More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
The IRS recently noted that December is the month for giving generously to charities, friends and family. But it’s also a time that can have a major impact on the tax return you’ll file in the New Year. Here are some tips from the IRS covering everything from charity donations to refund planning, followed by some equally timely tips on charitable giving from Eleanor Blayney, the CFP Board’s consumer advocate.
From the IRS:
- Contribute to Qualified Charities. If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by December 31. You can always ask the charity about its tax-exempt status. You can also visit IRS.gov and use the “Exempt Organizations Select Check” tool to see if your favorite charity is qualified. Donations charged to a credit card by December 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 if it’s mailed in December. Gifts to individuals, whether to friends, family or strangers, are not deductible.
- What You Can Deduct. You generally can deduct cash contributions and the fair market value of property donated to a qualified charity. Special rules apply to certain donated property, including clothing, household items, cars, and boats.
- Keep Records of Donations. You must keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include cancelled checks, bank, or credit card statements, or payroll deduction records. You can also ask the charity for a written statement of their name, your contribution date and the amount given.
- Keep Records in a Safe Place. As long as you’re gathering records for your charitable contributions, it’s a good idea to start rounding up documents you will need to file your return in 2013. This includes receipts, canceled checks, and other documents that support income or deductions that you will claim. Be sure to store them in a safe place.
- Planning for Major Purchases. If you are making major purchases during the holiday season, don’t base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can affect the timing of a tax refund. The IRS issues most refunds in less than twenty-one days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive a refund.
From the CFP Board:
Make sure your clients a longer-term view when considering holiday gifts, suggests noted advisor and CFP Board Consumer Advocate Eleanor Blayney. As the final installment in its “12 for ’12 Approach to Financial Confidence,” the Board in a release points out that gifting and charitable donations made at the end of the year can offer multiple benefits and long-term rewards if made with some thought and a plan.
Following are Blayney’s four strategies to giving:
- Plan Now, Give Later, Part 1: “By simply budgeting and setting money aside throughout the year for year-end giving, you’re certain to make the season merrier, both for you and the people and causes you care about.” However, when clients spend without prior planning, anticipating paying off the bill later, Blayney says it’s a “sure-fire way to turn the joy of giving into a new year’s hangover.
- Plan Now, Give Later, Part 2: This is a category of planned giving—which Blayney calls “smart and generous,” that takes a current asset and earmarks it for a future charitable gift, retaining the assets for the donor during his or her lifetime. Such strategies include making a charitable bequest in a will or naming a charity as a beneficiary of a retirement plan or insurance policy. Charitable remainder trusts and gift annuities also provide for future donations, but can generate current tax deductions in an amount equal to the present value of the later transfer.
- Plan Now, Benefit Later: This category of planned giving uses “today’s money to build a better future,” writes Blayney. While many holiday gifts depreciable goods, Blayney suggests giving gifts that provide longer-term benefits to the recipient, such as contributing to a child’s college savings plan, paying for a skills-building workshop, or, “picking up the fee for an adult child or relative to talk to a CFP professional.”
- Plan Now, Benefit Now: This category of giving is one that provides immediate tax savings. Blayney suggests, for example, that rather than simply writing a check to a charity, consider donating appreciated securities held for more than a year; the donors gets the tax deduction for the market value of the securities donated, and avoids capital gains taxes. Finally, Blayney notes that for individuals who may be subject to estate and gift taxes, making a gift to a beneficiary today can have the advantage of minimizing the total taxes that must be paid both now and later. That might especially be true this year, depending on how the fiscal cliff negotiations, which includes gift and estate tax exclusions, plays out.
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