I am often asked, this time of year, “how can I pay less tax this year?” The easiest answer, the answer no one wants to hear, is “make less money.” However, lest I motivate you to be unproductive and unmotivated the remainder of the year, this is the worst economic advice ever given. Paying more tax is not always a bad thing. It usually means you made more money. Until the applicable tax rate hits 100%, one is still better off, economically speaking, earning more income than less income. That being said, there still are legitimate ways to reduce the amount of tax owed. As the holiday season nears, many people will look for ways to give back and make a difference in their communities. Philanthropy is good, but it is always better when the good feelings associated with giving come with a big tax deduction.
Give a Gift to Your Future-Self
We have all heard the saying “you have to spend money to make money.” The same could be said about saving money on taxes. The general rule for tax deductions is that you have to spend money to deduct money. One exception to that general rule is the income deduction allowed for contributions to a traditional IRA. In 2013, every taxpayer is allowed to contribute $5,500 to a traditional IRA account. You then get to deduct these contributions from your ordinary income. The financial incentive is clear, the Federal government wants you to save more and they have provided a tax deduction to entice you to do it. Take them up on the offer and give your future-self a gift. Your future-self will thank you later.
Give to a Charity
It is important that as you are feeling charitable that Uncle Sam will recognize that charity when it is time to file your income tax return. The Internal Revue Code has long allowed a deduction for donations made to charities. However, there are rules that must be followed if you want to get that deduction. Primarily, these rules involve substantiating the amount of the contribution and deduction. The amount of substantiation required depends on the amount and type of donation.
The substantiation requirements for monetary donations of less than $250 are fairly informal. Appropriate substantiation can include a bank record of the contribution or a written communication from the receiving organization stating the name of the organization, as well as the date and dollar amount of the donation. For donations of $250 or more the Internal Revenue Code requires more onerous substantiation. First, when making such a monetary donation you must be sure to obtain a contemporaneous written acknowledgment, stating the amount of the contribution, whether the receiving organization provided goods or services in consideration for the donation, in whole or in part, and a good-faith estimate of the value of any goods or services the organization provided. If the donation was to a religious organization and the goods or services received consist solely of intangible religious benefits, the contemporaneous documentation must also contain a statement to that effect. Donations of property, other than cash, to a charity also require a contemporaneous written acknowledgment for donations exceeding $500 in a year. If the value of donated property exceeds $5,000, you will also need to obtain a qualified appraisal of the property and attach that to your tax return. Before making any sizeable donation to charity it is wise to consult a competent tax advisor to ensure that your deduction will have the desired effect on your tax bill. The trusted tax attorneys of the Dana Law Firm will ensure that you get the most from your charitable donations.