Common Tax Topics
6/16/2017
Dear Clients and Friends,
I wanted to send you a newsletter with some of the common topics that came up during this last tax season, in the hopes that the topics may be beneficial and educational to you, either for Year 2017, or beyond. Not everything discussed in this newsletter will apply to everyone, but the topics are common enough, that many of the topics are worth reading.
If you have any questions, please let us know and we can review your specific tax situation with you.
Charitable Contributions –
If you write a check for $ 250, or more, to a charity, and you want to claim the payment as a charitable contribution on your tax return, you are required to get a letter from the charity showing, the date and amount paid, identifying the organization as a US charity with US tax id number, and stating that no goods or services we received for the donation.
The donation letter needs to be obtained, on or before, the date the tax returns are signed by both the taxpayer and tax preparer. Charitable contributions letters obtained after the tax returns are signed, do not count as substantiation for charitable contributions.
So if you are missing the letter and are audited several years later, a charitable contribution letter obtained after the date the tax returns are signed, will not count as substantiation. The courts have continuously upheld this strict timing requirement.
It is Congress, and not the IRS, that included this strict requirement in the tax regulations. Clearly this requirement was added by Congress under the perception that many taxpayers do not have adequate substantiation for their donations, and a substantial amount of tax revenue is being lost to unsubstantiated donations, and hence the strict rule.
Your CPA will ask you for charitable contribution letters before completing your tax return to protect your donation from being disallowed on examination. Your CPA is not trying to be difficult or require excessive documentation, the CPA is just trying to protect your deduction and make sure you understand that contribution letters must be obtained prior to signing the tax return.
If you do not want to be required to obtain charitable contribution letters, and you still want a deduction on your tax return for charitable contributions, please make sure each donation check you write is $ 249 or less. The $ 250 limit applies to each donation check and not the total donations to a single charity for the year, so you can contribute $ 500 or more to a charity for the year, and you can avoid the contribution letter requirement, if you make each donation check during the year $ 249, or less.
There is another rule not to write two donation checks for $200 on the same day to the same charity, in an attempt to bypass the $250 payment rule.
For donations checks less than $ 250, you still need to have written documentation of all donations, like a cancelled check or receipt, but the charitable contribution letter, stating no goods or services were received, etc. is not required.
It is not uncommon for charities, even long established charities, to issue letters that do not contain all of the required statements required by the IRS, i.e. no good or services received or whether the organization is a US Charity, etc., since the charity’s officers may be more concerned with explaining the benefits of their cause, or the good that will result from your donation, rather than focusing on what the taxpayer needs to support donations for tax purposes.
Charities can also have a lot of turnover in staff with volunteers, and this can lead to charitable contribution letters drafted by personal unaware of the required statements, and unfortunately inadequate charitable contribution letters are more common than you would think.
Last tax season we estimated about 15% of the contribution letters we reviewed were missing required statements and all that is needed is to get the charity to provide a revised contribution letter with all the required statements.
If a charity is unwilling to provide a complete contribution letter, and you still want a tax donation reported on your tax return, you should considering donating to a different charity in the future.
If you plan to donate a car, even more information needs to be included in the contribution letter, like the value of the vehicle, mileage, and the VIN Number, so before you make a donation of a car, or other high value non-cash items, please make sure the organization is willing to provide you the proper donation letter and contact your CPA to check the letter.
Covered California -
If you have obtained Health Insurance in California from Covered California during the year, you should always plan to file your tax return on time or earlier, and never after 04/15 or on extension.
Under Covered California, you likely may be receiving subsidies on your Health Insurance in the form of the Advance Premium Credits that are based on your actual income earned during the year. The lower your income the higher the subsidy. There are thresholds where the subsidies are phased out and completely eliminated.
At the beginning of the year, the Advanced Premium Credit is based on an estimate of what you think your income will be in the year, but when you file your tax return, is when your actual income is determined and the amount of your actual Advanced Premium Credit is calculated.
For many taxpayers, the best way to maximum the Advanced Premium Credit is to lower their income with an IRA Contribution.
The deadline to make an IRA Contribution is 04/15 into the following year. If you miss the IRA deadline of 04/15, you can miss an important opportunity of potentially increasing your Advance Premium Credit, substantially.
This tax season we had a client that was able to save $13,766 in taxes by making a $6,500 IRA Contribution, due to the Advanced Premium Credit. This result does not always apply to everyone, and is dependent on your income and the Advance Premium Credit thresholds, but this situation can potentially apply to anyone obtaining health insurance under Covered California.
The problem with not providing your tax return information by 04/15, is first you do not know if you qualify for an IRA Contribution, second, how much of an IRA Contribution you qualify for, and third what impact an IRA Contribution will have on your Advance Premium Credit. My client, could have lost the benefit of the IRA Contribution, if the tax returns were prepared on extension after the IRA Deduction deadline, resulting in a loss of $13,766.
Taxpayers whose estimated income at the beginning of the year is lower than their actual income at the end of the year, will have to pay back the excess Advanced Premium Credit Amounts that were applied the monthly health insurance payments during the year.
So filing late is never recommended when obtaining health insurance under Covered California, since need to know by 04/15, if you owe any taxes and/or if you have to pay back any of the Advance Premium Credit.
Health Savings Accounts -
Everyone should consider making contributions to a Health Savings Account (HSA). If you are on Medicare, you do not qualify to make contributions to a Health Savings Account. With today’s high medical expenses, it is always nice to have money saved for medical expenses and it is even better to pay for the medical expenses with money that is tax free.
The Health Savings Account Contribution (HSA) is only a deduction in tax on your Federal Tax return, but not on your California Tax Return, so the contributions are tax free Federal, but not also tax free State.
If you contribute $ 7,750 per year for 20 or 30 years, this would shield income from Federal Taxes $ 155,000 or $ 232,500, respectively, not including interest and dividends, and most of us will have to spend these amounts in out of pocket medical expenses over the next 20 to 30 years, anyway.
The HSA is not used to pay health insurance premiums, but out of pocket medical expenses.
There is no requirement when the money in an HSA has to be used up and the money in the account earns interest/dividends tax free.
See the two web links for additional information on Health Savings Accounts:
https://www.hsaresources.com/faq/#distributions-07
Some HSA Accounts issue you credit cards that you can use to pay out of pocket health expenses. Keeping track of HSA expenses does require additional accounting on your end for medical expenses paid with and without HSA funds, but the HSA is worth it for the tax savings and the security of having money saved for out of pocket health expenses.
Home Sales –
With the recovery in the housing market in the Bay Area, it is possible that a portion of the gain on the sale your primary residence may be taxable.
If you live in your home as a primary residence for up to two years, or more, the gain exclusion is $ 250,000 per taxpayer. So the gain exclusion is $ 250,000 for single person and $ 500,000 for two individuals as married. Both married individuals need to have lived in the home as their primary residence for at least two years out of the last five years.
If the gain on sale of a personal residence exceeds, $ 250,000 or $ 500,000, the gain in excess is taxed at capital gains rates. The exclusion of gain on the sale of personal residence, does not apply to other property you hold, like rental property, and property that is not a primary residence.
If you sell your house for a gain during the year, you should check with your CPA at the time of the sale, to determine if you have a taxable gain and whether the gain will require any additional payments of tax during the year.
Check your Tax Withholding –
The reason most individuals received refunds when they file their taxes returns, is because employers has been (over) paying taxes on your behalf, through wage withholdings.
Some employers do not withhold fully on tip income. If you have a substantial amount of tip income, you may have substantial under withholding.
If you receive retirement income, many times you can decide how much withholding is taken out of retirement distributions, if any.
Depending on your income, the federal withholding rate should be from 10% to 35%. You should check your withholding rates during the year by dividing the FIT (Federal Income Tax) by your total wages and if you are getting 3% to 5%, then you have a situation where you may have substantial under withholding.
You should also make sure you have enough California state income tax withholding (SIT) from 1% to 9% by dividing SIT by your total wages.
You should contact your CPA to provide you the tax percentages that applies to your situation and to determine if you have any substantial under withholding.
If you are retired, and your income is low enough that you are not to be subject to tax, or subject to a low tax, or you are making estimated payments to supplement the withholding, then under withholding of taxes may not be an issue for you.
Everyone else should check if their withholding is adequate at least a few times during the year, to make sure there are no surprises as the result of owing a large unexpected balance at the end of the year.
If there is substantial under withholding, you may be required to also make quarterly estimated payments during the year, to avoid late payment penalties, to make up the difference in the under withholding and this is another reason to check your withholding.
Social Security -
There is generally no Federal or State Income Taxes withheld on Social Security Benefits but if you have other Income along with your Social Security, up to 85% of the Social Security Benefits can be taxable, and you may have additional taxes due.
If you are new at receiving Social Security Benefits, then you should contact your CPA to review your situation to determine how much of your social security benefits are taxable, and how much additional taxes will be due.
In some cases, taxpayers need to make quarterly estimated payments to pay the tax on their social security benefits when the taxpayer has other income besides social security.
Many taxpayers have been caught by surprise with having to pay taxes on social security benefits when combined with other income, and this is a surprise you want to avoid by letting your CPA know when you start receiving social security benefits.