Month: May 2022

Do you give money to your church?

Do you get a tax benefit from those donations?

How about your donations to other charities?

Recent changes in the tax code have done much to destroy your benefits from church and other tax-deductible 501(c)(3) donations. But there’s a way to donate the way you want, get revenge on the tax code, and realize the tax benefits you deserve.

This get-even tool is the donor-advised fund, an increasingly popular way to donate to your church and other 501(c)(3) organizations. Indeed, donor-advised funds have exploded over the past few years, with over one million donor-advised fund accounts in existence as of 2020.

Example. You donate $100,000 to the fund today. You get the $100,000 deduction now. From the fund, you donate $10,000 a year to your church (probably more as your money in the fund grows tax-free).

National investment firms such as Fidelity, Schwab, and Vanguard have all created donor-advised funds. These “commercial” donor-advised funds hire an affiliated for-profit investment firm to manage the assets in the accounts for a fee that varies based on the account balance.

You can also establish a donor-advised fund account with a community foundation that has a local orientation; a single-issue non-profit, such as a university or an environmental charity like the Sierra Club; or an independent, non-commercial organization such as the American Endowment Foundation, National Philanthropic Trust, or United Charitable.

You can always donate cash, including money in IRAs and 401(k)s, to your donor-advised fund account. But many donor-advised funds also accept non-cash donations, including

stocks, bonds, and mutual fund shares,
real estate,
privately owned company stock,
LLC and limited partnership interests,
Bitcoin and other cryptocurrency, and
life insurance.

Donating stock or mutual fund shares that have appreciated is a great tax strategy. Here’s why:

If you owned the stock for more than one year, you get a deduction equal to its fair market value at the time of the donation.
And you don’t pay any capital gains tax on the appreciated value of the stock.

Example. Darius owns 1,000 shares of Evergreen stock that’s publicly traded on NASDAQ. He paid $10,000 for the stock back in 2010, and the shares are worth $100,000 today.

He establishes a donor-advised fund in 2022 and donates the stock.

He gets a $100,000 charitable deduction for 2022.
He pays no federal tax on his $90,000 gain.

As you can see, there are many benefits to donor-advised funds for the charitably inclined, and few drawbacks. If you would like to discuss donor-advised funds, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 26, 2022

The IRS Classification Settlement Program (CSP) offers a chance to settle your employment tax debt due to worker misclassification if you do not qualify for Section 530 relief.

CSP agreements typically result in a substantial reduction of assessed employment taxes, especially if you misclassified workers over several years.

The CSP allows you and the IRS tax examiners to resolve worker classification cases early in the audit process, reducing burdens on you. The procedures also ensure that if you qualify for Section 530 relief, the Section 530 relief procedures will be properly applied.

But there’s a catch. In order to qualify for the CSP, you must have filed all required 1099s for the independent contractors disputed by the IRS.

Generally, you will qualify for the CSP if you have timely filed all required 1099s for the workers that you have misclassified as independent contractors. If you failed to file the required 1099s, you will not qualify for the CSP.

Depending on the extent to which you have complied with IRS reporting requirements, and the strength of your arguments for why your workers are really independent contractors rather than employees, CSP agreements will vary in the percentage of employment tax adjustments offered.

25 Percent CSP Offer

If you meet the reporting consistency requirement (in other words, you timely filed all of your 1099s for the workers in question), you satisfy either the substantive consistency requirement or the reasonable basis requirement, and you have at least a colorable argument that you satisfy the other requirement, then the CSP offer will be an adjustment of 25 percent of the employment tax owed for the most recent tax year under examination.

A “colorable argument” means that your argument for why you meet the requirement has some merit but is not sufficient to fully satisfy the test.

Key point. The CSP savings here are huge (25 percent of one year, or about 8 percent of what could be). Without the CSP, you likely would face back payroll taxes, penalties, and interest on three years.

100 Percent CSP Offer

If you meet the reporting consistency requirement but clearly do not meet the substantive consistency requirement or clearly do not meet the reasonable basis test, the offer will be a full employment tax adjustment for the most recent tax year under examination. In other words, you will be required to pay 100 percent of the employment tax due for the year under examination.

Again, this is a huge savings: one year of payroll taxes versus three years of payroll taxes, penalties, and interest.

With both the 25 percent and 100 percent deals, you must agree to classify the workers in question as employees on a going-forward basis, thus ensuring future compliance in the eyes of the IRS.

If you would like to discuss the CSP, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 19, 2022

It isn’t easy to make predictions, especially about the future. But there is one prediction we’re confident in making: you will have substantial out-of-pocket expenses for health care after you retire. Personal finance experts estimate that an average retired couple age 65 will need at least $300,000 to cover health care expenses in retirement.

You may need more.

The time to save for these expenses is before you reach age 65. And the best way to do it may be to open a Health Savings Account (HSA). After several years, you could have a fat HSA balance that will help pave your way to a comfortable retirement.

Not everyone can have an HSA. But you can if you’re self-employed or your employer doesn’t provide health benefits. Some employers offer, as an employee fringe benefit, either HSAs alone or HSAs combined with high-deductible health plans.

An HSA is much like an IRA for health care. It must be paired with a high-deductible health plan with a minimum annual deductible of $1,400 for self-only coverage ($2,800 for family coverage). The maximum annual deductible must be no more than $7,050 for self-only coverage ($14,100 for family coverage).

An HSA can provide you with three tax benefits:

1. You or your employer can deduct the contributions, up to the annual limits.
2. The money in the account grows tax-free (and you can invest it in many ways).
3. Distributions are tax-free if used for medical expenses.

No other tax-advantaged account gives you all three of these benefits.

You also have complete flexibility in how to use the account. You may take distributions from your HSA at any time. But unlike with a traditional IRA or 401(k), you do not have to take to take annual required minimum distributions from the account after you turn age 72.

Indeed, you need never take any distributions at all from your HSA. If you name your spouse the designated beneficiary of your HSA, the tax code treats it as your spouse’s HSA when you die (no taxes are due).

If you maximize your contributions and take few distributions over many years, the HSA will grow to a tidy sum.

If you have any questions about HSAs, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 12, 2022