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Tagged: tax planning

Tax Planning With Charitable Donations

By Bob Palechek, CPA | August 7, 2020

This article is to provide you a summary of how charitable deductions work, what is allowed and not allowed, limitations, and new items (see end of article).

Charitable donations are deducted on Sch A as itemized deductions.  With the increase in standard deduction amounts (now $24,800 for married filing jointly) along with a $10,000 limit on State and Local Taxes (SALT), breaking the threshold for claiming itemized deductions versus the standard deduction is harder than ever.  This means while your charitable intent is a good thing, it may not necessarily bring tax savings.  At least through 2025, after that we go back to the old rules.

It can therefore make tax planning sense to lump or bunch together charitable donations in every other year.  Trying to max out a year to receive a tax benefit.  Charity paid with a credit card counts in the year of the credit card charge and not when you pay the credit card.  Donor-advised funding can help with breaking the threshold in the year of the donation then spread the gift in smaller amounts to specific charities over several years.

Allowable donations include; money or property donated to churches, synagogues, temples, mosques, other religious organizations, non-profit schools and hospitals, public parks, and public charities.  If you are unsure, please visit WWW.IRS.GOV.  The IRS maintains a database of qualifying charities.

Non-Allowable donations include; money or property donated to civic leagues, sports clubs, chambers of commerce, most foreign organizations, individuals and politicians.  If you are unsure, please ask your tax person.  An addition to this category began in 2018, if you make a payment to a college for the right to purchase sporting event tickets, that payment is no longer deductible!

Substantiation of donations that do not exceed $250 in any one day to anyone organization can be supported by bank records.  Cash donations require written acknowledgment from the Charity as well as all donations that exceed the $250 rule.

Non-cash donations, the most popular being made to resellers of thrift goods.  Think clothing, books, household items, electronics, etc.  Best practice is to keep detailed records of precisely what you donated, exact quantities, and fair market value of each item.  Larger claimed deductions should have the best records.  The IRS has taken several taxpayers to court previously and were successful in their efforts.  The Courts believed the donations occurred but denied the deduction because there were no detailed records to back-up the donation deduction.

If you make a donation but receive something in value in return, the fair market value of what you receive needs to be deducted from the donation amount.  For example, if you bid on a gift basket at a charitable auction, only the amount you actually pay above the value of the gift basket is deductible.

There are limitations in how much you can deduct each year.  Cash donations are limited at 60% of adjusted gross income currently through 2025, then back to 50%.  Capital gains property, for example, stock in a public company is limited to 30% of adjusted gross income.  This can be a nice tax planning tool if you have some highly appreciated stock, as you get the fair market value as a possible deduction on Sch A and can avoid paying capital gains tax on the appreciation.  If you choose to only deduct the cost of the stock, you can obtain a 50% limitation, but this would be kind of unusual.  The good news, anything not allowed by virtue of a limitation can carry forward for up to five years.  The same percentage limits carry forward as well.

New for this year only (CARES Act):  The limitation for cash donations is now 100% of AGI, not 60%.  You can shelter all of your taxable income this year with a charitable donation.  The same five-year carryover rule applies.  Also, under CARES Act, anyone can claim a $300 charitable deduction without having to itemize.

How to Put the Premium Tax Credit to Work

By Bob Palechek, CPA | July 19, 2019

The Affordable Care Act (ACA) – nicknamed Obamacare – was disappointing for some, but a godsend for others. If today it is your solution for healthcare coverage, you will want to take maximum advantage of one aspect of it called the ‘Premium Tax Credit,’ assuming you qualify.

The Premium Tax Credit (PTC) is a tax credit ‘advance’ that qualifying taxpayers can receive to help pay the cost of the private health insurance they are purchasing through a Health Insurance Marketplace.

It is considered an ‘advance’ because you can choose to benefit from it every month as a reduction in the cost of your monthly health insurance premium. Whatever sum is determined for you by the HHS formula will be paid directly to the insurance company to lessen how much you have to pay out of your pocket for premiums.

You can also choose not to apply the credit to your insurance premiums. Instead, you can wait to receive it when you file your tax return. In that case, if the amount of the annual credit is higher than your tax liability, the difference will come back to you as a tax refund. And if you owe no taxes, the full amount of the year’s credit will be refunded to you.

Who Can the Premium Tax Credit Benefit?

This tax credit may be available to those paying for their own health insurance. For example:

  • Those whose employers do not offer to pay for health insurance;
  • The self-employed; or
  • People retiring before the age of 65 (when Medicare kicks in), whether they are giving up employer-paid health insurance or not.

However, their household income cannot exceed 400% of the ‘Federal Poverty Line,’ or FPL. The FPL is affected by:

  • Where you live (Alaska and Hawaii’s ‘lines’ differ from the rest of the country);
  • Your family size, which is the number of people you will include on your tax return for the year; and
  • Your income which, for PTC purposes, equals your AGI plus tax-exempt interest.

For example, if you and your spouse live in one of the 48 contiguous states or Washington, D.C., in 2019 the FPL is $16,910. So, if just the two of you file a joint tax return and your AGI + tax-exempt interest income is $67,640 (400% of $16,910) or less, you may qualify.

Understanding AGI

AGI is not only the total of those incomes that are taxed at ordinary income tax rates. If income from any source is taxed at all, it is included in your AGI. Also, AGI is your income before the standard deduction.

Your AGI includes:

  • both qualified and ordinary dividends;
  • the net of both short-term and long-term capital gains;
  • business income or losses;
  • rental income or losses; and
  • deductible contributions to your Health Savings Account.

Your AGI never includes:

  • The portion of your Social Security that is not taxable; or
  • Qualified distributions from a retirement account, like direct rollovers to a new plan or Roth distributions.

However, don’t forget that you must ‘add back’ any tax-free interest received during the year.

When Might You Benefit from the PTC?

The people most likely to benefit from the PTC are those younger than 65 who:

  • are keeping their AGI low by primarily living off Roth distributions and Social Security; or
  • are self-employed and can control when their business losses occur.

To qualify for the PTC, you or a family member also must:

  • Have health insurance purchased through the Health Insurance Marketplace;
  • Pay the balance of the premium (after applying the advance credit payments);
  • Not be eligible for affordable insurance through an employer; and
  • Not be eligible for a government program like Medicaid, Medicare, and others.

These four qualifications must be met for a period of at least one month and must all be occurring during the same month. Some additional requirements include:

  • Having income between 100% and 400% of the FPL for your family size;
  • Not filing taxes as Married Filing Separately (with a few exceptions); and
  • Not being claimed by someone else as a dependent.

If you have any questions about whether you are getting the maximum out of the Premium Tax Credit, call us at 1-844-4-Ask-Jim (1-844-427-5546) and let our Tax Planning Department review it for you.