Nine Tips on Deducting Charitable Contributions

Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.

1. 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

2. 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.

3. If you receive a benefit of some kind in return for your contribution, you can only deduct 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.

4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which someone can sell the property.

6. 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.

7. 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.

8. 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.

9. 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, see Publication 526, Charitable Contributions. For information about noncash contributions, see Publication 561, Determining the Value of Donated Property. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Publication 526, Charitable Contributions
• Publication 561, Determining the Value of Donated Property
• Schedule A, Itemized Deductions
• Form 8283, Noncash Charitable Contributions

10 tax tips: Experts offer advice as April 15 closes in

Kenneth Schachter for Newsday writes:   Millions of Americans look toward April 15, the federal and state tax filing deadline, with the dread typically reserved for a root canal appointment.  Torment comes not simply in writing a hefty check to the government but in gathering records, grappling with complex instructions and straining to understand how to cope with evolving regulations.  In 2011, Americans filed 143.6 million individual tax returns worth $1.3 trillion in gross collections.

To help our readers skirt the worst pitfalls, Newsday contacted several tax experts and asked for their best advice. Tax tips follow:

1) Tax considerations are a "tiebreaker" only
In general, don't make a financial decision based solely on tax considerations, said Arnold Berman, a certified public accountant, attorney and accounting professor at Pace University, which has a campus in Pleasantville. For instance, it doesn't make sense to buy a home and take out a mortgage just to get the tax deduction, Berman said.
"You spend ten grand to save three grand," he said. "The tax effect solely shouldn't drive decisions."

2) Get an extension if necessary
Dread creates inertia for many filers, leading them to put off working on their returns until the last moment. Then they rush. "My biggest suggestion is to not rush through the return," said Ken Coletti, an accounting professor at Marist College, based in Poughkeepsie. "To get an extension is not that hard to do. You're better off filing an extension than rushing through something and making a mistake."
Coletti reminds that, even with an extension, filers have to pay estimated taxes.

3) Watch for outliers
If you're working on your own taxes and the numbers seem out of whack to the positive or negative, recheck your work, Coletti said. Gut instinct is a good indicator something is off.

4) Sell losers, give away winners
If you are considering giving shares in a security that has lost value to a relative or an IRS-approved charity, it's better to sell the security and instead give away the cash, said James Bailey Jr., a partner at BlumShapiro, based in West Hartford, Conn. Cashing out of the security lets you take advantage of the capital loss on your tax return. On the other hand, if the shares have appreciated, you're better off giving the shares. The recipient will likely pay less in taxes than you, if you were to sell.

5) Base your tax return on reality
Business and freelancing expenses are legitimate, but the claims should be grounded in fact and documented. Likewise, if you donate goods to a charity like the Salvation Army or Goodwill Industries International, make sure the valuation is realistic and keep your receipts.
"It's better to try to prepare a tax return based on reality rather than fantasy," Berman said.

6) When in doubt, hire a pro
If you have a complex tax return, it pays to hire a professional. Some filers who have successfully prepared a relatively simple return with the help of one of the popular tax preparation software packages mistakenly believe that they can handle more complex situations.
"That ultimately can get you into trouble," Coletti said.

7) Don't lose track of the cost basis
Capital gains taxes are based on the price you paid for the investment -- the cost basis. When stocks and bonds are transferred from one brokerage to another, the new brokerage sometimes has "a challenge" in tracking the cost basis, Berman said. For that reason, it's incumbent on the buyer to keep good records.

8) Get ahead of the game
Major life events like marriage, divorce and a home purchase or sale have major tax implications. Most people simply react when the tax deadline looms, Coletti said. Instead, he said, taxpayers should weigh the tax consequences of their actions well in advance.

9) Check the websites
The IRS and New York State have websites that can help befuddled tax filers, Berman said.
"They're actually user-friendly," he said.

10) Bunch your deductions
If your itemized deductions will be just under or just over the standard deduction amount, consider bunching some expenses, Bailey advised. For instance, a homeowner could pay the coming year's property taxes by Dec. 31 and claim the current year's as well. The next year, skip the whole deal.

Gains, losses and estate tax returns / What can I deduct in 2012 for the estate?

Karin Price Mueller/The Star-Ledger  writes: Question. My mother had a fairly large stock portfolio. In 2011 I sold a portion of her stocks to cover her living expenses. She died in 2011. Her final tax return reflected the sale of the stock and a net loss in capital gains. As executor, I sold off the rest of her stock in 2012, which had a capital gain. Can I use the losses in final tax year of 2011 to offset the gains for the estate in 2012? Also, her home is now in the estate. What can I deduct in 2012 for the estate? — JS

Answer:  We’re sorry to hear about your mom.  When you sell stock, the difference between the net sales price and the price at which you purchased the stock, or the basis, is reported as gain or loss on your income tax return in the year of sale and may be subject to tax.

When an individual dies, capital assets held by the decedent obtain a "step-up" or "step-down" in basis, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park. So when the asset is sold by the estate, the basis for determining gain or loss is not the decedent’s original basis but the value of the assets as of the date of death (or in some cases, six months after death).  An estate is a separate taxpaying entity from the decedent.

"You cannot use losses incurred by your mother and reported on her final income tax return for 2011 to offset any gains incurred by the estate and reported on the estate’s income tax return (Form 1041) in the following year," Romania said. "However, upon your mother’s death, any assets included in her estate received a `step up’ in basis to the value on her date of death."

Romania said this is the value that should be used for basis in computing any gains or losses realized by the estate, and generally will reduce the gains that sale of these assets would otherwise generate.

Any unused net operating losses incurred by the estate, however, may be passed through to the beneficiaries, an exception to the general rule that losses incurred by one taxpaying entity cannot be passed through to another, she said.

As for her home, note that deductions permitted on an estate tax return are not necessarily the same as those that are permitted on an income tax return, said Ruth Lynch Buchwalter, an estate planning attorney with Day Pitney in Parsippany.

"Assuming that the home was not specifically devised, such as your mother’s will did not say `I give my home on Blackberry Lane to my only son,’ the first rule is that almost all expenses that are deductible may only be deducted once, either on the federal estate tax return or the federal income tax return, but not on both," Buchwalter said.

If your mother’s estate was less than $5 million, a federal estate tax return probably wouldn’t have been filed for her estate, she said. In that case, you are only concerned with the income tax returns.

"As executor, you must consider why you are holding this home in the estate to determine what deductions are permitted," she said. "If the estate is holding the home as an investment to generate rental income, then the same expenses that are deductible by an individual owning rental real estate are deductible on the income tax return for your mother’s estate." She said insurance, maintenance expenses, and property taxes would be deductible on the estate’s income tax return.

How to calculate your IRA’s required minimum distributions

Holly Nicholson for NewsObserver.com writes:  Q. I follow “Money Matters” regularly. Two questions about required minimum distributions (RMDs) I haven’t seen addressed anywhere.

1) If an account contains both pre-tax & post-tax contributions, is RMD calculated on only the pre-tax component plus employer contributions & earnings or the total amount?

2) Can withdrawals of post-tax amounts count toward RMD?

To be more specific: account A is an IRA with mixed contributions; account B is a traditional IRA with pre-tax contributions only. How do I determine RMD? Can withdrawal of my post tax basis amounts from A be used to cover RMD for both A & B and then no tax owed for that year?

A. The RMD will be based on the total amount. Age 70 1/2 or April 1st of the year following age 70 1/2 is when required minimum distributions (RMDs) begin. If you wait until April 1st of the following year, two distributions will be required that year. The one for the previous year must come out by April 1st and the second must come out by December 31st. RMD is the amount an owner of an IRA is obligated to take out; ordinary income taxes are generally owed on this amount. Unless you are currently working for the company, any funds in company sponsored retirement plans are also subject to the RMD rules. If you are 70 1/2, still working for the company and not more than a 5 percent owner, the RMDs from that employer’s plan can be delayed until retirement. The RMD is calculated by dividing the appropriate account balances as of December 31st of the preceding year by the corresponding life expectancy from the Internal Revenue Service life expectancy tables. If your spouse is more than 10 years younger you use the joint life expectancy table, all others will use the IRS single life expectancy table. Any RMD not taken is subject to a hefty 50 percent IRS penalty. All banks, brokerage houses, mutual funds and other retirement plan providers have to report minimum required distribution amounts to both the taxpayer and the IRS. You can take your RMD from one or several accounts as long as the amount taken is based on the total of all applicable accounts.

If you have made non-deductible contributions to an IRA you have basis. You should have filed form 8606 in any year a nondeductible contribution was made. You cannot chose to withdraw the nondeductible contributions before taxable contributions and earnings for any reason (RMD, Roth Conversion normal distribution etc.). The value and basis of all IRAs are combined to compute the non-taxable portion of the distribution, based on a pro rata allocation. Example: The total of all of your account values on December 31st prior to the year in which you turn 70 1/2 equals $300,000, $50,000 of which is from non-deductible contributions. If your RMD is $10,949, 17 percent of this would not be subject to tax and the remainder would be subject to ordinary income tax.

Read more here: http://www.newsobserver.com/2013/03/31/2792309/how-to-calculate-your-iras-required.html#storylink=cpy

Read more here: http://www.newsobserver.com/2013/03/31/2792309/how-to-calculate-your-iras-required.html#storylink=cpy

The Pocket CPA / Every April, American taxpayers are gripped by a collective panic as they try to make sense of their finances. Now, help is at hand—literally.

Hillary Rosner for Hemisphere Inflight Magazine writes: IF YOU’VE NEVER STARED, dumbfounded, at toppling piles of crumpled receipts, wondering how your financial affairs came to resemble your laundry hamper, chances are you’re an accountant (or should be). Every year, as Tax Day approaches, millions of Americans swear panicked oaths to the gods of organization. What they get in response are software developers, who’ve been churning out personal finance apps faster than you can say “credit for qualified retirement savings contribution.”

There are dozens of these apps on the market right now, and while they won’t help you find that W-2 you slipped between the pages of a TV Guide for safekeeping, they promise to do pretty much everything else to whip your sorry personal finances into shape. Some are free, some require a subscription, but all offer a version of the same sell: You need help, and here it is.

Mint, MoneyBook, Doxo, Pageonce—these are just a few of the tools available, online and on smartphones, for tracking and managing money. Mint, for example, shows what you’ve been spending via color-coded charts, reminds you to pay bills and lets you set budget goals. Doxo, a “digital file cabinet,” aims to obliterate the crumpled-paper mountain by helping you store, manage and share financial documents. And if you long to be able to see all your bills and statements in one place, rather than hopping from one institution’s website to the next, Pageonce specializes in providing a central link for accessing multiple accounts and paying bills.

The Internet swarms with enthusiastic testimonials for these apps (“Invaluable for dumb schmoes like myself that virtually survive on impulse buys!”). Indeed, spend enough time reading such reviews and it can seem as though personal finance apps hold the key to happiness. If I just download this I’ll be organized! And rich! And taller!

While we’re all prone to believing in magic bullets from time to time—especially where technology is concerned—a dose of realism can be as useful as an SMS alert that you’ve spent 78 percent of your monthly salary on a pair of shoes. Having access to your financial information, after all, doesn’t necessarily give you dominion over it. As Amanda Clayman, a New York-based financial therapist (a growing field), puts it: “If you have information about your out-of-control spending, that’s just going to make you feel worse.”

Clayman does recommend that her clients use financial apps, but warns that the findings, removed from any real-world context, can be misleading. What makes financial sense for Joe Schmo of L.A. might not for Liz Schmo of Hoboken. Receiving data is just the first step; once you’ve got it, you need to figure out what it means for you.

Michael Kay, president of Financial Focus, a financial planning company in Livingston, N.J., is a firm believer in the power of data. “We encourage all our clients to know their numbers, understand their spending habits, make sure they’re saving appropriately,” he says. Kay cautions, however, that financial apps can give people a false sense of security. “Isn’t it what everyone wants, to feel that they’re in control? If you think you’re in control but you actually aren’t, you might have a bigger problem.”

For Joan Gray Anderson, co-director of the University of Rhode Island’s Center for Personal Financial Education, the very act of admitting that you have a money problem is a huge step forward. Gray Anderson studied the impact of consumer education programs on financial behavior, and found that what people actually learned was less important than the fact that they had enrolled in these programs. “What mattered was that they had opened their minds to learning and applying financial information to their lives,” she says, adding that those who sign up for financial apps are on a similar path. “The person who seeks out these finance venues is already predisposed to learn about personal finance and make some behavioral changes.”

In the end, however, the real benefit of these apps may be that they help people make the most of a far more valuable commodity than cash. “If you are spending less time dealing with stupid financial nonsense, that leaves more time to play with your kids, read a book of poetry or enjoy a beer with friends,” says David Wolman, the author of The End of Money. “Doesn’t that in turn make you happier?”

Failure to File or Pay Penalties: Eight Facts

Zoller Swanson Company writes: The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Last Minute Tax Return Filing and Getting an Extension

It is April 1, which means only two weeks remain until federal income tax returns are due on April 15.  If you have already filed your tax return, congratulations on getting your return filed on time rather than waiting until the last minute.  But for those of you who have not yet filed your tax return, there are some important tips to remember.

The final two weeks before income tax returns are due is a very busy time for tax preparers.  If you have not already gathered your W-2s and other tax documentation and provided it to a tax preparer, it may be difficult at this point to find one who is both reputable and has the bandwidth to take on another return.

But remember that even if you cannot get your tax return completed by April 15, you can file an extension.  Whether you are expecting to owe taxes or receive a refund, you can file a six-month extension, giving you until October 15 to file your tax return.

An extension provides benefits to you in a couple of ways.  First, it gives you time to get organized if you have not already.  If today is the first day you have considered gathering your tax documentation, scrambling to do so at the last minute may make it more likely you will make a mistake.  This could result in you missing deductions you are due or in underpaying the tax you owe, which could mean tax penalties from the IRS down the road.

Second, filing an extension can reduce the money you might otherwise have to pay the IRS in fines and penalties.  Should you choose to file an extension, remember that an extension just gives you more time to file your return, not more time to pay any taxes due.  If you are receiving a refund, this is not a concern to you (as the IRS has no problem with waiting longer to pay you the money they owe to you).  However, if you expect to owe taxes, you need to calculate an estimate of your taxes due and pay that amount at the time you file your extension.

Even if you cannot afford to pay an estimate of your tax owed, you should still file an extension rather than do nothing.  The penalty the IRS charges someone for failing to file a tax return is much higher—literally 10 times the amount—than the amount the IRS charges for filing an extension but failing to pay tax due.

For example, if you owe $1,000 in taxes and file an extension without paying, you will be assessed a failure-to-pay penalty of .5 percent per month.  This is only $5 per month, which is not a bad amount to pay for effectively getting a loan from the IRS.

But if you owe $1,000 in taxes and do not file an extension or pay, you will be assessed a failure-to-pay penalty of 5 percent per month.  This amounts to $50 per month, which can start to add up much more quickly.

The price of delayed tax filing

Michelle Singletary for LancasterOnline writes: The Internal Revenue Service has good news for some taxpayers.  First, if you didn't file your tax return in 2009, you still have time —until April 15 — to claim any refund you might be due.  The IRS estimates that half the potential refunds for 2009 are more than $500. That's not chump change in my book. It could be enough to help pay for the preventive maintenance you're supposed to regularly get for your car.

There is a three-year window from the original deadline of your tax return to claim a refund. If you don't file your return within this time period, your money goes to Uncle Sam.

The 984,400 taxpayers who did not file a federal income tax return for 2009 could be giving up a little more than $917 million, the IRS estimates.

I know the government needs the money right now, but I bet you need it more. This procrastination, if that's why you didn't file, is costly.

More than 120 million individual filers received a tax refund during the 2012 fiscal year. The refunds totaled almost $322.7 billion. The average individual income tax refund (based on Forms 1040, 1040-A, and 1040-EZ) was $2,879.

Maybe you didn't file because you didn't have much income. But go back and look at your W-2. Did you have your taxes withheld? The IRS comes up with its estimate by using third-party information it receives, such as reported income tax withholdings on W-2 forms.

There is a catch to getting your refund. The IRS may hold your 2009 refund check if you have not filed tax returns for 2010 and 2011.

"If a taxpayer is facing a time crunch for doing this, the key is to be sure that the 2009 return, at least, is filed by April 15," said IRS spokesman Eric Smith.

In other good news, the IRS says it is giving late-payment penalty relief to businesses and individuals who request an extension.

But the relief is only available to filers attaching to their returns any of the 31 forms that were held up primarily because of the late enactment of the American Taxpayer Relief Act. You remember, this was the law that was passed to prevent a leap over the "fiscal cliff."

The law had an impact on a number of tax forms, which the IRS had to revise. "Revising those forms required extensive programming and testing of IRS systems, which delayed the IRS' ability to release, accept, and process those forms," the agency said. "These delays may affect the ability of some taxpayers to timely estimate and pay their 2012 tax liability when requesting an extension to file."

You are charged a late-payment penalty on tax payments made after the regular filing deadline. The penalty is one-half of 1 percent of the tax you owe per month. There's no late-payment or late-filing penalty if you file a return late that results in a refund, Smith said.

Some of the delayed 2012 forms include:

• Form 3800, General Business Credit.

• Form 4562, Depreciation and Amortization (Including Information on Listed Property).

• Form 5695, Residential Energy Credits.

• Form 5884, Work Opportunity Credit.

• Form 8396, Mortgage Interest Credit.

• Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit.

• Form 8839, Qualified Adoption Expenses.

• Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

You can find the complete list of the eligible forms by going to irs.gov and searching for "Notice 2013-24." To qualify for the relief, you have to request an extension to file your 2012 return.

Here's another piece of vital information. Your request for an extension, which you can make by submitting IRS Form 4868, does not mean you get more time to pay. You still have to estimate your tax liability and pay that amount by April 15. The extension applies only to filing the return. If you don't pay on time, the IRS charges interest on the taxes owed.

I know some of you are wondering that if you have to calculate what you owe, why the need to file for an extension?

Many people have complicated returns with lots of forms to fill out. Add in the delay this year and they well may need more time to gather all the supporting documents.

But if you're asking the question, you probably do your return early anyway. Return-filing procrastinators know what I mean.

Taking Advantage of Home Energy Efficiency Savings

Before you press send on your online tax return or finish your last meeting with your financial advisor, make sure you are saving as much money as possible for making energy-efficient choices at home.

Energy efficiency is always a good idea for your bottom line and this year you can take advantage of some related tax credits.

Here are three questions the Alliance to Save Energy has answered about energy efficiency home tax credits in 2013:

Who is eligible? 

You can receive tax credits by installing specific energy-efficient home improvements between Jan. 1, 2011 and Dec. 31, 2013 in your primary residence (that you own).

What energy-efficient home improvements are eligible? 

You are eligible if you have purchased and installed certain energy-efficient products, including:

• Exterior windows
• Insulation for exterior doors or roofs
• Central air conditioner, heat pump, furnace, boiler, water heater or biomass stove. 

Just be sure to check and make sure your energy-efficient improvement meets the minimum standards so you qualify for the credit. 

How much is the credit? 

The tax credit, which is capped at $500, accounts for 10 percent of the cost of building envelope improvements (excluding labor costs). There is also a limit of $200 for windows, and specific dollar limits for heating and cooling equipment.

You should also know there is a cap on the credit amount for fiscal years 2006-2013 combined; if you have claimed this credit in the past, it counts against the $500 limit (but does not affect the $1500 limit available for 2009 and 2010). So, for example, if you claimed $300 in 2007, you can only claim $200 in 2011; if you claimed $800 in 2009, you cannot claim any more credit.

Learn More about Energy Efficiency Tax Credits

The Alliance’s Energy Efficiency Home and Vehicle Tax Credits resource provides more information about credit values and requirements for specific purchases, and what you need to do to receive the credits.

Tax Breaks for Married Couples Selling Their Home

Michael Marz for Demand Media writes: Your home, like most of the other property you own, is treated as a capital asset by the Internal Revenue Service. Therefore, if you and your spouse sell the home at a profit, capital gains taxes would ordinarily be due. However, the law allows most people to exclude a portion of their taxable gain. For married couples who can satisfy four requirements, the tax code offers a substantial tax break by doubling the maximum gain exclusion from $250,000 to $500,000.

Joint Return Required

Of the four requirements, the joint return test is the only one that you have control over. Provided you remain legally married on the last day of the tax year that you sell the home, which for most taxpayers is Dec. 31, you can satisfy the first requirement by filing a joint return. Both of you must consent to filing jointly and sign the return.

The Ownership Test

All taxpayers, whether married or not, must pass the ownership test to take advantage of the capital gain exclusion. For married couples, however, only one of you needs to satisfy the requirement. If either of you were the legal owner of the home for at least two of the five years immediately prior to the sale, the test is satisfied.

The Use Test

Satisfying the use test requires that you both lived in the home for at least two of the same five years just before the sale. During those two years, however, you and your spouse must have used it as your main home. Whether it's a house, mobile home, houseboat, cooperative apartment or condo – they're all eligible to be a main home. If you had multiple residences, your main home is generally the address closest to your jobs, is where you receive mail, is listed on your tax returns and is where your car is registered, for example. The two years of use don't have to be consecutive or cover the same two years used for the ownership test.

Prior Gain Exclusion

The final requirement for being able to exclude the gain from the sale of your home from your tax return is that neither you nor your spouse excluded the gain from a different home during the past two years. If this condition can't be satisfied, you may still be eligible to exclude $250,000 of gain if the prior home sale was done by your spouse and you can satisfy all four requirements on your own.

Gain Calculation

If you made a substantial profit on the home sale, you may want to calculate the precise amount of the gain to see if the $500,000 exclusion will cover all of it. First, you'll subtract all selling expenses from the sales price. Selling expenses typically include commissions, the cost of advertising the home, legal fees and loan charges or placement fees you pay. From this amount you subtract your cost basis in the home to arrive at your capital gain. The cost basis of a home is ordinarily the price you purchased it for plus the cost of any permanent home improvements you made.

Should You Pay Your Taxes With a Credit Card?

Jason Steele for Credit Digest writes: While the majority of American will expect a tax refund this year, there are still a sizable fraction of us who will have to scrounge up their savings to pay Uncle Sam what they owe.

And while some are vaguely aware that there are ways to pay taxes with their credit cards, few really understand the benefits and drawbacks of these options.

Here are the basics.

How to pay taxes with a credit card

The IRS is happy to receive payment in the form of a check, but they do not directly accept credit cards. Instead, they have authorized a handful of private companies to accept payment on their behalf. And while this service is convenient, it comes at a cost. Authorized processors charge a fee of between 1.88% and 2.35% of the amount remitted to the IRS. In addition, some state and local governments will also accept taxes paid with a credit card.

To choose from an authorized payment processor, visit the IRS credit card payment site.

Paying taxes with a credit card versus a debit card
In addition to credit cards, taxpayers can also use their debit cards to remit payment to the IRS through the same authorized payment processors. And rather than being charged a percentage of their payment, payments using a debit card only incur a flat fee of about $2- $3 per payment. Therefore, taxpayers who are only using a payment processor for convenience alone will want to use a debit card instead of a credit card, so long as their payment is above approximately $100.

When it makes sense to use a credit card
With a credit card fee of at least 1.88%, most taxpayers will save money by simply mailing a check to the IRS. But there are some rare situations where payments using a credit card can make sense. First, those who have a card with a 0% APR promotional financing offer can avoid interest for as long as 18 months. This may be the best option for cardholders who are unable to pay their tax bill immediately.

Also, there are very few credit cards that offer rewards greater than the fees the processors charge, but they do exist. For example, the Capital One Venture Rewards card offers double miles for each dollar spent, and each mile is worth one cent as a statement credit towards any travel related expense. So by paying a 1.88% credit card fee, cardholders still earn a small, .12% reward on their tax bill. For example, a $2,000 tax payment would result in a net gain of $2.40 worth of rewards.

And finally, paying taxes with a credit card can be an easy way to meet the minimum spending requirements necessary to receive a credit card’s sign-up bonus. For instance, new applicants for the Starwood Preferred Guest card from American Express earn 10,000 points after their first purchase, and another 15,000 points after spending $5,000 within six months. If cardholders are unable to spend $5,000 in that time, incurring the credit card fee to pay taxes might be worthwhile as the additional 15,000 points that can be worth hundreds of dollars in rewards. Even then, these strategies only makes sense when cardholders avoid interest by paying their statement balance in full.

Why it’s a bad idea to use a credit card
Unless cardholders are using a 0% APR promotional financing offer, it makes no sense to use a credit card as a means of financing a tax payment. This is because the IRS offers its own financing options with lower interest rates. For instance, their current rate is 3%, although it can be adjusted each quarter. This is far below the standard interest rates of any credit card, especially when the credit card processing fee is considered. And while these installment plans do have a setup fees, they still offer more savings for most cardholders compared to credit card fees and interest.


By understanding the process of paying taxes with a credit card, taxpayers can make the best decision when it comes time to fulfill this essential obligation.