Pump the Breaks Before Donating that Vehicle to Charity

Many people might consider donating their vehicles to charity at year end to start the new year. Why not get a fresh ride and a tax deduction, eh? Pump the brakes — this strategy doesn’t always work out as intended.

Donating an old car to a qualified charity may seem like a hassle-free way to dispose of an unneeded vehicle, satisfy your philanthropic desires and enjoy a tax deduction (provided you itemize). But in most cases, it’s not the most tax-efficient strategy. Generally, your deduction is limited to the actual price the charity receives when it sells the car.

You can deduct the vehicle’s fair market value (FMV) only if the charity 1) uses the vehicle for a significant charitable purpose, such as delivering meals to homebound seniors, 2) makes material improvements to the vehicle that go beyond cleaning and painting, or 3) disposes of the vehicle for less than FMV for a charitable purpose, such as selling it at a below-market price to a needy person.

If you decide to donate a car, be sure to comply with IRS substantiation and acknowledgment requirements. And watch out for disreputable car donation organizations that distribute only a fraction of what they take in to charity and, in some cases, aren’t even eligible to receive charitable gifts. We can help you double-check the idea before going through with it.

Five Last-Minute Tax Moves for Your Business

The days of the calendar year are vanishing quickly, but there still may be some last-minute strategies that business owners can use to lower their 2019 tax bills. Here are five to consider:

  1. Postpone invoicesIf your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
  2. Prepay expensesA cash-basis business may be able to reduce its 2019 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
  3. Buy equipmentTake advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2019 return, the assets must be placed in service — not just purchased — by the end of the year.
  4. Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2019 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year end. But certain plans — such as SEP IRAs — allow your business to make 2019 contributions up until its tax return due date (including extensions).
  5. Qualify for the pass-through deductionIf your business is a sole proprietorship or pass-through entity, you may qualify for the pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $160,700 ($321,400 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can evaluate your current tax liability and offer guidance based on your particular situation.

Year-End Tax and Financial To-Do List for Individuals

With the dawn of 2020 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2019 ends:


Check your Flexible Spending Account (FSA) balance
If you have an FSA for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.

Max out tax-advantaged savingsReduce your 2019 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2019 return if they’re made by April 15, 2020.)

Take required minimum distributions (RMDs)If you’ve reached age 70½, you generally must take RMDs from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2020, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.

Consider a qualified charitable distribution (QCD)If you’re 70½ or older and charitably inclined, a QCD allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).

Use it or lose itMake the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.

Contribute to a Section 529 planSec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).

Review withholdingThe IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld because of changes under the Tax Cuts and Jobs Act. Use its withholding estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator ) to review your situation.

If it looks like you could face underpayment penalties, increase withholding from your or your spouse’s wages for the remainder of the year. (Withholding, unlike estimated tax payments, is treated as if it were paid evenly over the year.)

For assistance with these and other year-end planning ideas, please contact us.

Asset Protection is Just as Important as Tax Planning

Like many financially savvy individuals, you’re probably already thinking about filing your tax return next year. But don’t overlook another critical and equally important aspect of financial planning: asset protection. Here are some fundamental strategies to consider.


Buy Liability Insurance

Liability insurance policies help protect your assets from the financial risks associated with personal liability that results from an adverse legal judgment. Auto and homeowner’s policies, for example, usually include some liability coverage. Increasing your liability coverage beyond the standard amounts will provide additional asset protection.

Personal liability umbrella insurance can give you even more liability coverage above the limits of your auto and homeowner’s policies. For instance, if you were sued for causing a car accident or found liable for injuries suffered by a visitor to your home, umbrella insurance could provide coverage up to the policy limits (such as $1 million).

Look to Statutory Protection

Federal or state law exempts certain kinds of property and assets from creditor liens. Thus, some assets you own may automatically be protected due to statutory guidelines. Qualified retirement plans are this type of asset, as are IRAs and 401(k) plans, life insurance proceeds and Section 529 college savings plans. But keep in mind that inherited assets may not have the same degree of protection.

The amount of home equity that’s protected (generally called the “homestead exemption”) depends on state law. In some states, it’s very generous, but in others it’s extremely limited, given the value of homes today. In a couple of states, there’s no protection. Consult with an attorney about your state’s laws.

Establish a Trust

Assets placed in an irrevocable trust can’t be removed, nor can the trust terms be changed. Thus, you’ve effectively relinquished control over the assets and put them out of reach of your creditors. The asset transfer must be done in advance of the act that created the liability, or the transfer could be nullified. In other words, the time to think about setting up such a trust is before you need to take advantage of it.

An irrevocable trust also can help you protect assets for your children and grandchildren. Consider structuring the trust in a way that effectively gives future generations the benefit of the assets without transferring ownership of them to your heirs. This can shield those assets from your descendants’ future creditors.

If you decide to use trusts as part of your asset protection strategy, remember that they may be subject to higher income tax rates and additional tax filing requirements. Trusts also may be costly to set up and require expert legal counsel to administer and maintain.

Obtain Expert Assistance

The details involved in implementing asset protection strategies can be complex. We can offer you guidance in your case.

 

Sidebar: Asset Ownership Structure is Key

Ownership of your assets plays an important role in whether they can be seized by creditors. Thus, it might be wise in some situations to transfer ownership of certain assets to your spouse. If you’re at a high risk of liability — for example, you’re a business owner — one strategy might be to retain ownership of assets with statutory protection, as mentioned in the main article, and transfer ownership of all other assets to your spouse.

Business Owners, Your Bad Debts May be Deductible

If you hold a business-related debt that’s become worthless or uncollectible, a “bad debt” deduction may allow you to cut your losses. But there are a few hoops to jump through.


Business or Nonbusiness

Business bad debts generate ordinary losses; nonbusiness bad debts are reported as short-term capital losses. The latter can be used only to offset capital gains (plus up to $3,000 in ordinary income). Also, you can’t take a deduction for partially worthless nonbusiness bad debts. They must be totally worthless to be deductible.

A business bad debt is a loss related to a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly or totally worthless. Common examples include credit sales to customers for goods or services, loans to customers or suppliers and business-related guarantees.

Some debts are considered both business and nonbusiness (personal). For example, say you guarantee a loan on behalf of one of your best customers, who also is a friend. If your friend later defaults, the test for whether your loss is business or nonbusiness is whether your “dominant motivation” in making the guarantee was to help your business or your friend.

If a bad debt is related to a loan you made to your business, the IRS may deny a bad debt deduction if it finds that the loan was a contribution to capital.

To qualify for a bad debt deduction, the underlying debt must be bona fide. That is, you must have loaned the money or extended credit with the expectation that you would be repaid and with the intent to enforce collection if you weren’t repaid. Proper documentation is key.

Included in income?

Not all bad debts are deductible. The purpose of the deduction is to offset a previous tax liability. So, you must have previously included the receivable in your income.

Typically, that’s not the case with respect to accounts receivable if your business uses the cash-basis method of accounting. Cash-basis taxpayers generally don’t report income until they receive payment. If someone fails to pay a bill, the business simply doesn’t include that amount in income. Permitting a bad debt deduction on top of that would give the business a windfall from a tax perspective.

Accrual-basis taxpayers, on the other hand, report income as they earn it, even if it’s paid later. So, a bad debt deduction may be appropriate to offset uncollectible amounts previously included in income.

Pursuing a Deduction

Review your business debts to assess whether any became partially or totally worthless during 2019. If so, and if you’re an accrual-basis taxpayer, we can help you pursue a deduction.

 

Sidebar: Handle Acounting for “Charge-Offs” Carefully

You can deduct a partially worthless portion of business debt, but only if that amount has been “charged off” for accounting purposes during the tax year. The IRS takes the position that simply recording an allowance or reserve for anticipated losses isn’t enough. You must treat the amount as a sustained loss, which requires specific language in your books. Deductions for totally worthless debts don’t require a charge-off. But it’s a good idea to do so anyway because, if the IRS determines the debt was only partially worthless, it can disallow the deduction absent a charge-off.

Living the Dream of Early Retirement

Many people dream of retiring early so they can pursue activities other than work, such as volunteering, traveling and pursuing their hobbies full-time. But making this dream a reality requires careful planning and diligent saving during the years leading up to the anticipated retirement date.

It all starts with retirement savings accounts such as IRAs and 401(k)s. Among the best ways to retire early is to build up these accounts as quickly as possible by contributing the maximum amount allowed by law each year.

From there, consider other potential sources of retirement income, such as a company pension plan. If you have one, either under a past or current employer, research whether you can receive benefits if you retire early. Then factor this income into your retirement budget.

Of course, you’re likely planning on Social Security benefits composing a portion of your retirement income. If so, keep in mind that the earliest you can begin receiving Social Security retirement benefits is age 62 (though waiting until later may allow you to collect more).

The flip side of saving up enough retirement income is reducing your living expenses during retirement. For example, many people strive to pay off their home mortgages early, which can possibly free up enough monthly cash flow to make early retirement feasible.

By saving as much money as you can in your retirement savings accounts, carefully planning your Social Security strategies and cutting your living expenses in retirement, you just might be able to make this dream a reality. Contact our firm for help.

Making Gifts to Loved Ones? Don’t Forget Tax Planning!

Many people want to pass assets to the next generation during their lifetimes, whether to reduce the size of their taxable estates, to help family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that the type of assets you give can produce substantially different tax consequences.


Multiple Types of Taxes

Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2019, it’s $11.4 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.

Estate Tax Impact

If your estate is large enough that federal estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

If estate tax isn’t a concern, your family may be better off taxwise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.

Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.

Income Tax Considerations

You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.

Don’t gift investments that have declined in value. A better option is generally to sell them prior to death, so you can claim the tax loss. You can then gift the sale proceeds.

Capital losses can offset capital gains, and up to $3,000 of net capital losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess capital losses can be carried forward until death.

Choose Wisely

No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any substantial gifts you’d like to make.

Making Charitable Donations Out of IRA RMD

With the new higher standard deductions, it has become difficult to itemize deductions for most taxpayers who historically have done so. Therefore, most taxpayers are receiving no benefit from charitable donations.

However, receiving a tax benefit from charitable donations is still available for those taxpayers who are 70 1/2 or older and who are receiving RMDs (Required Minimum Distributions) from their IRA accounts. To receive the tax benefit, the IRA recipient must have their IRA trustee write the check directly to the charity from the IRA account. By following this procedure, the IRA recipient will reduce the total IRA distributions by the charitable donations and only report the net of these two amounts as taxable IRA distributions. This, in effect, reduces the amount of AGI (Adjusted Gross Income), which reduces income taxes and can also potentially reduce the amount of taxable social security benefits, while potentially reducing the taxpayer’s Medicare premiums in future years.

Not a bad deal to reduce taxes AND give to charity. Questions? Contact us today!

Act Now to Save 2019 Taxes on Your Investments

Do you have investments outside of tax-advantaged retirement plans? If so, you might still have time to reduce your 2019 tax bill by selling some investments — you just need to carefully select which investments you sell.


Balance Gains and Losses

If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.

If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, you’ll essentially lock in the peak value and avoid tax on your gains.

Review Tax Rates

At the federal level, long-term capital gains (on investments held more than one year) are taxed at lower rates than short-term capital gains (on investments held one year or less). The Tax Cuts and Jobs Act (TCJA) retained the 0%, 15% and 20% rates on long-term capital gains. But, through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets. For example, for 2019, the thresholds for the top long-term gains rate are $434,551 for singles, $461,701 for heads of households and $488,851 for married couples.

But the top ordinary-income rate of 37%, which also applies to short-term capital gains, doesn’t go into effect for 2019 until taxable income exceeds $510,300 for singles and heads of households or $612,350 for joint filers. The TCJA also retained the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.

Check the Netting Rules

Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains.

You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.

Consider Everything

Keep in mind that tax considerations alone shouldn’t drive your investment decisions. Also consider factors such as your risk tolerance, investment goals and the long-term potential of the investment. We can help you determine what makes sense for you.

Illinois’ Tax Amnesty Programs Run From October 1 to November 15, 2019

Illinois has enacted two tax amnesty laws – one covering taxes administered by the Illinois Department of Revenue, and the other covering franchise taxes and license fees administered by the Illinois Secretary of State. These acts provide taxpayers the opportunity to pay outstanding tax liabilities and receive penalty AND interest forgiveness on taxes paid in full during the amnesty period.

Taxpayers may participate in the programs any time between October 1, 2019, and November 15, 2019.

Illinois Department of Revenue – Tax Types and Periods

The program covers taxes due from periods ending after June 30, 2011, and prior to July 1, 2018.  The tax amnesty program applies to most taxes collected by the Illinois Department of Revenue such as:

  • State income tax (individual, corporate, and partnership)
  • Sales and use tax
  • Real estate transfer tax
  • Payroll withholding
  • Excise and utility taxes (telecom, hotel, liquor, utility, etc.)

To report a tax (or additional tax) liability, you’ll need to file an original or amended tax return and make full payment of the tax during the amnesty period.  If the tax due has been referred to a private collection agency, payment must be made to the private collection agency.

Illinois Secretary of State – Tax Types and Periods

The program covers franchise taxes and license fee liabilities for any tax period ending after March 15, 2008, and on or before June 30, 2019.  Eligible tax liabilities include:

  • Unreported increases to paid-in capital
  • Initial and annual franchise taxes

Participants eligible for the franchise tax amnesty program include Illinois corporations, foreign (e.g., Delaware) corporations authorized to transact business in Illinois, and all foreign corporations that have been transacting business in Illinois without authority.  To participate, you’ll need to file a one-page amnesty petition that sets forth all the documents filed under the amnesty program and make full payment of the tax during the amnesty period.

If you have questions about whether you qualify for these programs, please contact your local Scheffel Boyle office.