He who says he can and he who says he can't are both usually right.  Confucius

Who pays estimated taxes?

Generally, self-employed individuals are the main group of taxpayers that are required to pay estimated taxes.  Retirees and individuals receiving unemployment benefits also are required to pay estimated taxes unless they elect to voluntarily withhold federal taxes from their pay.  Finally, employees are required to pay estimated taxes if he or she did not withhold enough taxes from their wages.

When are estimated taxes due?

The due dates are:

• Quarter 1 - April 15
• Quarter 2 - June 15
• Quarter 3 - September 15
• Quarter 4 - January 15

If the 15th falls on a weekend or on a federal holiday, then the due date is the next business day.

How are estimates determined?

For most individuals,  the required annual payment is the lower of 100% of the previous year tax or 90% of the current year tax.  Then divide this amount by four to determine the amount to pay per quarter.

Example:  Your 2012 tax was $5,000.  For 2013, you believe your business will grow and your accountant estimates that your 2013 taxes will be $6,000.  Estimated payments based on 2012 taxes will be $5,000 / 4 = $1,250 per quarter.  Estimated payments based on 2013 projected taxes will be .90 x $6,000 / 4 = $1,350.  To avoid the penalty for failing to pay the proper estimates, you will need to pay at least $1,250 per quarter.

If your adjusted gross income (AGI) is greater than $150,000 ($75,000 married filing separate) then you must pay 110% of the previous year tax or 90% of the current year tax.  Then divide this amount by four to determine the amount to pay per quarter.

Example: Your AGI for 2012 was $500,000 and the tax was $160.000.  For 2013, you believe your business will decline a little and your accountant estimates that your 2013 taxes will be $150,000.  Estimated payments based on 2012 taxes will be 110% x $160,000 / 4 = $44,000 per quarter.  Estimated payments based on 2013 projected taxes will be .90 x $150.000 / 4 = $33,750.  To avoid the penalty for failing to pay the proper estimates, you will need to pay at least $33,750 per quarter.

Exception to these rules

You are not required to pay estimated taxes if your tax is less than $1,000.

If did not pay enough estimates during the year and you are left with a large tax bill, call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.  You may also qualify for penalty abatement.

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.

Safe harbor deduction amount

If you elect to use the safe harbor method, the deduction for home office is $5 multiplied by the square footage of the home office.  The square footage can not exceed 300 square feet.  Therefore, the deduction is limited to $1,500.  The amount of safe harbor can be adjusted by the IRS.

Requirement to claim home office deduction

The requirements to claim the home office deduction still apply.  For example, the space must be used exclusively for business and for employees, the home office maintained for the convenience of the employer.  However, if you use the safe harbor method, you do not need to maintain records.

Switching from safe harbor to actual

Using the safe harbor method in one year does not limit you to use actual expenses the following year.  But once you elect to use safe harbor in one year, you are not allowed to amend the return and change the deduction to actual expenses later.

Other considerations

The amount of the deduction can not exceed the gross income reported for the business.

You can not depreciate the home in the year the safe harbor method is used.

If the safe harbor method is used, you are able to fully claim deductions such as property taxes and mortgage interest on schedule A.

For more detailed information on the home office safe harbor deduction, you can read IRS Rev. Proc. 2013-13.

If you have any question on home office deductions, call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.

Cash Contributions of Less Than $250

If you donated less than $250 to any one charity then you will follow these rules for proper record keeping.  For example, you donated to Red Cross three times during the year, $75, $100, and $25 for a total of $200.  Then you donated $200 to United Way.  You would use the less than $250 rules for proper record keeping because you did not donate more than $250 to any one charity.

However, if you donated $500 to your local church by giving $10 every week during service, then you must follow the greater than $250 donation rules.

To claim a deduction for cash contributions of less than $250 given to any one charity, one of the following must be retained:

1. A bank record showing the amount contributed, date of contribution, and name of charitable organization.  This may include a cancelled check, bank statement, or credit card statement.
2. A receipt from the charitable organization showing the amount contributed, date of contribution, and name of charitable organization.
3. If you deducted from your wages, then a pay stub or W-2, and a letter from the charitable organization.

Cash Contributions of $250 or More

To claim a deduction for cash contributions of $250 or more given to any one charity, then you must retain a letter from the charitable organization detailing the amount contributed, a statement whether goods or services were provided in exchange for the contribution, and the fair value of goods or services provided if there was an exchange.

The letter from the organization must be dated by the due date, including extensions, for filing the tax return.

If you do not have a letter, then you can not claim a deduction.  Also, you can not claim the deduction if you obtain the letter at a later date due to an IRS audit.

Noncash Contributions of Less Than $250

Noncash contributions are treated a little differently than cash contributions.  These rules apply for the total amount of noncash contributions regardless of how many charities you donated to.  For example, you donated $100 worth of goods to Red Cross and $400 to United Way.  You would use the $500 and greater noncash contribution rules for record keeping purposes.

For noncash contributions of less than $250, you must retain the following:

1. A receipt from the charity showing the name of the organization, date and location of donation, and reasonably detailed description of property
2. An estimate of the fair market value of property donated
3. Determine the original cost or basis of the property donated
4. The amount you claimed as a deduction

Noncash Contributions of More Than $250 and Less Than $500

These rules are in addition to the rules stated for less than $250 noncash contributions.

1. Written acknowledgement from charity
2. The written acknowledgement should include a description, whether goods or services were provided in exchange for the donation, and fair value of goods and services provided if there was an exchange.
3. The acknowledgement must be dated prior to the due date of your return, including extensions.

Noncash Contributions of More Than $500 and Less Than $5,000

These rules are in addition to the rules stated for more than $250 and less than $500.

1. Documentation on how you obtained the property whether you received it by purchase, gift, exchange, or inheritance
2. The estimated date you obtained the property
3. Purchase price or cost basis of property

Noncash Contributions of $5,000 or More

If you have a contribution of $5,000 or more, you will need to follow all the rules stated previously.  Also, you will need obtain a qualified appraisal of the donated property from a qualified appraiser.

If you read all these rules, you will realize that claiming charitable contributions on your return is not given.  Proper record keeping is required to claim charitable contributions on your tax return.

If you have any question on charitable contributions or you are being audited due to claiming charitable contributions, call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.  We can help by representing you.

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.