Are you taking advantage of Qualified Charitable Distributions ("QCDs")?
Many people withdraw money from their IRA to make charitable contributions. The IRA distribution becomes taxable income, and the charitable contribution reduces taxable income. It's a wash, so no big deal, right?
Wrong. This method results in no change to the taxable income, but the adjusted gross income ("AGI") goes up because of the distribution.
AGI is used in numerous calculations on your tax return. Just one simple example is the itemized deduction for medical expenses on Schedule A. As explained in our blog post, medical expenses are only deductible to the extent they exceed a percentage of your AGI. If you receive retirement income, your AGI goes up. Making a charitable contribution lowers your taxable income, but not your AGI. Since this method increases your AGI, less of your medical expenses are deductible.
QCDs allow IRA owners to make charitable contributions and meet Required Minimum Distribution rules without having the amount increase AGI or become taxable income. When a payment is made directly from the IRA to the organization it can be reported on the tax return as if the amount were not a taxable distribution. Since AGI is not increased, more medical expenses are deductible.
Since the QCD is not added to income, it should be noted that the contribution cannot be deducted from income. This is only fair, to prevent the double-dipping of contribution amounts.
For an amount to be a QCD, these rules must be followed.
QCDs meet RMD requirements, and no more than $100,000 may be treated as a QCD. For more information or to see if you can use this strategy to reduce both your AGI and your taxable income while satisfying your desire to make charitable contributions, call us at 435-275-8400 or visit thinknextstep.com.
Are your out-of-pocket medical expenses giving you any tax benefit? Do you realize that unless you have an effective medical expense tax strategy in place, it is likely that your out-of-pocket medical expenses are NOT tax deductible? Without an effective tax strategy in place, your out-of-pocket medical expenses must meet two difficult thresholds before they can be deducted on your tax return.
As we meet with new clients, this is often an issue that hasn’t been explained to them before. Many new clients say they have been submitting their medical expenses to their prior tax accountant thinking they were being included on the tax return and reducing their tax burden. However, unless you meet the two difficult thresholds above, you are getting no tax benefit.
One simple Tax Strategy for Medical Expenses to consider is a Health Savings Account (HSA). If you meet the IRS qualifications for an HSA, the HSA allows you to contribute money and receive a tax deduction. This tax deduction occurs simply by depositing the money to the HSA, even if you do not have any out-of-pocket medical expenses for the year.
We get calls every week from people who are concerned about scammers. It is very important to be extra cautious with your identity and banking information. The IRS will not inform you of a lawsuit via a phone call. They will not email you. They will not text you. They will not contact you on social media. If you ever have a communication from someone claiming to be the IRS, ask for their name, badge number, and call back number. Then you can call the IRS at 1-800-366-4484 and confirm their information. Included below is handy list for what to do if you suspect a scam. If you have questions, please call us first! We can help you determine if a request is legitimate or not.
Schedule C is an attachment to your personal tax return to report business income and expenses. Most often it is used for reporting small, side businesses, such as for a homemaker that also sells makeup, or an office worker that also does lawn care. There are no limits, though, and it can be used for much larger, full-time business activities. (I’ve seen it used for a sales business that exceeded $1 million a year in gross revenues!)
Because Schedule C is (at least compared to the corporate and partnership returns) an easy business return, and because taxpayers have abused it in the past by reporting hobbies as businesses and other inappropriate business expenses, the schedule is viewed by some as a red flag for the IRS.
Put simply, the IRS “red flags” are so-called because of an increased likelihood of an audit, and the increased likelihood of an audit most often comes because of previous abuses by taxpayers.
There is nothing wrong with filing Schedule C. Often it is the most efficient and effective way to report business activity, and I have no concern about reporting an activity on Schedule C. While the overall odds of being selected for an audit are pretty low, being selected can happen to anyone. The key is to ensure that everything is in place to be able to successfully defend yourself, just in case. If you maintain proper documentation, you should be able to sail through an audit with flying colors.
There is a familiar buzz in the air this time of year. Some anxiously awaiting their tax refund, others wondering why the heck they aren’t getting a tax refund at all. Even worse, some shocked by the news of a big fat tax bill they weren’t expecting. We all start to believe, or at the very least wonder, if an effective tax strategy is determined by the answer to this one question - “how big is your tax refund?”
The value of an effective tax strategy is NOT measured by the size of your refund by any means. Here are a few items to consider as you measure the value of your tax accountant and evaluate the effectiveness of your current tax strategy:
The true value of your tax accountant and tax strategy lies in minimizing your overall tax burden and understanding what you can do to keep more money in your pocket. An effective tax strategy must be identified and implemented long before a tax return is due.
So, the next time you are tempted to use the “how big is your tax refund” question as your measuring stick, remember there are much more important questions to consider and adjustments to be made.
Next Step Blog
Our blog is intended as a tool to keep people informed about relevant tax and accounting issues. If you have a question or an idea for a post, let us know!