9 Tips on Reporting Charitable Contributions on Your Tax Return
Giving to charity may make you feel good and help you lower your tax bill.
Here are nine tips to help ensure all of your contributions are eligible for deduction on your tax return.
- If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate.
- You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.
- If you receive a benefit of some kind in return for your contribution, you can onlydeduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.
- Donations of stock or other non-cash property are usually valued at fair market value. Fair market value is generally the price at which someone can sell the property.
- Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.
- You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.
- To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.
- You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.
- If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.
For more information on charitable contributions, talk to your tax preparer today.
10 Tips on Filing an Amended Tax Return
Do you need to make corrections or change information on a tax return that’s already been filed? Don’t worry; you can do this easily by filing an amended tax return. This year you can use the new IRS tool, ‘Where’s My Amended Return?’ to track the status of your amended tax return.
Here are 10 tips you should know about filing an amended tax return:
- Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended tax return. An amended return cannot be e-filed. You must file it on paper and mail it in.
- You should consider filing an amended tax return if there is a change in your filing status, income, deductions or credits.
- You normally do not need to file an amended return to correct math errors. The IRS will automatically make those changes for you.
- Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later.
- If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.
- If your changes involve the need for another schedule or form, you must attach that schedule or form to the amended return.
- If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. You may cash your original refund check while waiting for the additional refund.
- If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties.
- You can track the status of your amended tax return three weeks after you file with the IRS’s new tool called, ‘Where’s My Amended Return?’ The automated tool is available on IRS.gov and by phone at 866-464-2050. You can track the status of your amended return for the current year and up to three prior years.
- Always be sure to mail the amended returns as certified mail and request a return receipt! Amended returns take up to 12 weeks to process, so be patient when waiting for any refund you may be owed.
Should You Take the Standard or Itemized Deductions?
What’s the Difference?
When clients come to our office to file their tax return, we often get asked whether it is more beneficial for them to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.
Here are six facts to help you choose:
1. Calculate your itemized deductions by adding up the cost of items you paid for during the year that you might be able to deduct. Expenses include:
- Home mortgage interest
- State income taxes or sales taxes (but not both)
- Real estate and personal property taxes
- Gifts to charities
- If your expenses are over the minimum threshold, you can also include:
- Medical and dental expenses that insurance did not cover
- Unreimbursed employee business expenses
- Cost of preparing your tax return
2. Know your standard deduction. If you do not itemize, your standard deduction amount depends on your filing status. For 2012, the basic amounts are:
- Single = $5,950
- Married Filing Jointly = $11,900
- Head of Household = $8,700
- Married Filing Separately = $5,950
- Qualifying Widow(er) = $11,900
3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return.
4. Check for the exceptions. Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions.
5. Choose the best method. Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.
6. File the right forms. To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on Form 1040.
For more information about allowable deductions, contact your tax preparer today.
Is Your Tax Return Sending a Red Flag to the IRS?
There are certain items that if reported (or not reported) on your return will trigger the IRS to want to dig a little deeper into your finances. Take a look at these 10 tax audit red flags to be sure you aren’t drawing the attention of the IRS.
- Foreign Assets – If you check off the box on your tax return (Schedule B) that declares you have an ownership interest in foreign accounts. You should always provide the information about that asset. If you do not, the IRS will definitely want to know how much money you have stored out of the United States.
- A vengeful enemy – Did you recently go through a messy divorce? Fire a disgruntled employee? Some people will go to great lengths to seek revenge by ruining another person’s reputation. This can be done by contacting the IRS, phone call or letter, and reporting possible underreporting of income, or even committing a serious financial crime. These allegations do not have to be based on facts to get the IRS to check into it.
- Rounding – When reporting expenses on your tax return, the IRS recommends rounding to the nearest dollar, not to the nearest hundred or thousand. Items such as business expenses or unreimbursed employee expenses that all happen to be, for example, $1,000 or $3,500 can cause the IRS to question the validity of the expenses. It may seem like these are made up figures or overstated figures to the IRS.
- Questionable Deductions – Trying to take a tax deduction for an expense that is not clearly allowable on your return always runs a risk of being scrutinized. Writing off a pool as a medical deduction is one of the most common risky deductions. To qualify, you must be able to prove that you purchased the pool solely to help with the treatment of a medical condition. If you don’t have a doctor’s prescription requiring the use of a pool the deduction likely won’t be allowed.
- High Net Worth – It is more common for taxpayers with income over $5 million to be audited than people with less income. This is simply because the tax returns tend to be more complicated and any mistake will usually lead to higher revenue for the IRS.
- Reporting versus Saying – If you report large net losses on your business returns regularly and then in an interview state that you see huge profits, this might make the IRS want to check in on your company. Even if what is said is not factual, it does not mean the IRS won’t want to confirm the information anyways.
- Lots of Work Related Driving – Although it may seem like a nice idea to be able to get a big deduction for all of the gas costs you had for the year, make sure you are tracking what was business versus personal use. A large vehicle expense can easily make the IRS second guess your figures, resulting in an audit.
- Overestimated Donations – The IRS bases the reasonableness of your charitable donations on your income level and other measures. If you are reporting large donations, make sure you keep your receipts to be able to back up your calculations.
- Unprofitable Business – If year after year your business has not seen profits, beware the IRS might reclassify it as a hobby instead. If you can authenticate the losses and explain how the business is staying open while making no money, they will accept the losses as is. If you can’t verify the reasoning behind the losses and don’t have items that prove you are a real business (such as business cards), the IRS might revise your tax return.
- A Shady Tax Preparer – If the IRS has found by auditing taxpayers that the same tax preparer keeps coming up on the returns, they may target your return simply because of the person you have file it. Be sure you are always having your returns prepared by a qualified professional.
Are Your Children Being Educated About Money?
Three out of ten parents don’t talk to their children about money or have had just one major talk with their children on the subject, according to a U.S. survey conducted for the AICPA. Children tend to be over the age of ten by the time their parents first talk to them about money.
Above talking to children about finances, parents are more likely to talk to them about other important topics, such as:
- The importance of good manners
- The benefits of good eating habits
- The importance of getting good grades
- The dangers of drugs and alcohol
- The risks of smoking
It is important to teach children the right lessons about financial responsibility and help them to be prepared for a sound financial future.
Some tips for how to get these ideas across to your children:
- Start Early. Your children learn at a young age to want items, such as toys, clothes, or games, at this time, you should start teaching them about saving. Have them practice saving by putting away some of their birthday or allowance money to purchase the item they want, give them a goal to meet and once it has been met, let them buy the item. This will teach them the basics of delayed gratification and budgeting for a goal.
- Speak in Their Terms. Your child may have no interest in learning about the compounding interest on their college savings account; they are more likely to care about money to spend with friends or to buy a toy. Take this opportunity to teach about savings by relating it to something they will care enough about now to listen.
- Repeat Often. The more often you talk to your children about good financial decisions, the more likely it is to stick with them in their future. At meal times, talk about saving for big purchases, like vacations, and how it might affect budgets.
- Walk the Talk. As they say, actions speak louder than words. By giving in easily to your children if they make a fuss over a toy at store, then you will have a hard time convincing them that delayed gratification and sticking to a budget is effective.
Teaching your children now about the benefits of saving and budgeting is just as important as teaching them to be polite. These are basic skills that your children will need to know to be a well-rounded adult. For more information on what other financial knowledge you should be passing on to your children, contact your accountant today.
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