3 Special Gifts That Will Earn You Money Back

It’s better to give than to receive, except when it comes to taxes.

Fortunately, the holiday season provides the perfect opportunity to give more to those you care about and less to greedy Uncle Sam. Here are a few options for tax-deductible gifts.

Build a Child’s College Fund

A great gift that fits the bill is a contribution to a 529 plan. These plans allow a child’s college fund to grow tax free, and reduce state income taxes for contributors across the country.

Under federal law, individuals can contribute up to $14,000 a year to a 529 plan, and married couples can give as much as $28,000 a year. When their child is ready for college, parents can withdraw money from the plan and pay no taxes on it. They just have to be sure to use the money for tuition and other expenses required to attend college.

Parents and grandparents are the ones who most often contribute to the plans, and they can receive multiple tax breaks. Working parents are able to avoid paying a federal gift tax and in many states, can deduct the contribution from their state income tax. Retired grandparents can reduce the estate tax their children will have to pay.

There is even the opportunity for married parents or grandparents to contribute a lump sum of $140,000 for the next five years. This lump sum option can generate a much larger return on investment. But it could also leave money on the table if the IRS increases the maximum allowable contribution during the next five years.

Send Gifts to your Business Contacts

Parents and grandparents, though, aren’t the only ones who can benefit from giving money during the holidays. The federal government allows individuals to deduct as much as $25 per gift to business associates and customers during the holidays. That means if you want to give to those who have helped you at your job this year, feel free. And you will also receive something special: a reduction in income taxes. Just remember that the maximum deduction is $25 per recipient each year, so if you sent someone a $25 business gift earlier in the year, you won’t be able to deduct your holiday gift to them.

Donate to Charity

Making a donation to charity, whether it’s giving a bag of old clothes or some cash, is often a tax write-off. Of course, not every charitable gift will give back to you. Donating to political causes and candidates, purchasing raffle tickets for a fundraiser and in-kind donations of your talent and expertise are not tax deductible.

So when you make your list this Christmas, check it twice. Once to make sure you bought all the gifts for your family, and again to make sure you’ve set yourself up for every tax break tyou can get. After all, it is the giving season.

Photo: Oxclock

Reducing Taxes on Your Holiday Bonus

A Holiday Bonus Poem

It’s that time of year
When bosses spread cheer,
And that gift of extra pay,
Comes to make your day.

But don’t spend it all,
On your next trip to the mall,
Because on you is the onus
To pay the taxes on that bonus.

There’s nothing like a poem to remind you that it’s the giving season, both for friends and family, and the government. As the spirit of generosity is in the air, companies and employees need to know that holiday bonuses are considered supplemental wages and subject to taxes.

There are two ways to calculate the tax.

In most cases, a company would award the bonus through payroll, and apply the flat bonus tax of 25 percent. That means on a $10,000 bonus, the company would withhold $2,500 for taxes.

The other option is a little more complicated and involves adding the bonus to your regular income, and paying taxes on the combined amount. Either way, if too much was taken out, you can get a refund when you file your taxes the following year.

Avoiding Taxes?

Are there any ways to avoid paying tax on the bonus? No. And failing to report and pay taxes could lead to problems down the road. But there are ways to minimize or delay the impact. Here are three options:

Give a little more: Employers can estimate the taxes an employee would have to pay on the bonus, and add that to the total amount. That way, after taxes, the employee would get to keep the intended bonus amount. Obviously, this requires the employer to be more generous, which is not always possible.

Invest in the future: Another option – that would avoid both payroll and income taxes – is to put the bonus into the employee’s 401K retirement plan. While employees would not actually receive a check during the holidays, they would also not have to pay taxes on that money until they withdraw it.  In the meantime, that bonus could continue to grow.

Kick Off a Healthy New Year: Employers can decide to award holiday bonuses in January and offer the option of placing the money in a Flexible Spending Account for healthcare. None of that money would be taxed, but the employee would have to use it on qualifying health or dependent care expenses.

Plan For Less

If you’re an employee and your company will not offer any of the options above, then do your best to plan ahead and factor the taxes into your holiday budget. And if it makes you feel any better, giving is always better than receiving.

Photo: Wealthy On My Way

Protect Yourself from IRS Telephone Scam

You may have heard of companies that ask for money up front and claim they’ll convince the IRS to forgive all of your taxes.

But did you know some scammers are claiming to be IRS employees and telling innocent victims they’ll be arrested, deported, or lose their drivers’ licenses if they don’t pay their taxes over the phone?

New IRS Telephone Scam

Last week, the IRS warned taxpayers of this latest ruse and suggested ways to protect themselves from a scamming industry that continues to use fake emails, caller IDs, and websites to steal people’s money.

“This scam has hit taxpayers in nearly every state in the country,” said IRS Acting Commissioner Danny Werfel last week. “We want to educate taxpayers so they can help protect themselves. Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer.”

In this recent phone scam, the scammers spoof the IRS toll-free number on the victim’s caller ID. If the victims don’t pay these fake IRS employees, they are threatened with jail time, deportation or license revocation. After that call, other scammers once again use faux caller IDs and pretend to be from the local police or Department of Motor Vehicles.

“If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling,” said Werfel.

Protecting Yourself from IRS Phone Scams

The great G.I. Joe used to say, “knowing is half the battle.” So to protect yourself from these scams, you should know that if there were a tax issue, the IRS says it would most likely contact you first via regular mail, not by phone. If you’re not sure if you were contacted in the mail and get a phone call from someone claiming to be from the IRS, you should call the IRS at 1-800-829-1040. The IRS says employees at that line can help you with a payment issue – if there really is such an issue.

If you have no reason to believe you owe any taxes, then the IRS says you should call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484. You can also report this scam to the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Add “IRS Telephone Scam” to the comments of your complaint.

Protecting Yourself from Electronic Scams, or Phishing

Scammers also use unsolicited email and websites that pose as legitimate sites to get personal and financial information in a process known as “phishing.” To keep yourself safe, know that the IRS does not use email, text messages or social media to request your financial information. If you get an email from the IRS that asks for your personal or financial information, don’t open any attachments and don’t click on any links in it. Instead, forward it to phishing@irs.gov.

To learn more about phishing, check out this page from the real IRS.

Tax Deductions for Professional Gamblers

What could be better than winning $8.3 million at the World Series of Poker next week?

Not paying taxes on all $8.3 million.

Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.

This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.

Are You a Professional Gambler?

So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.

The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.

Gambling Guidelines 

  • Make a profit. Everyone loses money sometimes. But if you never win and or profits, it’s hard to suggest that you make a living by gambling. This is the same way the IRS distinguishes between a small business and a hobby.

  • Keep records of the time you spend practicing and competing. By maintaining books and records show that you’re not just a casual gambler, you can prove that you’re a professional.

  • Study hard. Prepare for each tournament with a poker expert. This will show you consider gambling your job, and that improving your game is part of professional development.

  • Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.

“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket.  Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.

What Expenses Can Be Deducted?

Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of  tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.

List of Possible Deductions

  • Internet Costs, if you regularly play online
  • Home office expenses
  • Tax advice
  • Subscriptions to gambling magazines and newspapers
  • Gaming fees, chat room fees
  • Club membership fees and dues
  • Clerical and record keeping expenses
  • Travel and meal costs during tournaments
  • Wages paid to relatives or employees for their assistance

You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.

To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets and rides by casinos. Don’t try to pass those off freebies as expenses.

So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.

Photo: Play Among Friends