Do you have the right records for Charitable Gifts?

For most of us, getting organized to complete our annual Income Tax Return is a chore. We would prefer to expend the minimum amount of effort to get the job done. Luckily, many records such as income figures are provided to us by others (W-2’s, 1099’s etc). In addition, minimizing your taxes due often involves documenting charitable gifts for itemized deductions. Maximizing the benefits from those charitable gifts does require a bit more work on your part. While you may be aware that you need to keep records to deduct charitable gifts you make, you may not realize that it is fairly common not to receive IRS-compliant documentation from nonprofit organizations. Therefore, it is up to you to know the rules yourself and confirm you receive the correct documents. Below is an outline of what to keep when you make Charitable Gifts (by donating Cash, Check, via Credit Card, etc): For Gifts under $250: You need to have a record showing the name of the organization, date and amount of the contribution. One or the other of these will work:

1. Bank Record such as cancelled check, bank or credit card statement, or
2. A receipt from the organization

This means gifts such as putting cash in the Salvation Army Red Bucket are not deductible.

For Gifts of $250 or more: In addition to the record showing the name of the organization, date and amount of the contribution described above, you also need a written acknowledgement from the charity that meets all three of the following requirements:

1. The acknowledgement includes the amount of the contribution. and
2. It states if any goods or services were received by you in exchange for the gift. (Note: this is required even if no goods or services were received; this is the most commonly missed item we see on charity acknowledgement letters.) and
3. The written acknowledgement needs to be received before you file your tax return.

There are documented court cases in which the IRS disallowed deductions made for charitable gifts that would have qualified as deductions, but proper documentation was not provided to the taxpayer by the charitable organization. If you are missing any of the information above, you should reach out to the organization. They may not even be aware of the reporting requirements themselves, especially for a small, volunteer run charity.

For non-cash gifts such as donations of personal items or household goods, shares of investment securities, etc, there are additional recordkeeping requirements to follow. Please be sure to consult IRS Publication 526 or contact us to learn more.

Identity Theft Actions

In a previous Blog post, Protecting Your Financial Life in the Digital Age, we discussed ways to protect yourself against identity theft. While it is important to take all the precautions you can to protect yourself it is also important to know what to do if you should fall victim to identity theft. Below are several actions to take if you find your identity has been compromised. Action 1: At a minimum, you should place a fraud alert with the three Credit Reporting Agencies.  This should limit a potential thief’s ability to establish new credit in your name.  Complete instructions can be found with this link.

For added protection, consider freezing your credit. This will limit any new credit from being established under your name while the freeze is in effect.

To freeze your credit, contact each of the nationwide credit reporting agencies:

• Equifax — 1‑800‑525‑6285
• Experian —1‑888‑397‑3742
• TransUnion — 1‑800‑680‑7289

You'll need to supply your name, address, date of birth, Social Security number and other personal information. Fees vary based on where you live, but commonly range from $5 to $10. This fee may be waived with a verification that you are a victim of identity theft.

After receiving your freeze request, each credit reporting agency will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze.

Action 2: Request credit reports from at least one of the three Credit Reporting Agencies.  Review your report for any lines of credit that you don’t recognize.  The report will have instructions on disputing your account if needed.  Reports may be accessed for free at www.AnnualCreditReport.com.

Action 3: Contact custodians of your bank and investment accounts to inform them of your identity theft.  Banks may assign new account or credit card numbers.  Investment custodians may flag your account to avoid distributions of funds without additional steps to authenticate requests.

Action 4: Consider filing a Police Report and an Identity Theft Complaint with the Federal Trade Commission (link here).  Document all communication with banks and financial institutions.  Keep dated notes of phone calls and copies of all correspondence.  Official disputes should be in writing and sent with tracking (such as certified mail with a return receipt).

Action 5: If you are victim of Tax related fraud, also consider these steps.

Generally you will need to file a paper tax return.  Along with the return, Form 14039 – Identity Theft Affidavit will need to be attached to alert the IRS of the fraudulent activity.  For subsequent years once your identity has been authenticated, the IRS will provide you a PIN Number to file future returns electronically.

Consider requesting a tax transcript to see what return was filed under your social security number.  This can be done at http://www.irs.gov/Individuals/Get-Transcript.

Consider reviewing your Social Security statement to ensure that your earnings history is reported correctly.  This can be done at http://www.ssa.gov/.

The Hidden Danger of Large Tax Refunds

It is no secret that many taxpayers use payroll tax withholding as a method of forced savings.  Each spring they receive a large refund on their tax return, using the proceeds to fund a vacation, a car down payment, or other large purchase or savings goals.  In doing so, they put themselves at more risk than they realize. You have heard the usual arguments against overpaying on your tax return to receive a large refund.  There is the opportunity cost, which is the forgone interest you could have earned by saving or investing those funds during the year.  Given near zero interest rates on traditional banking products, this loss is small.  Most who rely on the large refund technique would argue that the inaccessibility of these funds promotes savings when self-control is not enough.

If there were a substantial risk your refund could be delayed by months or even years, would you change your mind about this strategy?  The IRS reports that tax fraud related to stolen identities is on the rise.  In one common scam, a thief will file a false return under your social security number and claim a large refund.  Once you attempt to file your actual return, the IRS system rejects your claim.

In most tax fraud cases, it takes time to work through the layers of IRS taxpayer bureaucracy and advocacy to substantiate your claim.  This process is slow and it can take up to 18 months or more to get your refund.  It is not hard to imagine a scenario where a taxpayer who relies on this large annual tax refund is left in a pinch when her refund is delayed.  You may be the one stuck with penalties or interest when your delayed refund results in missed payment deadlines for your real estate taxes, credit card bill or other bill you planned to pay with the refund.

This year I encourage you to avoid over-withholding to gain a large refund.  Instead, adjust your withholding to a lower level sufficient to pay your expected tax bill.  Then, with your larger net paycheck, focus on ways to save out of sight, out of mind.  In today’s digital banking era, direct deposits and automatic transfers from each paycheck can easily be setup to force savings.

Getting Organized for Taxes

It is that time of the year when ads for tax software and national tax firms are beginning to appear, reminding us that tax filing season is quickly approaching.  Before you get too anxious, remember half the battle is getting organized.  To help those whose records are a little scattered, we have compiled some helpful hints in getting organized:

Record Keeping

• Have trouble hanging on to receipts?  Opt to pay by check or credit card for easy record keeping.  Better yet, if you have lots of deductible expenses, opt for a separate account for deductible versus personal expenses.
• Wonder how long to keep those tax records?  Generally the IRS has three years from the due date of your return to audit and ask for more documentation.  Be safe and keep everything for 5 years.  After that, feel free to toss (or shred) supporting documentation.  Keep the return itself forever as you never know when it might come in handy.

Charitable Donations

• Paid Cash & No Receipt?  Not deductible.  Period.
• Donation of more than $250?  Be sure the organization acknowledges the gift in writing AND states that no goods or services were provided in exchange for the gift.
• Do not undervalue your non-cash gifts (Goodwill, Salvation Army, Etc).  Use an aid such as Deduct It, Deduct It! to properly value your donated items.   

Medical Expenses

• Ask your medical facility and pharmacy for a summary of all expenses incurred during the year.  This is a great way to save time adding up receipts.
• Transportation costs to and from medical care are deductible.  Keep a log of medical miles with the date, # of miles, and facility visited.   

Real Estate

• If you refinanced your home, do not forget mortgage interest for the old loan and the new loan.  Even if they are from the same bank, you may get separate reports on interest paid.
• Many counties provide records of Real Estate Tax paid.  Champaign County has records available here.
• If you bought or sold your home, closing documents may be needed to determine who (buyer/seller) paid how much in taxes.

Reviewing your prior year return might help remind you of items you may need for this year.  If your tax situation is more complicated, such as those with rental properties or consulting income, consider tracking your expenses with programs such as Quicken™ or Mint.com.

Same-Sex Marriages Recognized For Federal Tax Purposes

Yesterday, the US Treasury and IRS ruled same-sex couples legally married in a jurisdiction that recognizes that marriage will be valid for federal tax purposes.  This applies whether or not the couple is currently living in a jurisdiction that recognizes the marriage.  This ruling clarifies tax filing and benefit questions following the Supreme Court striking down the Defense of Marriage Act (DOMA) in June of this year.  You can read the complete ruling here.

What about Illinois Civil Unions?

This ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law, thereby excluding Illinois Civil Unions.  However, if you were married in another state or foreign country recognizing same-sex marriages, you may still qualify.

What benefits does this include?

The ruling applies to all federal tax provisions where marriage is a factor.  This includes:

• The ability to file a joint tax return and the ability to take personal and dependency exemptions
• Taxation of employee benefits, such as tax free receipt of same-sex spousal health insurance
• Estate and gift taxes, allowing for unlimited tax-free gifts and unlimited marital deduction for estate tax purposes to your same-sex spouse

Can I Amend Prior Tax Returns?

Yes, if you previously filed single or head of household in a year in which you were legally married, you may be eligible to amend the return to change marital status. There are limitations to be aware of.  For instance, the statue of limitations general restricts amendments of returns to three years following the original due date of the return.  For most couples, this would restrict them to amending only 2010 and beyond.  Exceptions may apply for specific circumstances.

What are the next steps?

For our clients who are affected by this ruling, we will be discussing how this applies to you directly and how to adjust your financial and tax plan accordingly.

If you are not a client, but interested in finding more about how your tax situation integrates into your entire financial picture, contact us today!