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- Written by: Julie Welch
Many people cannot deduct their tax return preparation fees because the fees are miscellaneous expenses. Miscellaneous expenses are deductible as itemized deductions to the extent they exceed 2% of your adjusted gross income (AGI). However, if you are in business for yourself, a major portion of your tax return preparation fees may be deductible against your business income. You can deduct the tax preparation fees for the following:
Your business (Schedule C)
Your rental properties (Schedule E)
Your farm (Schedule F)
Ask your tax professional how much of the fee relates to these items. Deduct that amount on those specific forms. Allocating these fees saves you income taxes since it reduces your AGI which you use to compute several limitations on itemized deductions. This allocation also saves you self-employment tax if it relates to your business or farm.
In 2012 you have $55,000 in business income, your spouse has $20,000 in wages, and you pay $1,200 for the preparation of your tax returns. Only your itemized deductions over $1,500 ($75,000 x 2%) are deductible. If your tax return preparation fee is your only miscellaneous itemized deduction, you get no tax deduction for the fees you pay. However, if your tax return preparer allocates 75% of the fee to your business, you can deduct $900 ($1,200 x 75%). This will save you about $345 in tax.
Savings of self-employment tax:
Amount of deduction $900
Self-employment tax rate x 13.3%
Savings of self-employment tax $120
Savings of income tax:
Amount of deduction $900
Tax rate x 25%
Savings of income tax 225
Total savings $345
Furthermore, if the Internal Revenue Service audits your tax return, and the main focus is your business, you can deduct your accountant’s fees. Also, if you receive any governmental notices concerning your business, you can deduct the fees you pay your accountant to resolve the matter.
Julie Welch (Runtz) is the Director of Tax Services for Meara, King & Co. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.
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- Written by: Julie Welch, CPA/PFS, CFP
By: Julie Welch, CPA/PFS, CFP | Donating appreciated property to charity can produce substantial tax savings. Appreciated property might include art, antiques, real estate, and stock. It does not include ordinary income property, such as inventory or a work of art you created. Generally, to take full advantage of this tax benefit, you must have owned the property more than one year before you give it away.
Giving appreciated property to charity is better than selling the property and donating the sales proceeds.
| You own art worth $2,000. You bought the art five years ago for $500. If you sell the art and donate the proceeds from the sale, you get these results:
Contribution of cash after the sale $2,000 Taxable gain ($2,000 - $500) $1,500 Tax cost $(420) Net tax savings $140 By selling the property and contributing the proceeds to charity, you receive a $2,000 tax deduction for the cash contribution. However, you are taxed on the $1,500 gain from the sale. Thus, your net tax savings is only $140. |
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If, instead, you donate the art directly to the charity, you will receive a tax deduction for the full fair market value of the art. Contribution $2,000 Taxable gain $0 Net tax savings $560 The tax savings are significantly better when you contribute the art directly to the charity because you avoid the tax on the gain from the sale. |
Do not give depreciated property to charity
Giving property that has gone down in value to charity is a bad idea. You cannot deduct the loss. You are better off selling the property and donating the proceeds from the sale to the charity. This allows you to donate the same amount to the charity, deduct the charitable contribution, and also recognize a loss on your tax return, as long as the item is either business or investment property such as stock.
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You bought stock two years ago for $10,000. It is now worth $7,000. You are in the 28% tax rate bracket. If you give the stock to charity, you can only deduct $7,000. Your tax savings is $1,960 ($7,000 x 28%). However, if you sell the stock for $7,000, you can deduct the $7,000 proceeds you give the charity and you can recognize a loss of $3,000 ($7,000 sales price less $10,000 cost). Your tax savings from the donation is still $1,960 ($7,000 x 28%). However, you also have the tax savings of $840 ($3,000 x 28%) from deducting the loss. |
Julie Welch (Runtz), CPA, CFP, and Randy Gardner, LLM, CPA, CFP, are the authors of 101 Tax-Saving Ideas, 10th edition.