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“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin’s declaration is likely the most famous tax quote ever. But honestly, it’s rather negative. Consider instead this quote by Oliver Wendell Holmes, Jr., which is inscribed above the entrance to the IRS headquarters in Washington, D.C. “Taxes are what we pay for a civilized society.”
Whatever your thoughts on the subject, taxes are a yearly fact of life, and it’s nearly time to start thinking about them again. In this special section, you’ll find stories on how to find a reputable tax preparer, the best tax-smart savings accounts, the tax impacts of charitable giving, and how one local family made it their business to help people with their taxes.
Charitable Donations The Basics of Giving
You know the old adage, It’s better to give than to receive. With proper planning, it’s possible to do both at the same time. Especially during this season of giving, your financial goals may include giving to the causes most important to you. As you plan, these strategies can help you make the greatest impact while potentially receiving tax savings, too.
Ground rules for giving
The tax aspects of charitable giving can be complex. It’s always wise to consult a tax professional about your giving strategy. That said, here are a few ground rules for charitable giving:
- Request a receipt if you donate $250 or more to a single charity. If the donation is in cash, you’ll need a receipt or supporting bank records, regardless of amount.
- Get an independent appraisal for gifts of property in excess of $5,000 ($10,000 for closely held stock). You won’t need an appraisal for exchange-traded stocks, bonds or mutual funds.
- Subtract the value of any benefits you received for your charitable contribution (for example books, tapes, meals, entertainment and so on) before you deduct it.
- Itemize deductions on your tax return if you plan to deduct charitable donations. If your standard deduction exceeds your charitable contributions and other deductible expenses, you likely won’t itemize. You’ll help your favorite charity—which is a good reason on its own—but won’t reduce your tax bill.
Tax treatments by type of gift
The tax advantages of a charitable contribution generally depend on three factors: the recipient (only donations to qualified charities are deductible), how you structure the gift, and the type of asset you choose to give. Different types of charitable donations—cash, stock or personal property—offer different tax advantages and drawbacks:
- Cash: Cash donations are simple but as previously mentioned, make sure you keep a receipt from the charity or a bank record (such as a canceled check or statement) to substantiate your cash gift, no matter how small.
- Tangible personal property: You can donate almost any item, including used clothing, household goods, or vehicles. Gifts of used clothing and household items must be in “good” used condition or better, under IRS tax rules. If the property doesn’t relate to the charity’s mission, you may deduct the amount you paid for the property or the property›s current reasonable value, whichever is less. If property is related to the charity’s mission—old clothes donated to the Salvation Army, for example—it’s usually fully deductible based on its current reasonable value. Some charities will provide guidance on the value, but it’s ultimately up to you to determine the value for tax purposes.
- Long-term capital-gain property: You can usually deduct the full fair market value of appreciated long-term assets you’ve held for more than one year, such as stocks, bonds or mutual funds. In addition, if you donate stocks or other investments, you pay no capital gains tax. Donating investments—especially highly appreciated securities—instead of cash can be a very effective and tax-efficient way to support a charity. Generally, if your assets have appreciated in value, it’s best not to sell securities to generate the cash you need for a donation. Contributing the securities directly to the charity increases the amount of your gift as well as your deduction. But remember, the deduction is limited to 30% of your adjusted gross income (AGI). If you’re holding securities with a loss, it’s usually better to sell first. By doing so, you can take the capital loss for tax purposes and then donate the cash. In most cases, though, donating appreciated securities can be a cost-effective way to benefit the charities of your choice.
- Volunteering: You can deduct transportation costs and other expenses related to volunteering. However, the value of volunteer time isn’t deductible.
Giving through specialized charitable vehicles
While gifts of cash or appreciated investments can be given directly to a charity, it often makes sense to consider specialized charitable vehicles to make giving easier and to manage the tax benefits. If you give regularly, endowed giving vehicles like donor-advised funds or private foundations can make sense.
Donor-advised funds, for example, allow you to contribute cash or appreciated investments held for more than one year, receive a current-year tax deduction, and avoid paying capital gains tax on the sale of assets contributed. You can invest funds to potentially grow over time and then grant the assets to a worthy cause down the road.
If you prefer to leave assets to charity but also earn income for a period of time, a charitable remainder trust (CRT) or pooled income fund is worth exploring.
Each vehicle, strategy and provider may offer different benefits, including tax deductibility, administrative costs, flexibility, and account minimums. For more options or to compare options, talk with a financial planner to establish a giving approach to suit your needs.
How to Choose a Tax Preparer
Tax season is nearly here, and if you’re not planning to do your own taxes but you don’t have a tax preparer, now’s the time to find one.
But there are so many options. How do you choose?
- First, check out tax preparers’ qualifications: What training did they receive? Do they stay up-to-date by taking continuing education classes? Do they have a professional license?
- According to the IRS, three types of tax professionals — enrolled agents, certified public accountants, and tax attorneys — “have met substantial proficiency requirements.” These tax preparers are also qualified to represent their clients before the IRS on any tax-related matters, including audits, payment/collection issues, and appeals. Ideally, none of those issues will apply to you, but if they do, you’ll probably be grateful to have a competent professional who can communicate with the IRS on your behalf.
- Other types of tax preparers who participate in the IRS Annual Filing Season Program have what’s known as “limited representation rights.” This means they can represent clients before the IRS only on certain matters. In general, tax return preparers not listed in the searchable IRS online directory can prepare tax returns but wouldn’t be able to represent you with the IRS if there were problems after your return was filed.
- You should also check a tax preparer’s history for problems like disciplinary actions. The Better Business Bureau can help with this.
- In addition, if someone promises you a much larger tax return than you were expecting before they even look at your records, it’s probably a sign that something’s fishy. The IRS also recommends avoiding tax preparers who base their fees on a percentage of your refund or who ask to you to deposit your refund into their own account.
- Make sure the preparer offers electronic filing. According to the IRS, “any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically.”
- Finally, bankrate.com recommends asking any potential tax preparer for references and ensuring that the office will be open after your return has been filed in the event that you — or the IRS — have questions.
- In case you need more motivation to find a competent, trustworthy professional, keep in mind that you, not your tax preparer, are legally responsible for all the information on your tax return.
If you’re still not sure where to start, ask friends, relatives, or co-workers for recommendations. Once you have a list of a few options, let the research begin!
IRS Directory of Federal Tax
Return Preparers with Credentials and Select Qualifications:
Make a Complaint About a Tax Return Preparer:
Better Business Bureau: