Volunteer Tax Breaks

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If you are a volunteer worker for a charity, you should be aware that your generosity may entitle you to some tax breaks.

Although no tax deduction is allowed for the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services (subject to the deduction limit that generally applies to charitable contributions). This includes items such as:

  • Away-from-home travel expenses while performing services for a charity (out-of-pocket round-trip travel cost, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals). However, these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.
  • The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible).
  • If you use your car while performing services for a charitable organization you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs. Alternatively, you may deduct a flat 14¢ per mile for charitable use of your car. In either event, you may also deduct parking fees and tolls.
  • You can deduct the cost of a uniform you wear when you do volunteer work for the charity, as long as the uniform has no general utility (e.g., a volunteer ambulance worker’s jumpsuit). You can also deduct the cost of cleaning the uniform.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution by a written acknowledgment from the charitable organization. The acknowledgment generally must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution. This presents a problem where you as a volunteer make a contribution on behalf of rather than directly to a charity. One way around this is for the charity to pay for the expenses and then be reimbursed by you (or you can make the donation before the expense is incurred). If this isn’t possible, you can safeguard your deductions as follows:

  • Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, get a letter from the charity explaining why you’re needed at the out-of-town location.
  • If you are out-of-pocket for substantial amounts, you should submit a statement of expenses and, preferably, a copy of the receipts, to the charity, and arrange for the charity to acknowledge in writing the amount of the contribution.
  • You should maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Statute of Limitations on Back Taxes

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If you owe back taxes, how long does the IRS have to assess and collect them? The answer varies based on the situation. In many cases, the IRS has three years from the date a return was due or when it was filed, whichever comes later, to assess how much you owe, and up to 10 years to collect that amount. When a very large item is omitted from the return, the assessment period can last up to six years. However, if fraud or attempted tax evasion is involved or if a return was never filed, then there is no statute of limitations on how long the IRS can take to make an assessment.

If you haven’t paid taxes or filed a return, we can assist you in fixing the problem. We can prepare your returns and help you address any outstanding tax concerns. We can also work with you to tackle broader financial or other issues that you may be facing. Reach out to us today for more information.

Do You Have Foreign Assets? FBAR May Apply to You

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Are you aware of the nature of all your investments, domestic and international? Do you know if you have foreign accounts with an aggregate value higher than $10,000 at any time during the calendar year? U.S. taxpayers (including individuals and business entities) are required to report on foreign assets or investments they hold in offshore accounts. Under the Bank Secrecy Act, you may be required to e-file what is known as the FBAR directly with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. Given the diversity of assets that many people hold, we advise against assuming that the FBAR rules don’t apply to you. If you’re not sure, we can help you determine the answers.

As is often the case with tax laws, there are some exceptions and intricacies to the FBAR rules, so be sure to contact our office for more details. We can help you understand whether the rules apply to you and what you need to do to comply with them.

Consider state tax in retirement

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When you retire, you may consider moving to another state — say, for the weather or to be closer to loved ones. State taxes also may factor into the equation. Here’s what you need to know about establishing residency for state tax purposes — and why the process may be more complicated than it initially appears to be.

Identify and Quantify All Applicable Taxes

It may seem like a no-brainer to simply move to a state that has no personal income tax, such as Nevada, Texas or Florida. But, to make a good decision, you must consider all of the taxes that can potentially apply to a state resident, including:
•Income taxes,

•Property taxes,

•Sales taxes, and

•Estate taxes.

For example, suppose you’ve narrowed your decision down to two states: Texas and Colorado. Texas currently has no individual income tax, and Colorado has a flat 4.63% individual income tax rate. At first glance, Texas might appear to be much less expensive from a state tax perspective. Not necessarily. The average property tax rate in Texas is 1.93% of assessed value, while in Colorado it’s only 0.62%.

Within the city limits of Dallas, the property tax rate is a whopping 5.44%. So, a home that’s assessed at $500,000 would incur an annual property tax bill of $27,200 if it’s located in Dallas, compared to only $3,100 in Colorado. That difference could potentially cancel out any savings in state income taxes between those two states, depending on your income level.

If the states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.

Watch Out for State Estate Tax

Not all states have estate tax, but they can be expensive in states that do. Every dollar you pay in state estate tax is in addition to any federal estate tax owed, except for the federal estate tax savings from the state estate tax deduction. Currently, estate taxes are levied in:
•Connecticut,

•Delaware,

•Hawaii,

•Illinois,

•Maine,

•Maryland,

•Massachusetts,

•Minnesota,

•New York,

•Oregon,

•Rhode Island,

•Tennessee,

•Vermont,

•Washington, and

• Washington, D.C.

Beware — the federal estate tax exemption is $5.49 million in 2017. But some states haven’t kept pace with the federal level and, instead, levy estate tax with a much lower exemption. Also note that some states may levy an inheritance tax in addition to (or in lieu of) an estate tax.
Establish Domicile

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new state. The exact definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Because each state has its own rules regarding domicile, you could wind up in the worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old state. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

How do you establish domicile in your new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in the new state:
•Buy or lease a home in the new state.

•Sell your home in the old state or rent it out at market rates to an unrelated party.

•Change your mailing address with the U.S. Postal Service.

•Change your address on passports, insurance policies, will or living trust documents, and other important documents.

•Get a driver’s license and register your vehicle in the new state.

•Register to vote in the new state. (This can probably be done in conjunction with getting a driver’s license.)

•Open and use bank accounts in the new state.

•Close bank accounts in the old state.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. Your tax advisor can help with these returns.

Make an Informed Choice

Before deciding where you want to live in retirement, do some research and contact a tax professional in the new state that you’re considering. Taking these steps could avoid making a bad relocation decision when taxes are considered — one that could be difficult and expensive to unwind.