Many individuals filing their first federal income tax returns since the enactment of the new tax law are surprised to learn that they were not able to write off the donations they made to non-profit organizations in 2018. While few people give to charity solely for a tax break, much ink has been spilled over whether the potential loss of the charitable deduction will cause taxpayers to cut back on their generosity or stop giving to charity altogether. The fact is the Tax Cuts and Jobs Act provides some philanthropic-minded taxpayers with an opportunity to change their giving strategies for greater tax efficiency and charitable impact.
The New Tax Law
Under tax reform, the charitable deduction is available only to those taxpayers who itemize their deductible expenses. With a near doubling of the standard deductions to $12,200 for individuals and $24,400 for married couples filing jointly in 2019, it is estimated that the number of households clearing this threshold and itemizing deductions for charitable contributions in 2018 is approximately half of what it was in 2017, before the passage of the TCJA.
On the other hand, the law provides taxpayers whose deductible expenses exceed the cutoff and are able to itemize their deductions greater tax savings for their charitable contributions. For tax years 2018 through 2025, the amount of the deduction itemizing taxpayers may claim for charitable cash gifts increases to 60 percent of adjusted gross income (AGI) while keeping the current deduction for gifts of appreciated assets at 30 percent of AGI. Moreover, the TCJA’s repeal of the Pease limitations means that high-income households can deduct significantly more of their qualifying itemized expenses through 2025.
Unfortunately, many taxpayers do not have a well-though-out giving strategy; they merely write checks to non-profit organizations here and there. The new law provides an opportunity for families to create a giving plan that allows them to make a greater impact on their favorite charities while at the same time improving their own tax circumstances.
The Solution: Bunching Charitable Gifts
One tactic families can employ to ensure they receive the full tax benefit of their philanthropic efforts is to bundle together two or more years of charitable donations into a single year. This strategy of “bunching” several years of charitable gifts into one year can push taxpayers above the threshold for itemizing deductions in that year and provide them with a deduction for the full value of their donation. In alternate years, taxpayers could give less and simply claim the standard deduction.
As simple as this may sounds, bunching deductions requires careful planning and timing of expenses. After all, philanthropy involves far more than making donations to non-profit organizations in exchange for tax savings. Rather, philanthropy is a state of mind and long-term commitment of time, money and resources to effectuate a positive change in communities around the world and the lives of the people who live there. It is a code of ethics and guiding principle that families share and pass down from one generation to the next. Therefore, philanthropic-minded families want their charitable giving to make a measurable impact on the organizations and people who receive their gifts. To best accomplish this goal, taxpayers may want to consider directing their bunched charitable gifts to donor-advised funds (DAF) that support the specific charities that matter most to them.
More about Donor Advised Funds
DAFs are savings accounts controlled by sponsoring organizations, such as financial services firms or community foundations, that accept and invest taxpayers’ irrevocable charitable donations and later distribute those funds via grants to designated charities. The funds themselves are 501(c)(3) charities that act as turnkey solutions to help taxpayers manage and maximize their charitable giving and tax efficiency. Because DAFs invest donations for tax-free growth, a gift to a DAF in one year can result in a larger grant to a recipient charity in future years.
In return for their multi-year, bunched gifts to DAFs, taxpayers receive an immediate tax deduction for the full amount of their gift in the year of contribution. For cash gifts, the annual deduction can be as much as 60 percent of the taxpayers’ annual AGI in tax years 2018 through 2025, or 30 percent of AGI for gifts of appreciated assets, such as securities, real estate or interest in a family business held for more than one year. By comparison, taxpayers who make charitable contributions to a private foundation can deduct up to 30 percent of AGI for cash gifts and only 20 percent of AGI for appreciated assets. These types of non-cash donations to DAFs or private charitable foundations also provide taxpayers with the ability to reduce or eliminate their exposure to capital gains tax on the appreciation of those assets while also giving a much larger gift to charity. When DAF contributions surpass the IRS limits, taxpayers may carry the deduction forward five years.
For example, a taxpayer who gives $6,000 to charity every year may not receive the benefit of a full tax deduction in each of those years. However, if the taxpayer gives $12,000 to a DAF every two or three years, he or she is more likely to clear the standard deduction ceiling and qualify to write off the full value of his/her bunched charitable gifts in those years. Moreover, because the DAF invests the taxpayer’s $12,000 gift, the recipient non-profit entity will receive the appreciated value of that gift.
The requirements for participating in donor advised funds varies from one sponsor to the next. Even though there is no law governing when or how often a DAF must grant assets to qualifying charities, most have policies in place requiring account owners to grant minimum gifts to nonprofits every few years to ensure that funds are put to work for charitable causes. However, DAF participants should note that while they will receive a tax deduction in the year of their contribution, their donations may not reach the intended charities in the same year. As a result, donors should investigate DAFs before making contributions to ensure that the selected fund squares with the donor’s unique philanthropic goals and philosophies.
Another Solution for Older Taxpayers
Charitable-minded taxpayers over the age of 70½ who are financially comfortable and do not need their individual retirement account (IRA) savings to fund their later years have another giving strategy available to them. More specifically, these taxpayers may make qualified charitable distributions (QCDs) from their traditional IRAs directly to certain non-profit organizations to satisfy their annual IRA required minimum distribution (RMD) obligations. While taxpayers will avoid income tax on the transferred amounts to non-profit entities, their QCDs will not qualify for a charitable deduction. Moreover, taxpayers should be aware that are specific rules prohibiting them from making QCDs to donor advised funds or private foundations or from SEP IRAs, SIMPLE IRAs or 401(k) plans.
Despite the changes that the new tax law brings to charitable deductions, most people will continue to give generously to those in need and carry on their philanthropic traditions. Yet, it behooves taxpayers to examine their existing giving strategies in light of tax reform and consider employing different methods to improve the charitable impact of their gifts and their potential tax savings.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Under the Tax Cuts and Jobs Act (TCJA), businesses have an opportunity to claim larger depreciation deductions beginning in 2018 for qualifying new and used property, including passenger vehicles, they acquire and place into service between Sept. 28, 2017, and Dec. 31, 2026. However, it is critical that businesses pay particular attention to recent IRS guidance to determine deductions when vehicles are eligible for a 100 percent additional first-year bonus-depreciation deduction and subject to depreciation limitations.
In general, Section 179 and depreciation deductions for passenger automobiles are subject to dollar limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year. A new or used passenger car, SUV or truck used by a taxpayer at least 50 percent of the time for business purposes can also qualify for an additional first-year depreciation deduction, which the TCJA increased to a maximum of $18,000 for tax year 2018.
Under prior law, the allowance for a new passenger vehicle was limited to $11,160 in the first year or $3,160 for a used car. According to the IRS, this generous provision of the new tax law could result in irregularities in tax years after the placed in service year and before the first tax year succeeding the end of the recovery period. The safe harbor method of accounting recently issued by the IRS aims to mitigate situations in which the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction exceeds the first-year limitation.
If the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction is allowable exceeds the first-year limitation, the taxpayer may apply the safe harbor accounting method to deduct the excess amount of depreciation deductions on their income tax returns in the first tax year after the end of the recovery period. Doing so requires taxpayers to use the IRS applicable depreciation tables.
Excluded from the benefit of the safe harbor are passenger vehicles that taxpayers place in service after 2022 or those automobiles for which a taxpayer elected out of the 100-percent additional first-year bonus depreciation deduction or elected under Section 179 to expense all of a portion of the cost of the vehicle.
The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
By Edward N. Cooper, CPA
The IRS has issued its annual list of the Dirty Dozen scams that taxpayers should look out for in 2019. Under U.S. laws, taxpayers are legally responsible for the information contained in their tax returns, even when those documents are prepared by someone else. Therefore, it is critical that you take special care when selecting a tax preparer and reviewing your returns for errors. Your best defense to avoid falling victim to these scams is to learn how to spot them and remain vigilant throughout the year.
Phishing Attempts. Criminals are skilled as creating official-looking emails and websites that trick individuals into divulging their personal information. Taxpayers should be wary of all emails and text messages that request they log in to an established account or that ask for sensitive information, such as their social security or tax ID number. Moreover, remember that the IRS will never contact you via email or text, and any message purporting to come from the agency is most likely a scam.
Phone Scams. There has been a steady increase in phone scams in which criminals impersonate the IRS or claim to be IRS debt collectors in order con taxpayers into sending them bogus tax payments. Learn how to recognize these schemes and take extra precautions to protect yourself.
Identity Theft. Tax-related identity theft occurs when someone uses a stolen Social Security number or Individual Taxpayer Identification Number (ITIN) to file a fraudulent tax return and claim a refund. Safeguard your personal information and regularly review your credit report for signs of theft.
Tax Preparer Fraud. While the vast majority of tax professionals provide honest, high-quality service, there are some prepares who operate solely for the purpose of scamming taxpayers, perpetuating identity theft and reaping the benefits of refund fraud.
Inflated Refund Claims. Be wary of tax preparers who ask you to sign blank tax returns, promise you a refund before looking at your records or charging you fees based on a percentage of the refund. Do your homework and check references before selecting a tax preparer.
Falsifying Income to Claim Credits. Con artists have been successful in convincing taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. To avoid significant tax bills and penalties and interest, make sure that you verify the accuracy of the information contained in the tax return you file with the federal government.
Falsely Padding Deductions on Returns. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit, in an effort to reduce your bill or inflate the amount of your tax refund.
Fake Charities. Before making donations to charitable organizations, take the extra time to confirm that the group asking for a contribution is, in fact, a qualified and legitimate non-profit agency. A complete search is available on the IRS website.
Excessive Claims for Business Credits: Avoid improperly claiming tax credits, such as the fuel tax credit and the research credit, unless you satisfy the requirements to legitimately use them.
Offshore Tax Avoidance. Hiding money and income offshore has been the target of a wide sweep of successful enforcement actions. The best option for avoiding penalties and potential criminal prosecution is to come clean and voluntarily report offshore assets.
Frivolous Tax Arguments. While taxpayers do have a right to contest their tax liabilities, they should avoid using frivolous tax arguments or other unreasonable schemes to avoid their tax liabilities. The penalty for filing a frivolous tax return is $5,000 and felony prosecution.
Abusive Tax Shelters. The vast majority of taxpayers pay their fair share to the federal government. However, it is not uncommon for individuals to fall victim to con artists who scam them into using abusive tax structures. Always seek the opinion of professional counsel when faced with a complex tax-avoidance product.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The IRS issued the 2019 optional standard mileage rates that taxpayers may use to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
- 58 cents per mile driven for business use, an increase of 3.5 cents;
- 20 cents per mile driven for medical care or for moving purposes, an increase of 2 cents; and
- 14 cents per mile driven in service of charitable organizations.
It is important to note that a recently enacted change under the Tax Cuts and Jobs Act, taxpayers will not be able to use the business standard mileage rate as a miscellaneous itemized deduction for unreimbursed employee travel expenses. In addition, taxpayers cannot claim a deduction for moving expenses unless they are members of the Armed Forces on active duty under orders of a permanent change of station.
Taxpayers may not use the business standard mileage rate for any vehicles after they use any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
About the Author: Richard Cabrera, JD, LLM, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The new tax law in effect on Jan. 1, 2018, repeals the business deduction for lobbying local governments and their officials, including the Indian Tribal Governments.
While businesses are prohibited from deducting lobbying expenses on the federal and state levels, they previously could qualify to deduct the “ordinary and necessary” expenses they incurred to promote their agendas and yield influence over legislative issues on the local level, where there are a large number of local government bodies and officials as well as an array of different types of activities, transactions and interactions that may or may not qualify as lobbying.
As a result, it is imperative that business taxpayers begin to analyze and assess the expenditures they pay in 2018 to influence local governments, including, but not limited to, promoting or opposing zoning and other local law and regulation changes where the taxpayer has a direct interest, and communications with local government officials with respect to such activities. Careful attention should be paid to review the activities, arrangements and related agreements to determine whether lobbying expenditures are deductible under the new law.
The advisors and accountants with Berkowitz Pollack Brant work closely with businesses in the real estate, healthcare and hospitality industry to comply with complex tax laws while minimizing tax liabilities.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Posted on February 18, 2019