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:

• Job-related clothing and equipment
• Unreimbursed job expenses
• Job-hunting expenses
• Tax preparation fees
• Casualty and theft losses

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.

• Donate stock. If you donate cash to a favorite charity, consider donating profitable stock held more than one year. Not only will the donation be an itemized deduction based on the current value of the stock, the long-term gain will not be taxable.
• Make two years of giving in one year. Since you can claim donations when paid, consider prepaying next year’s donation in the current year. This effectively doubles your donations for one year, allowing for a higher itemized deduction total.
• Pay taxes prior to year-end. The same technique can be used with property taxes and other tax payments. Make next year’s payments in December of the prior year. This will effectively put two years of taxes into one filing year. While you may not be able to itemize deductions every year using this technique, it can yield a lower tax bill this year.
• Defer income. A good option for small businesses is to delay the receipt of income, which lowers the threshold for claiming medical expenses and miscellaneous deductions.

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.

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:

1. Expenses must be related to the duties and responsibilities of the employee for their employer.
2. The expenses must be properly substantiated in a timely manner. This is usually within 30 to 60 days.
3. Any excess reimbursements to the employee must be returned to the employer.

 
Applying the Rules
To apply these expense deduction rules to a sporting event:

• There must be a business purpose for attending the event and
• an employee must accompany a prospective customer, a current customer or supplier to the event.

If you apply these rules, your employer can usually deduct 50% of the ticket cost and related expenses.
 
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:

• No customer or supplier is in attendance. Make sure you attend the event with your customer or the tickets are deemed a gift.
• The environment does not provide for a quiet place to conduct business. Do not try to deduct concert tickets or sporting events if you do not first meet in a quiet place prior to or after the event to conduct your business affairs.
• Over-charging the ticket price. You may only deduct the price of a ticket that is generally available to the public.
• Bringing friends. Generally you can include a spouse in the event, but other family members or unrelated guests can raise red flags.

As you can imagine, this area of expense deductibility is often the focus for the IRS during a review. If in doubt, please ask for help and clarification on the deductibility of this type of entertainment expense.

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:

• Figure Your Itemized Deductions. Taxpayers need to add up deductible expenses they paid during the year. These may include expenses such as:
  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses
• Know The Standard Deduction. If a taxpayer doesn’t itemize, then the basic standard deduction for 2016 depends on their filing status*. If the taxpayer is:
  • Single - $6,300
  • Married Filing Jointly - $12,600
  • Head of Household - $9,300
  • Married Filing Separately - $6,300
  • Qualifying Widow(er) - $12,600
• Check the Exceptions. There are some situations where the law does not allow a person to claim the standard deduction. This rule applies if the taxpayer is married filing a separate return and their spouse itemizes. In this case, the taxpayer’s standard deduction is zero and they should itemize any deductions. See IRS Publication 17 for more on these rules.
• Use the IRS ITA Tool. Go to IRS.gov and use the Interactive Tax Assistant tool. It can help determine whether a taxpayer can use the standard deduction. It can also help a filer find their eligibility for certain itemized deductions.
• File the Right Forms. For a taxpayer to itemize their deductions, they must file Form 1040 and Schedule A, Itemized Deductions. Filers can take the standard deduction on Forms 1040, 1040A or 1040EZ.

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*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:

1. Personal Exemptions. You can frequently claim exemptions for yourself and your spouse on a jointly filed tax return. For married taxpayers filing separate returns, an exemption can only be claimed for your spouse if that spouse:
   • Had no gross income,
   • Is not filing a tax return, and
   • Was not the dependent of another taxpayer.
2. Exemptions for Dependents. A dependent is either a child or a relative who meets a set of conditions. You can usually claim dependents as exemptions. Be sure to list a Social Security number for each dependent.
3. No Exemption on Dependent’s Return. If you can claim a person as a dependent, then that dependent cannot claim a personal exemption on his or her own tax return. This is true even if no one claims that person on a tax return.
4. Dependents May Have to File. A dependent may have to file a tax return. This depends on certain factors like total income, whether they are married and if they owe certain taxes.
5. Exemption Phase-Out. If you earn above a certain amount, you will lose part or all of the $4,050 exemption.

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?

• Married couples filing jointly with incomes up to $61,500 in 2016 or $62,000 in 2017;
• Heads of Household with incomes up to $46,125 in 2016 or $46,500 in 2017; and
• Married individuals filing separately and singles with incomes up to $30,750 in 2016 or $31,000 in 2017.

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.

Retirement Accounts
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.
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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:

• 53.5 cents per mile for business miles driven, a 0.5 cent decrease from the 2016 rate
• 17 cents per mile for medical or moving purposes, which was 19 cents for 2016
• 14 cents per mile driven while serving charitable organizations

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.
 
Monetary Donations
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.
 
Donating Property
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.
 
Good Records
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.