Feeling Charitable? Be Sure You Can Substantiate Your Gifts

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As the end of the year approaches, many people give more thought to supporting charities they favor. To avoid losing valuable charitable deductions if you itemize, you’ll need specific documentation, depending on the type and size of your gift. Here’s a breakdown of the rules:

Cash gifts under $250

A canceled check, bank statement or credit card statement will do. Or ask the charity for a receipt or “other reliable written record” that provides the organization’s name, the date and the amount of the gift.

Cash gifts of $250 or more

You’ll need a contemporaneous written acknowledgment from the charity stating the amount of the gift. That means you received the acknowledgment before the earlier of your tax return due date (including extensions) or the date you file your return. If you make multiple separate gifts to the same charity of less than $250 each (monthly contributions, for example) that total $250 or more for the year, you can still follow the substantiation rules for cash gifts under $250.

Noncash gifts under $250

Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more

Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts, plus a description of the property.

Noncash gifts of more than $500

In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it. Also, file Form 8283.

Noncash gifts of more than $5,000 ($10,000 for closely held stock)

In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art)

In addition to the above, include a copy of the signed appraisal, not just a summary, with your return.

Finally, if you received anything in exchange for your donation, such as a book for making an online donation or food and drink at a fundraising event, ask the charity for the fair market value of the item(s). You’ll need to subtract it from your charitable deduction.

Saving taxes isn’t the primary motivator for charitable donations, but it may affect the amount you can afford to give. Substantiate your donations to ensure you receive the deductions you deserve.

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Medicare Premiums may Lead to Tax Savings

If you pay Medicare premiums for health insurance, you may be able to combine them with other qualifying expenses and claim them as an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans, which cover some costs that Medicare Parts A and B don’t cover.

Generally, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying health care expenses exceeded 7.5% of your adjusted gross income. But, if you’re self-employed people or a shareholder-employees of an S corporation, you can generally claim an above-the-line deduction for your health insurance premiums, including Medicare premiums. That means it’s not necessary for you to itemize deductions to get the tax savings.

Contact the office with questions about claiming medical expense deductions on your personal tax return. Also, be sure to ask for help identifying an optimal overall tax-planning strategy based on your personal circumstances.

408-252-1800

A Strategy to Raise Your Medical Expense Deduction

With a little planning, you may be able to boost your itemized medical expense deduction when you file your 2024 tax return next year. Only eligible expenses exceeding 7.5% of your adjusted gross income are deductible. It’s not an easy hurdle to clear, short of a major medical disaster, which, of course, you want to avoid. But you can use a strategy called “bunching” medical expenses to exceed the 7.5% threshold.

Say, for example, that you’ve already scheduled surgery that will involve out-of-pocket expenses but you still fall short of the deductible threshold. Think about scheduling elective procedures, such as dental work or Lasik surgery, and making qualified purchases [Topic no. 502, Medical and dental expenses | Internal Revenue Service (irs.gov)] that will push you over the threshold for the year.

Remember, only the expenses over that amount and that aren’t covered by insurance or paid through a tax-advantaged account will be deductible. Contact the office for help running the numbers.

408-252-1800

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How To Be Ready To Secure a Business Bad Debt Deduction on Your 2023 Tax Return

Is your business having trouble collecting payments from clients or vendors? You might be able to claim a bad debt deduction on your tax return. But if you hope to take the deduction on your 2023 return, you’ll have to get busy, because you must be able to show that you’ve made a “reasonable” effort to collect the debt.

First, a cash-basis taxpayer may claim a business bad debt deduction only if the amount that’s owed was previously included in gross income. Second, a business must establish that the debt is legitimate and can’t be recovered from the debtor. To this end, as mentioned, you must make a reasonable effort to collect the amount that’s due.

This doesn’t necessarily mean you have to file a lawsuit against the debtor. But you can’t just make a single phone call either. Give it your best shot. You might actually be able to collect the debt! But if you can’t, you’ll have put yourself in a position to potentially claim a bad debt deduction.

Partially or Totally Worthless

Often, the specific charge-off method (also called the direct write-off method) is used for writing off bad debts. In this case, you can deduct business bad debts that became either partially or totally worthless during the year.

For tax purposes, partially and totally worthless are defined as follows:

Partially worthless. The deduction is limited to the amount charged off on your books. You don’t have to charge off and deduct your partially worthless debts annually, so you can postpone this to a later year. However, you can’t deduct any part of a debt after the year it becomes totally worthless.

Totally worthless. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount (less any amount deducted in an earlier tax year when the debt was partially worthless).

Note that you don’t have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. But if you don’t record a charge-off and the IRS later rules the debt is only partially worthless, you won’t be allowed a deduction for the debt in that tax year. Reason: A deduction of a partially worthless bad debt is limited to the amount actually charged off.

Time Is Short

If you haven’t started your collection efforts yet but hope to claim a business bad debt deduction for 2023, time is short. So, spring into action now. For instance, you might start collection efforts through phone and email contacts. If that doesn’t work, you may want to follow up with a series of letters or even hire a collection agency. Finally, if all else fails, contact the office about the prospects of claiming a business bad debt deduction on your 2023 return.

(408) 252-1800

Follow IRS Rules to Nail Down a Charitable Tax Deduction

Donating cash and property to your favorite charity is beneficial to the charity, but also to you in the form of a tax deduction if you itemize. However, to be deductible, your donation must meet certain IRS criteria.

First, the charity you’re donating to must be a qualified charitable organization, with tax-exempt status. The Exempt Organizations Search tool on the IRS website allows users to search for a specific organization and check its federal tax-exempt status.

Second, contributions must be actually paid, not simply pledged. So, if you pledge $5,000 in 2023 but have paid only $1,500 by Dec. 31, 2023, you can deduct only $1,500 on your 2023 tax return.

Third, substantiation rules apply, and they vary based on the type and amount of the donation. For example, some donated property may require you to obtain a professional appraisal of value.

Many additional rules and limits apply to the charitable donation deduction. Contact the office to learn more.

(408) 252-1800

Standard vs. Itemized Deductions

When completing a tax return, taxpayers have two options: take the standard deduction or itemize their deductions. Most taxpayers use the option that gives them the lowest overall tax. Due to all the tax law changes in recent years, including increases to the standard deduction, that means taking the standard deduction – but not always. Let’s look at a few details about these two options.

Standard deduction

The standard deduction amount increases slightly every year and varies by filing status. Factors that affect the standard deduction amount include the taxpayer’s filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don’t itemize deductions are entitled to a higher standard deduction.

Most filers who use Form 1040, U.S. Individual Income Tax Return, can find their standard deduction on the first page of the form. For most filers of Form 1040-SR, U.S. Tax Return for Seniors, the standard deduction is on page 4.

Not all taxpayers can take a standard deduction. Those taxpayers include:

  • A married individual filing as married filing separately whose spouse itemizes deductions – if one spouse itemizes on a separate return, both must itemize.
  • An individual who files a tax return for a period of less than 12 months. This situation is uncommon and could be due to a change in their annual accounting period.
  • An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien can take the standard deduction in certain situations.

Itemized deductions

Taxpayers who choose to itemize deductions should file Schedule A, Form 1040, Itemized Deductions. Itemized deductions that taxpayers may claim include:

  • State and local income or sales taxes
  • Real estate and personal property taxes
  • Home mortgage interest
  • Mortgage insurance premiums on a home mortgage
  • Personal casualty and theft losses from a federally declared disaster
  • Gifts to a qualified charity
  • Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income

Some itemized deductions, such as the deduction for taxes, may be limited. Don’t hesitate to contact the office for more information on these limitations or any other questions.

Questions?

If you’re wondering which option is right for you, feel free to give us a call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500