Maximize your tax benefits for charitable gifts

While giving gifts to charity is usually a reward on its own, donors could often also expect to get a tax deduction. Because of recent tax law changes, that may not be the case this year, unless you take some extra planning steps.

Tax breaks for donating still exist

As before, charitable deductions are only available when you itemize your tax deductions (as opposed to claiming the standard deduction). However, even if you itemized in the past, you may decide not to under current law.

Certain itemized deductions have been reduced or eliminated, while the standard deduction has essentially been doubled to $12,000 for single filers and $24,000 for married joint filers. This means you could donate $10,000 to charity this year without realizing a charitable deduction, if you don’t have other itemizable deductions. The changes are effective for 2018 through 2025.

But don’t give up on donation tax benefits just yet. Depending on your situation, you might boost charitable donations to the point where you will still itemize deductions. Consider these ideas:

  • Give away appreciated property. If you’ve owned the property longer than a year, you can deduct its full current value — instead of your cost — without ever paying any tax on the appreciation.
  • Use a donor-advised fund (DAF). With a DAF, you designate charities that will receive contributions from a general pool. You can deduct your lump-sum donation immediately even though money may be paid out to charities over time.
  • Bunch your donations in years you expect to itemize deductions. Cut back or skip contributions in some years so you can double your donation amounts for other years.
  • Roll over funds from an IRA. If you’re age 70½ or older, you can transfer up to $100,000 directly from an IRA without any tax consequences. You get no tax deduction, but the distribution isn’t taxable either. The payout counts as a required minimum distribution (RMD). In other words, you had to take an RMD anyway, so you may as well give it to charity.

Feast on tax benefits for company picnics

Have you planned a summer outing for your employees? It might be a picnic or barbecue for the Fourth of July. Despite recent tax law changes eliminating most entertainment and meal deductions, your business can still deduct qualified expenses if certain requirements are met. In fact, you might be able to write off the entire cost.

What to expect for 2018

Most entertainment and meal expenses have been repealed, beginning in 2018. In addition, the tax benefits for company-provided eating facilities, like cafeterias or dining rooms, have been reduced. For 2018 through 2025, the deduction for these facilities is cut from 100 percent of the cost to 50 percent, before disappearing completely in 2026. Nonetheless, this remains a tax-free benefit to employees.

Under prior law, you could generally deduct 50 percent of the cost of your company’s qualified entertainment and meal expenses. For instance, if you held a business meeting with a client in the afternoon and then treated the client to dinner and drinks at night, the costs were deductible.

Picnics are still deductible

The tax law changes don’t affect a special tax law provision that says you can deduct 100 percent of the cost for company picnics and similar gatherings. This provision wasn’t affected by the other tax changes in this area. Just remember: To qualify for this deduction, you must invite the entire staff to the picnic. In other words, you can’t restrict the outing to a select group.

For instance, suppose a few friends or relatives crash the party. This won’t jeopardize the overall deduction, but expenses attributable to those social guests are nondeductible. For instance, if the picnic costs $5,000 for 48 employees and two guests show up, you can deduct $4,800 (96 percent of $5,000).

This is a unique opportunity to take advantage of a tax break while rewarding employees. Book it on your summer schedule. Contact Dye & Whitcomb, Fort Collins CPAs if you have question.

Turn your refresher course into a tax break

Maybe you feel the need to brush up on your skills in your particular line of work. One option is to take a refresher course at a local college this summer. What makes it even more enticing? You may be able to deduct the cost as a business expense.

Make sure your class qualifies for a deduction

If you’re an employee or self-employed and rack up some business education expenses (like refresher classes), the cost will qualify as an ordinary and necessary business expense only if it passes one of these two tests:

1. The education is required by your employer or by law to keep your current job.

2. The education maintains or improves skills needed in your present work.

However, you can’t deduct any of your expenses — even if you meet either one of the two tests stated above — if the class is needed to meet the minimum educational requirements of your current position or it qualifies you for a new trade or business.

The IRS takes a notoriously tough stance on what constitutes a “new trade or business,” and the courts usually back it up. For instance, deductions have often been denied in the past for nurses who take courses that might lead toward a career as a physician. Although, if you’re merely studying new developments in your chosen field, you should be OK.

A new tax law snag

Previously, unreimbursed employee business expenses, including costs of business education, could be deducted as miscellaneous expenses on your personal tax return. Under new tax laws, deductions for miscellaneous expenses are suspended from 2018 through 2025. That means no write-off is available this year.

Luckily, you may be able to arrange for reimbursements from your employer. Reimbursement payments are generally tax-free to recipients and deductible by the employer. If an employer uses a formal educational assistance plan, they can take advantage of a tax exclusion of $5,250 per employee.

Can you deduct medical expenses you paid for your relative?

New tax laws lowered the medical deduction threshold for 2018 to 7.5 percent of adjusted gross income (AGI) from 10 percent. But that’s still a pretty high bar to clear. Fortunately if you scour your records, you may find expenses to put you over the top — including amounts paid for relatives.

Here’s what counts for medical deductions

An expense generally counts toward the medical deduction threshold if it involves medical care for yourself or immediate family. Medical care costs can include such things as surgeries to equipment such as wheelchairs.

Medical expenses you’ve paid on behalf of other family members may also count, but it can get tricky. Typically, you can deduct medical expenses if the relative would have qualified as your dependent.

To have a relative qualify as your dependent, you must provide more than half of the relative’s annual support. He or she also can’t have more gross income than the $4,050 personal exemption listed in the tax code.

However, their expenses still count toward your medical deduction if they fail the dependency test solely because they had more gross income than the personal exemption limit.

Here’s an example: Mom receives $5,000 in annual income from investments, but her rent costs her $12,000 a year. So you help her out by paying the $7,000 difference. Although she wouldn’t qualify as your dependent due to the gross income limit, you still provide more than half of her support. If you then pay a $1,000 medical bill for Mom, the expense is added to your total.

Double-check to see if you can benefit from this little-known rule for medical expenses. The deduction threshold returns to 10 percent of AGI in 2019, so this may be your last chance.