’t itemize to claim a limited deduction on their 2021 federal income tax returns for cash contributions. These individuals can claim a deduction of up to $600 for cash contributions make to charities in 2021. Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual’s volunteer services.

Each individual’s tax situation is different. Please consult with a tax professional at Urbach & Avraham, CPAs to help you analyze the impact on your personal situation.

 

 

 

Unfiled tax returns?

by

“Better late than never” applies when it comes to filing income tax returns.

Here’s what you should know. 

Maybe you didn‘t get your 1040 done in time in a previous year and figured you couldn’t still file your income taxes. Or you thought you owed money that you didn’t have. The IRS knows that people file late sometimes, and it has systems in place to deal with that.

It’s absolutely critical that you file every year, for a variety of very good reasons. Failure to file means that you might:

  • Incur interest and penalties.
  • Lose a refund (you can claim a refund for up to three years after the return due date).
  • Reduce your Social Security benefits. If you’re self-employed and don’t file, you will not be credited for income that year.
  • May not qualify for credit and lending opportunities.
  • Certain professional licenses (CPA, legal) may be revoked in some states.
  • May be prohibited from serving in public office

Extenuating circumstances? Don’t Panic!

Were you or a family member extremely ill or disabled? Did you suffer severe hardships due to natural disasters? If you didn’t file because of hardships, we at Urbach & Avraham, CPAs can assist you in requesting an abatement from the IRS of penalties imposed due to the late filing.

File It ASAP

As soon as you realize you have a past-due tax return, you should prepare and file it.

If you can’t pay what you owe when you file, you can ask for an additional 60-120 days to fulfill your financial obligation. If that’s not enough time and/or you’re going to need to pay in installments, you can apply for an IRS Payment Plan.

What If You Don’t File?

The IRS may file a substitute return for you. If this happens, you may not get all of the deductions and credits that you should. We advise you to still file a tax return that includes everything, even if the IRS already prepared a substitute return. The IRS usually adjusts the return they created to reflect credits, deductions, and exemptions when they’re made aware of them.

The IRS will notify you if they file a substitute return. If you don’t’ file or submit a petition to Tax Court, the IRS will proceed with its proposed assessment, which will trigger a tax bill. Failure to pay it will result in your account going into the collection process. This can include the filing of a federal tax lien or a levy on your bank account or wages. If you continue to ignore the bill, you may be subject to additional penalties and/or criminal prosecution.

If prior year information is required, we can assist you in obtaining IRS transcripts. These transcripts provide all sources of payors of wages, interest, dividends, pensions and proceeds from sale of securities and real estate.

On Your Mark, Get Set, File!

Any correspondence from the IRS can create anxiety, as can realizing you missed a tax deadline. At Urbach & Avraham, CPAS, we encourage you to contact us if you’re concerned about a return you didn’t file. We can help you understand what your options are and how to proceed. We can assist you in abating penalties and obtaining IRS Transcripts if necessary. We can also help with tax planning throughout the year, so you don’t have to deal with a past-due return again.

 

Sole Proprietor vs S-Corporation     

by

   

Converting from Sole Proprietor to Sub-S has both tax savings and risks. Review them before making the move.  The structure you choose affects how your business is taxed and the degree to which you can be personally liable. Here’s a comparison of these two popular business structures.

Sole Proprietor This is a classic structure for single-owner businesses. No separate business entity is formed. A sole proprietorship does not limit liability, but insurance may be purchased. You report your business income and expenses on your personal income tax return (Schedule C of Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.
S-Corporation A corporation is a separate legal entity that files its own corporate income tax returns. Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed. If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This S-Corporation structure generally avoids federal income taxes at the corporate level.
Are there additional costs to being an S- Corporation? The switch from a Schedule C to an S-corporation increases the costs of doing business. Here are some of the additional expenses:
• Minimum state taxes
• Accounting fees for preparation of separate corporate tax return
• Payroll servicing costs -if business had no employees as a Schedule C, the owner now is required to receive a salary
• Unemployment tax on owner’s salary, in NJ is almost $1,000

Are there any tax savings? The tax you save is the steep 15.3% self-employment (SE) tax. You pay it on the entire sole proprietor earnings. You only pay the SE tax on the salary portion of your S-Corp earnings. For example, if there is net income of $142,800 (the Social Security max wage base for 2021) and you pay yourself a salary of $50,000, it saves you 15.3% of the difference or approximately $14,000. The greater the difference between your wages and net income, the greater the savings of the SE tax.

Both sole proprietorships and S-Corporations generally offer no difference in the calculation of income tax only the SE tax.

Any caveats? There are many considerations. Here are the main concerns:
• The IRS expects you to take a “fair” salary from your business, known as Reasonable Compensation. E.g., A solo physician or engineer with net income of $200,000 can’t justify a salary of only $50,000. Determination of reasonable compensation is complex and based on many factors. At Urbach & Avraham we make these calculations for use in business valuations in both litigation and non-litigated matters. We can assist you in determining a defensible figure should you decide to operate as a Sub-S Corporation.

More often than not, an S corporation has only one owner. This allows the owner to set salaries for employees, including his own salary. The IRS is sensitive to the potential for manipulating the tax laws in this area and is applying extra scrutiny to the salaries of S corporation owners.
• If you are injured or disabled, you can’t claim lost wages of $200,000 but rather only the W-2 wages of $50,000
• Pension contributions are only made on wages of an S-corporation, not on the net income. The lower the wages, the smaller the retirement benefits
• Your Social Security benefits are calculated on an average of 35 years of wages. The lower the wages, the lower the benefits
• Your Qualified Business Interest Deduction may decrease or increase – based on various factors

Which is suitable for my business? Schedule C or S-Corporation?
Different business entities offer different advantages. You should consider all of them and speak to a tax professional at Urbach & Avraham, CPAs to determine which advantages can help you the most given your current circumstances. You may discover, over time, as your circumstances change, so, too, does your choice of preferred business entity.

Tax Tips for College Tuition

by

College education is a huge expense. Parents should look into the various tax benefits that can help reduce the costs of sending a child to college. Here are some areas worth further investigation.

Section 529 College Savings Plans
Section 529 college savings plans are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several appealing features:

    • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
    • Some states offer their residents tax incentives for investing in an in-state plan.
    • As a parent, you retain control of the money in the account even after the child turns 18.
    • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts
Annual contributions to Coverdell accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).
Your contributions accumulate tax deferred at the federal level and earnings are tax-free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

Tuition Tax Credits
A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

  • American Opportunity Tax Credit (AOTC) 
    This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.
  • Lifetime Learning Credit (LLC)
    This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2020) for single taxpayers with modified AGI between $59,000 and $69,000, and for married couples with modified AGI between $118,000 and $138,000.

Student Loan Interest Deduction
A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans that you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 (between $70,000 and $85,000 for single filers). The deduction is available even if you do not itemize deductions on your return.

The earlier parents start saving for college, the better. If you have questions about the various college savings tax benefits, please contact one of our tax accountants at Urbach & Avraham, CPAs.

Tax Tips for Newly Married Couples

by

Checklist of tax and financial items for newly married couples:

Withholding – Newly-wed couples should consider changing their withholding. They should give their employers a new Form W-4, Employee’s Withholding Allowance. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax.

They can use the IRS withholding estimator on www.irs.gov to help complete a new Form W-4.

Name and Address Change – When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on your tax return must match what is on file at the SSA. To update information, taxpayers should file Form SS-5, Application for a Social Security Card, available at www.ssa.gov . If marriage includes a change of address, one should inform the IRS by sending Form 8822, Change of Address, available at www.irs.gov.

Filing Status – Married couples can file their federal income taxes jointly or separately each year. Usually, married filing joint is more beneficial, however couples should calculate the tax both ways to see which works best. If a couple is married as of Dec. 31, they are married for the whole year for tax purposes.

Prenuptial Planning – Part of the 2017 massive tax bill was the elimination of taxable and deductible alimony—which was in the tax code since the 1940s! As a result, prenuptials were turned on their heads unless they permitted a change for tax law changes. It is wise today for the pre-nuptial agreement to allow for changes in the tax treatment of alimony. Attorneys and their clients may consider wording which triggers changes automatically in the event of substantive changes in the tax treatment of alimony. Finally, not all states with an income tax follow the federal law. State tax law needs to be considered also. Litigation Support Partner, Jeff Urbach, works closely with divorce attorneys who can assist you with pre-nuptial agreements.

Marriage after Divorce? If a couple divorces and doesn’t change their wills, NJ statute dictates the outcome. Divorce revokes any dispositions of property made between former spouses prior to divorce. Will provisions leaving property to former spouse have no effect and property passes to next beneficiary named in will. After divorce, and especially before remarriage, one should consult with an elder law attorney. We work closely with many competent estate attorneys whom we can recommend.

Retirement Accounts – If a former spouse was named as the beneficiary of a qualified retirement plan, this will remain intact despite a divorce. After divorce, and especially before remarriage, one should review the beneficiary designations of all retirement accounts.

Everyone’s tax and financial situation is different. Please contact a tax professional at Urbach & Avraham, CPAs about your tax options. Look before you leap!

 

You can reverse a 2020 RMD by Aug. 31, 2020

by

RMD Background

A required minimum distribution, or RMD, is the amount of money one is required to withdraw from most retirement accounts after he or she attains a certain age. Beginning in 2020 the Secure Act raised that age from 70½ to age 72. Almost all retirement accounts are affected by the RMD rules. The one major exception is Roth IRAs.

RMDs for 2020

The CARES Act suspended most RMD payments for 2020. Any taxpayer with an RMD due in 2020 from an IRA, an inherited IRA, a 401(k) or 403(b) or defined-contribution retirement plan may skip those RMDs this year. Defined benefit plans are not exempt from RMDs for 2020.

Owners of IRAs, 401(k) plans or beneficiaries of inherited IRAs who already received an RMD in 2020 have until August 31, 2020 to rollover or repay the distribution to the retirement plan. This reversal of the 2020 RMD is intended to benefit older Americans who can refrain from taking money out, making it easier for their balances to recover from the 2020 decline in security values.

Who will benefit?

The ability to reverse a 2020 RMD is not expected to help the majority of retirement account owners who rely on the retirement income to live from. This IRS provision will generally only help those who are less reliant on their retirement account funds for their living expenses. Taxpayers in high brackets stand to benefit from saving the steep income tax and keeping funds longer in a tax-deferred account.  Individuals with extremely high medical expenses in 2020, should not consider reversing the 2020 RMD. The steep medical expenses will shelter the RMD from taxes.

Don’t forget the withholding!

One must return the entire amount of the 2020 RMD to your retirement account by August 31, 2020 to qualify as a reversal. Many individuals have income tax withheld from the RMD. The income tax withheld also has to be returned – not just the amount received. The amount withheld will be credited to your 2020 income tax return. This can reduce the amount of your September and December 2020 estimated income tax payments.

Example of withholding from RMD and reversal

Retired Rita withdrew an RMD of $50,000 in Feb 2020. She had $10,000 of federal income tax withheld from her RMD and received $40,000. If Rita would like to reverse the RMD she must return the entire $50,000 to her retirement account by August 31, 2020 even though she received only $40,000. On her 2020 US Income Tax Return (Form 1040) she will receive credit for the $10,000 of income tax withheld. This will enable her to reduce her third and fourth quarter 2020 US estimated income tax payments.

Look before you leap!

Everyone’s tax situation is different. If you feel you can benefit from the 2020 RMD reversal, contact your investment advisor. You should also contact our tax accountants at Urbach & Avraham, CPAs this week to assist you in the decision.