Since the passage of Tax Cuts and Jobs Act, talk of charitable donations and how it affects your tax situation has changed for many. If you’re one of the many who went from itemizing deductions to no longer doing so, you may now be donating money and not worrying about how it’s recorded.
That situation is not necessarily bad, for you SHOULD still be giving that money. There is great value in donating money to worthy causes even if it doesn’t affect your tax picture.
For those who are still in a position where your charitable giving affects your tax picture, however, there’s nothing wrong with being sure that you put it to its best use in all areas. So this week I wanted to write a little bit about how you can do that.
In this space, I can only hit on some of the big issues that you may not have realized you should think about. If you want to get deeper into it, click here for the IRS’s information on the subject, or always feel free to contact us and set up a personal discussion for your own situation.
The big thing here is to be sure you can substantiate the money that you give. Essentially, you want a record of everything you contribute. An easy way to do this is making donations by check so that the cancelled check serves as that record. Many charities will also give written communication (either with each donation or at the end of the year with a total for that year) detailing what you donated and this will also serve for substantiation purposes.
Things gets a little trickier when it comes to cash giving. There is some wiggle room with what you can claim you gave via cash, but if it is anything over $250, you will need a receipt to officially have it allowed.
These things get even trickier when you donate to an organization and get something in return. For example, if you give $100 and get a ticket to an event valued at $50, only the $50 difference is considered a charitable contribution.
(Trigger warning, the IRS discussion of this involves the term quid pro quo, a term that used to seem so innocent, but now you may be tired of hearing it.)
Then there are the situations where you donate property to a charitable organization. If this is something smaller, like donating clothes to Goodwill for example, getting written acknowledgment of the donation is enough. Once these donations go over $500, though, you move into the area where additional tax forms will be needed. And if you get over $5,000 you start to get into an area where qualified appraisals could become necessary.
And if you do a lot of work yourself for a charitable organization, did you know that the mileage you drive for the group can also become deductible?
Overall, this is a deduction that seems very simple on its surface and is in fact simple for a wide variety of transactions. It doesn’t take THAT much, however, to get into the more complicated areas, and you will want to be sure that you are aware of the rules so that you get the full benefit of your gift.
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The idea of who gets audited is one that seems to interest everyone. And of course it does, if there is are some tips on how it can be avoided, why wouldn’t you use them? Whenever I talk about the issue, though, I always harp on the idea that the best way to not worry about an audit is to make sure that your tax return is legitimate. If you fit in that legitimate category, then you can submit a return that uses the rules to your best advantage and know it will stand up to scrutiny. This doesn’t make an audit a fun experience, it will still be taxing (har har), but it won’t result in a huge financial hit.
Shedding some light on this issue was a recent tidbits column on taxes that I read. What it really comes down to is the issue between tax avoidance and tax evasion. Avoidance is the use of the rules to benefit yourself, while evasion is not paying what you actually owe. Evasion can come in many forms, be it underreporting income, making up expenses, shady bookkeeping practices, etc. Whatever it is, it means you didn’t follow the rules in good faith.
This doesn’t mean that tax avoidance is always applauded, nor should it be. We all have heard stories about extremely wealthy people or corporations paying so little in taxes that it just feels wrong. Where you place the blame for that can vary and feel tough to place. Do you blame the person who takes advantage of a legal situation or do you blame those who instituted the rules in the first place? This can start to feel even worse when you realize that the IRS is understaffed and underfunded, which means less people are getting audited, and then you can’t help but think that people in such positions might be getting away with even more than they should.
And then if you personally get audited, how fair is that? What you should pay by any metric should be much lower than what others are getting away with, isn’t it? I think most people feel this way, but again, we can only do what we can within the rules under which we must play.
In the same article, it mentions mathematical errors being one reason that the IRS’s computer scanning could mark a return for potential audit. Well, at least with ever more powerful electronic tools when it comes to preparing and filing, we can avoid that.
But it then mentions the potential marking of numbers that are out of the average range for those in similar positions to the taxpayer. Does that mean we shouldn’t use them, though, if they are legitimate? Of course not. Let this be the time when you can get back at the system. Maybe you made some moves that put you in a better spot than others, well then you should be able to reap all the benefits that come with that. At that point, you’re not doing any evading, you are just planning well. And no one should hold that against you, right?
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We work with many small businesses and love when those relationships become long-lasting and span many years. Unfortunately, this is not always possible because running a successful business is difficult and there are many trials that can pop up and lead a business to failure. For example, this recent article from Accounting Web lists 19 potential problems. Even if that number of 19 represented all the possible issues, the business landscape would be tricky to navigate, but the fact is that the real amount of potential pitfalls is even larger.
I’m trying to be transparent here, for the article is aimed toward accountants and how they can help (and charge) clients to continue to succeed. And sure, we are looking for business, too, so that our enterprise can also continue to succeed. But we legitimately want to help our clients succeed for that will only be beneficial to everyone involved.
And hey, one of the entries on that list is paying for services that don’t produce results. So instead, we strive to be a service that produces results.
I think for many businesses, finding yourself battling a few of those 19 potential pitfalls is normal and inevitable. It is going to be a rare time when someone starts a perfect business at the perfect time that enters a perfect marketplace and becomes wildly profitable from the start. Worrying about those pitfalls, though, does not mean that you’re bound for failure. In fact, if you are battling them, then you stand a much greater chance of success. The businesses that fail are the ones that do not address their issues.
And as you grow, which battles you need to fight will change. For example, sometimes you offer an item or service that a customer utilizes then will not need to purchase again for a long period of time. In this situation, you may start strong, but will need to continue developing a customer base to maintain that success.
Or it could be that you need some guidance on where to put your efforts in the future for growth. Maybe you experienced success, paid down your debt, and now have funds to spend elsewhere, but don’t know where. Standing still would lead to stagnation, so advice and guidance is needed to move in the right direction.
Yes, there are a lot of places where problems could arise, they are not the same for everyone, and they will not be the same for the life of your business. No matter what, there are people who can help, want to help, and will continue to help as you travel your business’s path. So wherever you find yourself, we would love to help.
For even one of the reasons that the original articles says businesses fail is that they won’t spend money to grow. Expenses are only bad when they aren’t leading you anywhere. Expenses are a good investment when they are put some place dedicated to guiding you toward long-term success.
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Thinking about tax returns never stops, even as we go through the last quarter of the year when it seems like the topic should not be that timely. The IRS is always releasing something, though, and some numbers that have come out recently give a look at how the Tax Cuts and Jobs Act affected the landscape.
As we have seen earlier following the April deadline for returns, the changes were not that wild. Sure, we saw some people whose individual situations were drastically different, but when you spread it out over the millions of tax returns received by the IRS, the numbers largely evened out with previous years. (And if you personally saw a drastic change and have yet to do anything about changing it for next year, time is running short on being able to do that … see last week’s blog.)
And although things do tend to even out when we are talking about tens of millions of instances, the IRS recently released numbers that showed over 2.5 million less tax refunds were sent for the 2018 tax season over 2017. This sounds bad when you think of it from the mindset of “I’d like a tax return,” but that doesn’t necessarily mean it is. After all, a refund is really only giving you money back that you already paid to the government and it was later determined that your obligation was lower. Some changes in how you pay taxes or have them withheld from your paycheck can simply mean that you get that money in smaller chunks throughout the year, giving you quicker access to it.
Where this goes in the future is going to be a little difficult to determine. For one thing, more and more people are making money outside of their standard I-receive-a-paycheck-and-a-W2 job which is lowering the number and amount of refunds. Also, some who was surprised by their tax bill last year would have made changes to avoid that next time. In that situation you tend to just want the final number to come out to zero instead of making sure you get a refund back. Those who get a refund tend to just be happy with it and see it as an unexpected (or hoped for) surprise. Again, never minding the fact that better planning could get that money to you quicker.
The IRS unsurprisingly expects the number of returns it receives to keep growing, though, so who knows where the number of refunds will go. The bigger key is to be sure that you are taking care of your own personal situation and planning within the rules that now exist. This doesn’t mean that figuring out where you stand when it comes to taxes is ever easy or an exact science, but it does mean that you can obtain the power to set up things to work to your best advantage. So if you want to be ahead of things and not just follow national trends, give us a call.
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This week saw the tax extension deadline of October 15th pass. That means you only have six months left before it is time to file taxes again on the regular April date.
Now I know that most of you read that and think six months means there is plenty of time before you have to worry about your tax situation. I also know, though, that there are many who should read that and realize instead that there is not much time left to make moves that can affect your tax picture.
This is the time to think of a critical question. Do you know what your tax return is going to look like when April comes around? If your answer is yes and you are happy with how things look, good job, carry on as you were. If you do not know, though, (or don’t like how things looked last year) it is time to start looking into things and avoiding unpleasant surprises.
Now sure, if your life and employment situation has not changed, then what your tax return looked like for 2018 will be a good approximation of what it will look like for 2019. You can know this without a deep dive. Small changes can make for big surprises, though. So even if you just got a significant raise at work, it can be worth getting the peace of mind that your withholding changed enough with it. Then there are the life changes - did you have a child, did you get married? Is your child no longer a dependent, did you get divorced? All of these will change your return.
Especially if you have had any big changes, though, that deep dive should come now while there is still time to make moves to change it. Did you start a new small business? Or are you running a small business that is now generating more income than before?
And remember, small business doesn’t mean that you left your regular job and started going at it completely on your own. Even joining the gig economy with something like Uber is “running your own business” in some ways as far as taxes are concerned. The money you make there has to be put on top of any regular income you made when it comes tax time. And in most cases, that money has not already been taxed.
Even if you are making some of this extra money and have thought about what its tax implications are, did you remember to include your spouse’s income, as well? This is all going to be made into one pile when it comes time to file your taxes.
Every year, we see clients who receive unfortunate news of how much their tax bill is. More often than not this is due to some changes in their situation that seemed small at the time, but loomed larger when they went into tax calculations. It is not the people making huge amounts of money who are surprised, but the ones in the middle, making some modest gains, who just did not plan.
Planning can hold off the shock of this. It cannot remove the fact that you need to pay some amount in taxes, but we can most likely lessen it some, and then plan for what you will need to pay. So if you do not yet have a handle on things, please contact us to look at your situation while there is still time to make a difference.
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