Published November 25, 2006 (published version was edited to shorten size)
Are you planning on making some additional 2006 charitable contributions before the year closes out? Here are some changes regarding donations that took affect August 17 of this year that you may want to take into account.
First off, don’t expect to write off minimal cash donations, such as to the Salvation Army kettle. This was Okay before, but not anymore. No matter how small, a receipt or a cancelled check must now document cash gifts in order to generate a deduction.
A second change is that gifts of clothing and household goods must be in “good or better condition” before any deduction can be taken. Generally you can claim a deduction for the fair market value of gifts in kind. At last count, clothing and household goods accounted for over half of such gifts reported and Congress thinks that a lot of the values have been inflated. This is a follow-up to their targeting vehicle donations a few years ago. At that time they limited taxpayers’ deductions to the selling price after the charity sold the vehicle. Of course, vehicles are a little easier to trace than a bag of clothing or your old couch.
To get a realistic idea of what your stuff is worth, you may want to look at the valuation guide on the Salvation Army website. You may also want to take pictures of those items that you are donating to substantiate your deduction. I expect that this new clarifying language will not slow down the perceived abuse one bit and that Congress will simply take away the thrift shop deduction at some point.
The biggest change in the charitable giving rules is the new provision allowing taxpayers over 70 1/2 years of age to give directly to a charity from their IRA. The maximum is $100,000 per taxpayer and it can be done in both 2006 and 2007.
This change is great because it gets money out of an IRA without needing to report it as income. One thing certain about most retired people is that they hate paying income taxes. Having saved for their retirement, they think that taxes should stop at the same time they stop working. Eventually many find out that the IRAs they have accumulated are the most taxed of all assets.
Coasting along in retirement while their IRA investments grow, many are suddenly faced with mandatory distributions for the first time at about age 70 even if they don’t need the funds. This extra income plays havoc with their tax returns since it increases the likelihood that Social Security benefits will be taxed, etc. Even giving the proceeds to charity does not help much since the income must still be reported. In addition, most retirees don’t itemize and need to exceed the generous standard deduction limits to get a tax benefit.
Charities have always wanted to tap into the IRA treasure chest and this innovative approach allows this to happen without any tax pain or complications at all. Be sure to plan ahead on this, since funds must go directly from your custodian to the charity and this could take time to sort out.
Saturday, November 25, 2006
Tuesday, October 10, 2006
Retirement Savings can be SIMPLE
Published September 7, 2006
Do you have a 401K type plan where you work? If not, you may want to talk to your boss about setting one up as early as some time this month. Only if it is set up by October 1st, will it do you any good for this year.
401K type plans let you deduct funds from your paycheck, before taxes, so that they can be contributed directly into a retirement account. Due to the complexity of setting up and administering such plans, which go by various names, many employers have avoided them. Not jumping in has meant that both employees and owners miss out, since such plans generally cover everyone in the company the same way.
The most recent of these types of plans to make an appearance is called the SIMPLE plan. It was designed for small employers to be inexpensive and uncomplicated to administer. Once installed, all or none of the eligible employees can participate. That means if you own a small business, you could set aside money even if none of your employees choose to join in.
The amounts that can be invested into a SIMPLE are the lowest of all the voluntary plans, topping out at $10,000 a year or $12,000 if you are over fifty. However, there is a key difference. Unlike many other plans, a SIMPLE plan allows you to pay in the maximum even if your gross pay is low. An owner could, in fact, place a spouse or other family member on the payroll and have them invest the maximum into their SIMPLE account without increasing their taxable income very much. This feature means that even a small proprietorship should consider the SIMPLE as a possible way to “max out” their retirement contributions .
If you operate your business as an S Corporation, a SIMPLE may be especially appealing. Here is why: Like many S Corporation owners, you may be holding down your gross pay in order to minimize paying payroll taxes. However, even with a low gross pay, you can still punch in the maximum into your SIMPLE plan.
There is a cost for setting up a SIMPLE plan. Generally, the employer will need to “match” up to 3% of each employee’s pay if they invest at least this much in a particular year. For example, if an employee earning $50,000 per year and invests 3% ($1,500) during the year, the employer will need to match the same amount. However, this is the maximum amount even if the employee invests at a higher level.
The incentive that this “match” provides may be enough to nudge your employees into participating. Since you do not need to make this benefit available for recent hires, it could be a great way for you to reward those who have been with you for awhile.
If your employer is offering a plan like this and you are not participating, you should start immediately. Having a little bit of money going into a retirement plan on an on-going is easy to get used to if it comes out of your paycheck. More importantly, if your employer is matching some or all that you could put in, you may be leaving money on the table.
If you are an employer who is considering getting into this, don’t lose sight of the October 1st deadline. It is right around the corner.
Do you have a 401K type plan where you work? If not, you may want to talk to your boss about setting one up as early as some time this month. Only if it is set up by October 1st, will it do you any good for this year.
401K type plans let you deduct funds from your paycheck, before taxes, so that they can be contributed directly into a retirement account. Due to the complexity of setting up and administering such plans, which go by various names, many employers have avoided them. Not jumping in has meant that both employees and owners miss out, since such plans generally cover everyone in the company the same way.
The most recent of these types of plans to make an appearance is called the SIMPLE plan. It was designed for small employers to be inexpensive and uncomplicated to administer. Once installed, all or none of the eligible employees can participate. That means if you own a small business, you could set aside money even if none of your employees choose to join in.
The amounts that can be invested into a SIMPLE are the lowest of all the voluntary plans, topping out at $10,000 a year or $12,000 if you are over fifty. However, there is a key difference. Unlike many other plans, a SIMPLE plan allows you to pay in the maximum even if your gross pay is low. An owner could, in fact, place a spouse or other family member on the payroll and have them invest the maximum into their SIMPLE account without increasing their taxable income very much. This feature means that even a small proprietorship should consider the SIMPLE as a possible way to “max out” their retirement contributions .
If you operate your business as an S Corporation, a SIMPLE may be especially appealing. Here is why: Like many S Corporation owners, you may be holding down your gross pay in order to minimize paying payroll taxes. However, even with a low gross pay, you can still punch in the maximum into your SIMPLE plan.
There is a cost for setting up a SIMPLE plan. Generally, the employer will need to “match” up to 3% of each employee’s pay if they invest at least this much in a particular year. For example, if an employee earning $50,000 per year and invests 3% ($1,500) during the year, the employer will need to match the same amount. However, this is the maximum amount even if the employee invests at a higher level.
The incentive that this “match” provides may be enough to nudge your employees into participating. Since you do not need to make this benefit available for recent hires, it could be a great way for you to reward those who have been with you for awhile.
If your employer is offering a plan like this and you are not participating, you should start immediately. Having a little bit of money going into a retirement plan on an on-going is easy to get used to if it comes out of your paycheck. More importantly, if your employer is matching some or all that you could put in, you may be leaving money on the table.
If you are an employer who is considering getting into this, don’t lose sight of the October 1st deadline. It is right around the corner.
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