Common mistakes and new tax code changes to consider
As we step into tax season once again, Biz New Orleans invited local tax professionals to share some things both businesses and individuals should avoid in order to stay on the right side of Uncle Sam.
1. Claiming too much. “The total amount of charitable contributions claimed cannot be more than 10 percent of the corporation’s taxable income,” says Kelly Haden, a tax supervisor with Ericksen Krentel & Laporte.
2. Thinking the IRS treats all charitable deducations the same. Whether you’re an individual, a C corporation or an S corporation (a corporation not taxed separately) make sure that whomever you make a donation to is a qualified organization with the IRS. (The IRS website has a list).
A common misconception, says Jennifer McGinnis, the director of tax compliance with Bourgeois Bennett, is that all GoFundMe accounts are deductible. “Of course, everybody wants to help, and you write a check,” she says, “but in most cases those are not charitable organizations.”
On the other hand, Haden says many of her clients who helped during the recent flooding in south Louisiana didn’t realize they could receive a deduction. “Many people driving to and from all these locations and helping people gut houses with a bona fide charity, their mileage is deductible.”
“It’s 14 cents per mile,” notes Gina Rachel, tax director with Postlethwaite & Netterville. “It’s not a significant amount, but for those who are doing it, you might as well take advantage of it if you can.”
3. Not having proof of your donation, such as letters and receipts. For cash donations over $250, “you should get an acknowledgment letter from that organization so that if you are audited you have that verification,” adds Haden.
“Record-keeping is very important, and if you clean out your closet and give your non-cash donations away to Bridge House or Vietnam Veterans you want to get that receipt from them and take pictures of your donated items,” reminds Rachel.
4. Thinking all charitable donations are 100 percent deductible. “If you bid $50 on an auction item and won a trip worth more than that, you can’t deduct that $50,” says Debbie Moran, senior tax manager with Hannis T. Bourgeois. Also, keep in mind that if you pay $100 for a charity dinner you cannot deduct the full $100, you have to deduct the value of the meal you ate.
5. Not knowing the full value of donated stocks. Donating appreciated publicly-traded stock can have great benefits because the deduction you can claim is for the fair market value of the stock. “Say, for instance, you had some stock that you paid $100 for and now it is worth $500, and you take that stock and donate it to a qualified charity,” says McGinnis. “You get to take a $500 deduction rather than a $100 deduction.”
6. Not planning ahead for future donations. Jennifer Bernard, director of tax services with LaPorte CPAs and Business Advisors, says she always asks her clients to examine whether they think their income will be higher or lower next year, and then looks at how they can make their charitable giving an overall part of their planning strategy.
“With any kind of itemized deduction, you want to plan for if the client is going to have a big year,” Moran says. “Let’s say you contribute $5,000 to the New Orleans Mission every year but this year you had a big year, why not give them $10,000 [and lower your taxable income]?”
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Looming Code Changes
Potential tax code changes under the Trump administration may present some challenges for tax professionals. President Trump has stated he’s in favor of reducing tax brackets for individuals but, at the same time, he’s looking at limiting itemized deductions.
“Putting a cap on total itemized deductions in general would be a big hindrance on people who give large amounts of charitable donations,” says Gina Rachel, with Postlethwaite & Netterville. “So even though you may be paying a lower tax, you might not be able to take as many deductions.”
Ken Abney, with Carr, Riggs & Ingram, believes any tax code changes will influence actions. “It will be interesting to see in the tax code what they decide to do to foster behavior,” he says.
What that behavior will be, however, is still unknown. “[The thought is that] tax rates will go down because Trump’s plan is like the Republican plan,” says Debbie Moran, with Hannis T. Bourgeois Moran. “But there’s no way for us to know, so we are waiting.”
The alternative minimum tax (AMT), which has been on the books since President Nixon, is one of the items on the chopping block. The AMT is a supplemental tax that is imposed in certain cases (corporations, estates and trusts) in addition to baseline income tax. “Everyone is so excited about that,” explains Jennifer McGinnis, with Bourgeois Bennett, “because it is so complicated, and it’s a whole different set of rules that you have to know.”
No one knows when the new tax code changes will take effect, but McGinnis is hopeful they will know something by the time the second-quarter estimated payment is due, which is June 15. In the meantime, “We are looking at how we can most efficiently apply the tax code as it is in place,” says Jennifer Bernard with LaPorte CPAs and Business Advisors.