Tax Planning

IRS Publication 5349: Year-round tax planning is for everyone as life changes can affect taxpayers’ expected refunds or the amount of tax they will owe. These changes include things like employment status, marital status, and financial gains or losses. Publication 5349 (below) provides tips on developing habits throughout the year that will help make tax preparation easier. This resource also includes a checklist of items taxpayers should have on hand when filing their tax returns.

 

Planning on Making Charitable Contributions this Holiday Season?

Will Your Donation Be Tax Deductible? 

Many taxpayers think that donating to any tax-exempt organization is tax-deductible. However, only contributions to specific tax-exempt organizations are deductible. §170 of the Internal Revenue Code does allow a tax deduction for charitable contributions but what are "Charitable Contributions"? 

§170(c) defines "Charitable Contribution" as a contribution or gift to or for the use of (I will stop us here as the section gets complicated). It would be difficult for an individual reading the tax code to determine whether a donation to a not-for-profit organization or tax-exempt organization is deductible without the help of a tax professional. Thankfully, the IRS rolled out Tax Exempt Organization Search (TEOS) an online tool allowing users to search for information about the exempt organization. Taxpayers may use TEOS to determine if a donation to a specific charity qualifies as a tax-deductible charitable contribution.  

How Much of Your Donation is Tax-Deductible?

Assuming you make a donation to a qualified organization, how much of this donation is deductible on your income tax return?  First, it is important to understand that receiving a tax benefit for claiming a charitable contribution is only available for those taxpayers who itemize their tax returns. Said another way taxpayers electing the standard deduction will not receive a tax benefit.

Did You Receive a Benefit or Something of Value? 

If you received a benefit or something of value in exchange for your donation than the amount of donation representing the FMV of goods or services received is not deductible.  Said another way, you may only deduct the amount of your donation that exceeds the value of any benefit received.

To illustrate: If you purchased two charity event tickets for $1,000 ($500 each) only a portion of the $1,000 will be tax deducible. If the FMV of goods or services being provided at the event is $150 per person/ticket than $350 a ticket is tax-deductible. In practice, the ticket might state how much of the purchase price is tax-deductible. Alternatively, the organization should mail letters to donors acknowledging the contribution and the value of goods or services provided.

I want to wish everyone a happy holiday and remember that making donations this time of year is not about the tax deduction(s) but about giving back and paying it forward.  HAPPY HOLIDAYS! 

Unable to Pay Tax Return Balance Due?

As tax season winds down many taxpayers will owe taxes when filing their income tax returns. This is not an issue when the taxpayer has money to pay the tax balance due. However, when the taxpayer does not have the funds necessary to pay the tax some individuals would rather not file or file a tax return extension.

Income Tax Return Balance Due (and cannot pay) 

In the event, a taxpayer has a balance due on their tax return and currently unable to pay.  The taxpayer should file the tax return without making payment for the amount due. Doing this will avoid a late filing penalty.

What is the Penalty for Failing to File a Tax Return by the Due Date?

Under §6651 of the Internal Revenue Code, a penalty is imposed for failure to file a tax return.  This penalty is 5% of the tax return balance due; and 5% for each additional month the tax return is not filed but not to exceed 25% in the aggregate. Therefore it is more important for a taxpayer expecting to owe taxes to timely file a tax return, than a taxpayer expecting a refund because the taxpayer receiving a refund will not be subject to a failure to file penalty.  

The IRS offers advice to taxpayers who owe taxes but can't pay.

An Extension of Time to File is Not an Extension of Time to Pay!  

Extensions are needed when information necessary to file a complete and accurate tax return is not available until after the filing deadline. This is very common for taxpayers that are partners and shareholders in flow-thru entities who receive their K-1 after April 15th.  

Taxpayers will need to estimate the amount of tax that will be owed with the tax return.  This amount should be paid with the extension (i.e. an extension payment). If the taxpayer underestimates this amount the taxpayer may be subject to a failure to pay estimated tax penalty (IRC §6654).  

Beware of Trap! Remember, an extension is an extension of time to file your tax return, not to pay the tax.  Therefore taxpayers need to estimate the amount of tax that will be owed and submit payment with the extension.  IRS TRAP-> the IRS can VOID your extension!  If the IRS determines the estimate was not reasonable the extension will be voided (as if the extension was never filed).  If this happens the taxpayer will be subject to a failure to file penalty.  

Additional information on filing a tax return extension can be found here. 

Apply for an Installment Agreement 

After filing an income tax return with a balance due (and without payment), the taxpayer will receive a bill from the IRS for the tax due plus any interest or penalty. The taxpayer may now enter into a payment plan called an installment agreement to pay the outstanding tax balance.  

If you have any income tax questions or need to speak with a Long Island Tax Attorney feel free to contact our law firm at (212) 520-2906.  Disclaimer: This blog post is offered for information and educational purposes only and not intended to be tax or legal advice.