Only about a third of Americans file income tax returns using itemized deductions. Unfortunately many of those who don't itemize are overpaying their taxes. Don't wait until tax time to figure out if itemizing your deductions yields a lower tax bill. Start now to review your situation and plan for a reduction in your taxes by the end of the year.
The standard deduction for 2017 is $6,350 for individual taxpayers and $12,700 for married couples filing jointly. If you can identify deductions over these amounts, your taxable income will be lower. The first step in this process is to estimate your known itemized deductions. Start by breaking out your potential itemized deductions into these five piles.
Pile #1: State and local taxes. You may deduct state and local taxes on either property or sales, but not both. If you live in a place with high property taxes, or you’ve made big purchases during the year and paid a lot in sales tax, this could be a big source of itemized deductions.
Pile #2: Mortgage interest. You can deduct interest paid to secure a primary or secondary residence. Since interest payments are front-loaded onto the early years of a mortgage, this is a big deduction for new homeowners.
Pile #3: Charitable contributions. Contributions to qualified charities can be used as itemized deductions. This includes cash donations, non-cash donations, and even mileage on behalf of qualified charities.
Pile #4: Medical expenses. Medical expenses greater than 10 percent of your adjusted gross income can be deducted from an itemized tax return.
Pile #5: Miscellaneous itemized deductions. With miscellaneous itemized deductions, you can generally deduct the total that exceeds 2 percent of your adjusted gross income. There are many potential deductions, such as:
Total up your potential deductions, remembering to only count the deductions for miscellaneous and medical expenses that exceed the adjusted gross income thresholds.
If You're Close but Not Quite There
If you are near your standard deduction threshold, here are some ideas to push you over the line.
On occasion, shifting deductions may result in using itemized deductions in one year and the standard deduction in the next. However, if you plan well, you'll have a lower total tax burden over the course of both years. Please feel free to ask for help if you would like to review your situation.
Earthquakes, volcanoes, and sonic booms. Storms, fires, and floods. Vandalism, terrorism, and car accidents. All of these fall under the U.S. tax code definition of “casualty losses,” and your losses due to these events may be tax-deductible.
According to the IRS tax code, a casualty loss is the “damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual.”
As you can tell from the lists of events mentioned above, this definition covers a lot. It’s usually easier to describe what casualty losses are not:
Not sudden: Things that progressively deteriorate over time are not casualty losses. Damage from mold, pests or just the passage of time don’t count under IRS rules. For example, your water heater breaking down after years of use is not a casualty loss, but any sudden water damage to your carpets as a result is.
Not unexpected: If willful or negligent behavior caused the destruction, that’s not a casualty loss. For example, a fire caused by playing with matches is not unexpected, nor is a car accident caused by drinking and driving.
Not unusual: The typical breaking of fragile items like china or glass is not a casualty loss; nor is the common destruction of property by a family pet.
A casualty loss is the “damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual.”
Why It Matters
If you have a casualty loss, you must first file a timely claim with your insurance company, if you are covered. Being able to prove claim submission and rejection of claims can help support your casualty loss deduction.
After subtracting any insurance payout, the amount of unreimbursed losses greater than 10 percent of your adjusted gross income, minus $100, is generally deductible from your tax return.
Jennifer Peck’s $500,000 home was destroyed by fire. The insurance company agrees on a $475,000 settlement, leaving Jennifer with a $25,000 casualty loss. Jennifer is able to deduct the amount of the loss, minus $100. That is greater than 10% of her adjusted gross income of $50,000. This gives her a potential deduction of $19,900.
There are often special conditions that apply. If you think you have a casualty loss that qualifies, we would be glad to talk it over with you.
As an employee, can you ever deduct the cost of a sporting event or other ticket on your expense report? Surprisingly, the answer can be yes, but only if you know and abide by the rules.
The Accountable Plan
If your employer uses accountable plan rules for reimbursing expenses, the IRS will not only provide the ability for you to be reimbursed by your employer for your qualified expenses, it will also allow your employer to deduct the expense on their corporate tax return. To be a qualified expense, three rules must be met:
Applying the Rules
To apply these expense deduction rules to a sporting event:
What Can Go Wrong?
As you can imagine, the IRS looks closely at those who deduct entertainment as a qualified business expense. Here are some things to watch for:
The average taxpayer claims the standard deduction when they file their federal tax return, but some filers may be able to lower their tax bill by itemizing. You can determine which way saves the most money by figuring your taxes both ways.
Here are some tips to help you decide which way to file:
*If a taxpayer is 65 or older, or blind, the standard deduction is higher than normal. The deduction may be limited if the taxpayer can be claimed as a dependent.
The majority of taxpayers are able to claim an exemption for themselves, decreasing the taxable income on their tax return. You may also be able to claim an exemption for each of your dependents. Each exemption usually allows you to deduct $4,050 on your 2016 tax return.
Below are five important tips to remember when it comes to dependents and exemptions:
If you have a low- to moderate-income you can take steps now to save for retirement and receive a special tax credit.
The “Saver’s Credit” helps offset some of the first $2,000 that you voluntarily contribute to an IRA, 401(k) plan or similar workplace retirement program. Also known as the “Retirement Savings Contributions Credit”, the Saver’s Credit is available in addition to any other tax savings for which you may qualify.
If eligible, you still have time to make qualifying retirement contributions and get the Saver’s Credit on your 2016 tax returns. You have until the due date for filing your 2016 return (April 18, 2017), to set up a new IRA or add money to an existing IRA for 2016. Elective deferrals (contributions) to a 401(k) plan or similar workplace program must be made by the end of the year.
Who can claim the Saver’s Credit?
Similar to other tax credits, the Saver’s Credit can increase a taxpayer’s refund or reduce the tax owed. Although the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it is often much less.
A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.
The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Roth IRA contributions are not deductible, but qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to a 401(k) or similar workplace plan are not taxed until they are withdrawn.
There are some other special rules that apply to the Saver’s Credit. To learn more or find out if you qualify, contact Ellsworth & Associates at (513) 272-8400. Mention this article and receive a free consultation.
The time to file taxes is growing closer. Don't just sit and wait for the inevitable. There are things you can do now to prepare.
Last Minute Deductible Donations
If you're like most taxpayers, December 31st is the final day to take actions that will affect your 2016 taxes. For instance, charitable donations are deductible in the year they were contributed. Donations charged to a credit card prior to the end of 2016 count for the 2016 tax year, even if the bill isn’t paid until 2017. If you write a check, it will count for 2016 as long you mail it by the last day of the year.
If you are over the age of 70 ½, you are usually required to take payments from your individual retirement accounts and workplace retirement plans by the end of 2016. Most workplace retirement account contributions should be made by the end of the year, but you can make 2016 IRA contributions until April 18, 2017. For 2016, the limit for a 401(k) is $18,000. For traditional and Roth IRAs, the limit is $6,500 if age 50 or above and up to $15,500 for a Simple IRA if you are 50 or older.
Did You Move?
If you moved during 2016, make sure to tell the IRS. To do this, send IRS Form 8822 (the “Change of Address” form) to the address included in the form’s instructions.
Did Your Name Change?
If you were married or divorced in 2016 and your name changed, let the Social Security Administration (SSA) know so the new name will match in IRS and SSA records. Do the same for any name changes of your dependents. A mismatch between the name on your tax return and the name the SSA has on file for you can result in issues processing your return, and might actually slow down your refund.
Make Sure You're Saving Copies of Your Tax Returns
If you haven’t kept copies of your tax returns in the past, you’ll want to start doing that now. The IRS is making changes to help guard taxpayers and validate their identities. For example, you might need to know your adjusted gross income amount from a previous tax return to confirm your identity.
The IRS has announced the 2017 standard mileage rates. These rates can be (but are not required to be) used to calculate the deductible expenses of using a vehicle for business, charitable, medical or moving purposes.
The standard mileage rates for the use of a vehicle in 2017 will be:
The business mileage rate was reduced half a cent per mile and the medical and moving expense rates each fell 2 cents per mile from 2016. The charitable rate is designated by law and will not change.
The standard mileage rate for business is based on a yearly study of the fixed and variable expenses of operating a vehicle, unlike the rate for medical and moving purposes, which is based solely on the variable expenses.
Using these rates is optional. You can always calculate the actual cost of using your car instead.
As tax filing season approaches, it's important to remember that taxpayers who give money or goods to a charity by Dec. 31, 2016, may be able to claim a deduction on their 2016 federal income tax return and reduce their taxes.
Only donations to eligible organizations are tax-deductible. IRS Select Check on IRS.gov is a searchable online tool that lists most eligible charitable organizations. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations even if they are not listed in this database.
Claiming Charitable Donations
Only taxpayers who itemize using Form 1040 Schedule A can claim deductions for charitable contributions. Charitable deductions are not available to individuals who choose the standard deduction or file Form 1040A or 1040EZ. Most tax software will alert taxpayers about the tax savings available if their itemized deductions, such as mortgage interest, charitable contributions, state and local taxes, exceed the standard deduction.
A bank record or a written statement from the charity is needed to prove the amount of any donation of money. Bank records include canceled checks, and bank, credit union and credit card statements. Donations of money include by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
For donations of clothing and other household items the deduction amount is normally limited to the item’s fair market value. Household items include furniture, furnishings, electronics, appliances and linens. Clothing and household items must be in good or better condition to be tax-deductible. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed. Special rules apply to cars, boats and other types of property donations.
Benefit in Return
Donors who receive something in return for their donation may have to reduce their deduction. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.
Older IRA Owners Have a Different Way to Give
IRA owners, age 70½ or older, can transfer up to $100,000 per year to an eligible charity tax-free. Funds must be transferred directly by the IRA trustee to the eligible charity. For details, see Publication 590-B.
The type of records a taxpayer needs to keep depends on the amount and type of the donation. An additional reporting form is required for many property donations and an appraisal is often required for larger donations of property.