Questions for the Tax Lady: October 25th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, if I donate Halloween candy and costumes to a local children’s home, is that deductible?

Answer: What a fun idea and a wonderful thing to do for those kids. Dressing up for Halloween is such a big part of childhood; I love the idea of helping underprivileged kids experience that!

To answer your question, yes you should be able to deduct the contribution so long as the children’s home is a recognized tax-exempt charitable organization. If you aren’t sure, you can ask the organization or you can check out www.IRS.gov to be sure. And remember, you will need some written acknowledgement of your donation from the children’s home, like a thank you letter.

Question: What are the differences between tax credits, deductions, and exemptions?

Answer: I’m so glad you asked this question, people use these terms interchangeably, and it drives me a little nuts.

A deduction refers to something you spent money on that can be deducted from your taxable income. The amount of the deduction varies based on what the expense was, how much you spent and IRS eligibility requirements. For example: if you donate $1,000 to a recognized charity, you could deduct your taxable income by $1,000.

An exemption allows you to reduce your taxable income, much like a deduction. However, exemptions are given in set dollar amounts ($3,650 in 2010) and are not tied to your actual expenses. Instead they are generally tied to the number of people you support. For example, you can claim an exemption for yourself, one for your spouse if you file jointly, and one additional exemption for each taxable dependent you support.

The tax bill impact of deductions and credits is tied to your tax bracket. If you are in the 25% tax bracket, a $1,000 deduction results in a $250 reduction in tax your tax bill. In the same vein - still assuming a 25% tax bracket - that $3,650 exemption will result in a $912.50 reduction in tax bill.

A tax credit is a dollar for dollar reduction in your tax bill. Credits are usually tied to how you spend money, or your income and family status. So, if you have a $100 tax credit, it will result in lowering your total tax bill by $100. Tax credits are almost always more beneficial than deductions.

There are refundable and non-refundable types of credits. A refundable credit means that if the amount of your credit exceeds the amount of taxes due, you can actually get a refund check for the rest. (For example, if your tax bill is $500, and you have a refundable credit for $1,000, you could actually get a refund check for $500.). Non-refundable credits can only result in a reduction of your tax bill, but not give you a refund. For example, if you have a $500 tax bill, and a $1,000 non-refundable tax credit, your tax bill will be reduced to zero, but you would not get a check for $500.

I hope this helps clarify these tax terms for you. Understanding the differences can help you make better tax choices.

Haiti Donations: $1.3 Billion

Relief organizations in the U.S. have raised an estimated $1.3 billion for Haiti relief, but experts are warning that more support will be needed to continue dislocated Haitians throughout hurricane season. Philanthropist Stacy Palmer says that while the money donated has provided food, water and shelter to many, the temporary homes most Haitians are living in are not suitable to withstand hurricane weather.

The donations have been enough to provide basic necessities such as food and water, according to Stacy Palmer, editor of the Chronicle of Philanthropy. But now homeless Haitians also need help fending off tropical storms.

"That's potentially worrisome with the hurricane season about to begin," she said. "The kind of shelters that people are in right now are tarps and things that would not necessarily be able to withstand a hurricane. The goal is to get sturdier kind of housing."

Palmer said that $1.3 billion is an impressive tally, coming close to the $1.6 billion that was raised in the wake of the 2004 tsunami in the South Pacific.

Continue reading at CNN.com…

Tax Court Denies Charitable Deduction for $200 Cash Given to Panhandlers & $29k of Stuff Donated to Goodwill

Last Thursday, the US Tax Court ruled on Roberts v. Commissioner and denied a taxpayer’s attempt to claim a charitable deduction for $200 cash given to panhandlers and $28,655 of household items donated to Goodwill. You can check out a section of the opinion below, courtesy of the Tax Prof, or click here for the full PDF.

For 2005 petitioner claimed, on Schedule A, Itemized Deductions, a $200 cash charitable contribution, which he described as donations to panhandlers and the Salvation Army, and $28,655 of noncash charitable contributions. Included with his 2005 Federal income tax return was a self-prepared substitute Form 8283, Noncash Charitable Contributions, in which petitioner claims to have contributed more than 450 items of property consisting primarily of used clothing, but also including, among other things, towels, bedsheets, books, costume jewelry, children's toys, and glass lamps. Petitioner's descriptions of the items of property allegedly contributed to charity are vague and include self-assigned estimates of their values. Petitioner also provided copies of five receipts from Goodwill Industries (Goodwill) dated January 9, April 13, May 18, September 16, and October 1, 2005. Only one of the receipts bears a signature indicating that the donated items were received by Goodwill, and the receipts provide nothing more than vague references to the items allegedly donated; e.g., "men's boots", "ladies' clothes", "men's clothes", "boy's clothes", "women's clothing", and "4 bags of clothes". ...

With respect to the claimed $200 of cash contributions to charity, petitioner has failed to offer anything more than his self-serving testimony that he made various donations to panhandlers and the Salvation Army. ... Petitioner did not offer any canceled checks, receipts, or other reliable evidence to substantiate the claimed $200 of cash contributions to charity. Accordingly, we sustain respondent's determination to deny to petitioner a deduction for the claimed $200 of cash contributions to charity.

[P]etitioner has neither attached to his Federal income tax return nor proffered an appraisal summary to establish the values of the items allegedly donated. ... [T]he copies of the five receipts from Goodwill neither reconcile with petitioner's substitute Form 8283 nor provide anything more than vague descriptions of the items donated. Accordingly, we find that petitioner has failed to establish, by proper and adequate substantiation, entitlement to a charitable contribution deduction for the noncash items he claims to have donated to charity. We therefore sustain respondent's determination to deny petitioner a deduction for noncash contributions to charity.

House Votes for Faster Tax Breaks for Chile Gifts

The House of Representatives passed a bill today that would allow taxpayers to deduct Chile relief donations made by April 15th on their tax returns. The non-controversial bill, which should easily sail through the Senate, would also extend the deadline for Haiti donations to April 15th. Check out the following article on the new development courtesy of the Associated Press.

Under current law, donors would have to wait until next year, when they file their 2010 returns, to claim the deductions. The House bill would allow donations made by April 15 to be deducted on 2009 returns.

The House passed the bill Wednesday on a voice vote, with no opposition. It now goes to the Senate. Congress passed a similar bill for donations to Haiti quake victims made before the end of February. The bill would extend the deadline for Haiti donations until April 15 as well.

The House has passed a bill that would allow taxpayers to write off charitable donations to Chile earthquake relief efforts when they file their 2009 taxes this spring.

Under current law, donors would have to wait until next year, when they file their 2010 returns, to claim the deductions. The House bill would allow donations made by April 15 to be deducted on 2009 returns.

Questions for the Tax Lady: March 8th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Can I still make donations to Haiti that can be counted on my 2009 tax return?

Unfortunately, no. The deadline to make deductions that can be counted on your 2009 tax return was February 28^th. However, if you have any extra money then you should still consider making a donation; you can claim the deduction on your 2010 return. To learn how you can make a contribution checkout this article on the top 10 options for donating to the Haitian relief efforts.

Question #2: If my husband and I start a new business can we classify it as a sole proprietorship or do we need to form a partnership?

You and your husband can classify the business as a sole proprietorship as long as you meet the following IRS conditions:

1. The only partners in the partnership are a husband and wife

2. They file a joint tax return

3. The husband and wife must materially participate in the trade or business.

4. Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture and each spouse filing a separate Schedule C, C-EZ, or F accordingly, and, if required, a separate Schedule SE to pay self-employment tax.

For more information see Election for Husband and Wife Unincorporated Businesses.

Questions for the Tax Lady: January 18th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply. I will do my best to get an answer for you!

Question #1: Roni, I donated to the Red Cross through my cell phone to support their Haiti relief operations. Can I deduct this donation on my tax return next year?

Yes. All contributions to qualified charities are fully deductible. Just keep a copy of your next cell phone bill as proof of the donation.

For those of you who have not already, text “HAITI” to 90999 to make a $10 donation to the Red Cross.

Question #2: What is the head of household filing status?

In addition to filing as single taxpayer you can also file your tax return as “head of household.” Typically, if you qualify then your tax rate will be lower and you will be able to receive a higher standard deduction. However, in order to qualify you must meet the following IRS requirements, for more information check out IRS Publication 501.

1. You are unmarried or “considered unmarried” on the last day of the year.

2. You paid more than half the cost of keeping up a home for the year.

3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you. See Special rule for parent, later, under Qualifying Person.

Post CFC Tax Incentives to Buy a Car

Now that the popular Cash for Clunkers (CFC) program has ended, consumers can no longer take advantage of a $3,500 or $4,500 rebate towards the purchase of a new car. However, the CFC program was just one of the many incentives the government has setup to encourage taxpayers to buy a new vehicle. For those of you debating whether or not you can afford a new car, check out the following list of Federal tax incentives.

New Car Purchase Deduction

To help stimulate the economy, earlier this year the IRS announced a new tax deduction for taxpayers who purchase a car in 2009. The new deduction allows you to deduct “state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle." Therefore, if you pay $2,500 in taxes when you buy that new car, then you can deduct those funds from your taxable income come next tax season. Just be sure to keep all of your sales documents so you have proof of the taxes you paid. Additionally, there is no word yet on whether the deduction will be extended or not. So, if you are planning to buy a car then you might want to do so before the end of 2009.

Hybrid Tax Credits

There are numerous tax credits that are still available for those of you hoping to purchase a hybrid, or alternative fuel vehicle. The highest of which is a $4,000 credit for taxpayers who purchase a Honda Civic GX that runs entirely on compressed natural gas. As opposed to the new car sales tax deduction, the hybrid incentives are tax credits, meaning it will lower your tax bill dollar for dollar. To see a list of all the qualifying vehicles, check out FuelEconomy.gov.

Electric Vehicles

Although somewhat less practical then a hybrid vehicle, electric powered automobiles come with the best set of tax incentives. As part of the Obama administrations American Recovery and Reinvestment Act of 2009, a new credit was created to encourage taxpayers to purchase electric vehicles. The credit is up to 10% of the purchase price, and depending on how much the vehicle costs, it could be a pretty significant tax credit. For those of you who might be hesitant, later in 2010 plug-in electric vehicles are expected to hit the market and will be eligible for a similar credit.

Vehicle Donations

If you decide to purchase a new vehicle, then you may want to consider donating your old car. In addition to knowing you are supporting a good cause, you can also reap certain tax benefits. There are several reputable charities that will take your still-running (sometimes even not running) vehicles. Just make sure that the charity you select has a non-profit status with the IRS, that way you can include the donation as a charitable contribution on your next tax return.

Conversion

If you are a mechanic, or are just handy with cars, then you might be able to take advantage of conversion tax credits. Another section of the American Recovery and Reinvestment Act of 2009 gives taxpayers who purchase a kit to convert their car to an electric vehicle a 10% tax credit, up to $4,000. Additionally, according to the IRS taxpayers may claim this credit even if they have already claimed a hybrid purchase credit.

Business Expense

Finally, if you are self-employed or own a business then you might be able to take advantage of certain business car credits. You could take a mileage deduction based on the amount you drive your car for business reasons. Alternatively, if you lease a vehicle then you could write off a percentage of the monthly payments that corresponds with the amount of time you use the car for work. These credits could save you up to $1,500 per year. However, business related vehicle expenses can be quite tricky, and if you intend to take this route then I highly recommend speaking with a tax professional before making any decisions.

IRS Reminds Charities and Churches of Political Activity Ban

Recently the Internal Revenue Service put out a press release reminding charities and churches, and other section 501(c)(3) organizations, that federal law prohibits them from becoming directly or indirectly involved in campaigns of political candidates. However, these organizations can engage in advocating for or against issues and, to a limited extent, ballot initiatives or other legislative activities. "The political contests, especially for president, are starting earlier than usual. The IRS, as it has in the past, wants to remind charities and churches of the ban on political campaign activity. We also want to urge nonprofit and religious organizations to review the guidance we have issued to help them avoid any problems," notes Steven T. Miller, Commissioner of IRS’ Tax-Exempt and Government Entities Division.

Top 5 Tax Audit Red Flags

CNN has compiled a list of the top five red flags in tax returns that might cause you to get audited. Included in the list is making too much money, giving too much to charity, taking too many credits, making careless errors, and failing to submit an alternative minimum tax schedule (if your earnings qualify). For more details on each of the five red flags, check out CNN.com.