Tax Tips For The New Year

The year 2010 is drawing to a close. You may have survived the holiday shopping season but what about your finances and taxes? In our "Money Coach" segment, personal finance contributor Alvin Hall offers host Michel Martin some last-minute tips for avoiding unwanted surprises in the coming tax year.

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MICHEL MARTIN, host:

I'm Michel Martin and this is TELL ME MORE from NPR News.

Coming up, a South Carolina retiree takes on California's massive budget deficit. We'll find out how in just a few minutes.

But first, congratulations, you survived the holiday shopping crunch, and now you can kick up your feet and bring in the new year.

Not yet says our money coach, Alvin Hall. You just have a few more days to juggle some of your finances in order to avoid any major surprises during tax season. We'll let Alvin explain. He's our regular contributor on matters of personal finance and the economy.

Alvin, welcome back. Thanks for joining us.

ALVIN HALL: Glad to be here.

MARTIN: We have this conversation every year.

HALL: Yes, we do.

MARTIN: And I'm wondering why is that? I mean, is it just do things change so much that people just have to be reminded that they've got to keep their finances in order at some point during - especially in this last week of the year.

HALL: I think that most people forget about their taxes and that they have to file them, and that's coming up soon, and they need to plan a little bit better than they do, especially in terms of any charitable donations they may have and what's deductible. So it's good to start thinking about it now when you're in a relaxed post-holiday mindset as opposed to as April 15 looms you all of a sudden become panicked, what do I need to do, how can I get it done?

It's best to think about it now and do a little forward planning.

MARTIN: Okay. So let's think about some of the things that are available to most taxpayers that they can do to - well, I guess I should just say it, reduce their tax liability. That's the goal, isn't it?

HALL: I think that's one of the goals. But also the goal is to support organizations that you believe are doing something good in society. So one of the things people need to look at is charitable donations, how much money you can give to an organization, or if you have property or shares you can give to an organization. All of that you need to think about.

But the government is very, very strict about charitable donations, and when you make one, you have to keep the receipt and the amount of that donation in order to be able to claim it. And there are different thresholds. So if you give an amount let's say of more than $250, then you have to have a written acknowledgement from the organization, and it must say whether the organization provided any services in kind.

For example, if you write a $250 check and go to a ball or a charitable fundraiser given by the organization, then the entire amount may not be deductible.

MARTIN: What about tithing? There are some people who donate 10 percent of their incomes to church as a matter of faith practice. Are tithes deductible?

HALL: That's a very good question, and it takes me back to my childhood. In general, the government says that tax qualified organizations that have the 5013(c) tax exempt status qualify for these types of donations. However, churches and other religious organizations don't have to come under this umbrella.

If you tithe, you need to keep a record of the amount of money that you have donated, even if it's a journal with the amount and the date, you need to keep that. I encourage people, if you're going to tithe, either do it as a debit - a standard debit from your payroll or from your checking account, or write a check so that you have some documentation that you've actually made this donation to your church or religious organization.

MARTIN: Now, we've talked a lot about the whole foreclosure situation, which is a very difficult situation that too many people find themselves in over the course of the year. I think most people know that mortgage interest is deductible, but what if you have been foreclosed upon? Can you deduct the amount of interest that you paid to the point at which foreclosure began?

HALL: I think you can. But the rules regarding this are a bit complicated. Sometimes if you've sold the property and you've gotten debt relief, the government will make you add that back into your salary, or into your earned income that year.

But in general, any interest that you've paid on your mortgage up to the point of the default should be deductible. But the government also offers people a rather complicated series of mortgage deductions, and people need to be aware if they have first homes and second homes, that it becomes very complicated.

MARTIN: Okay. Well, presumably if you have a second home you're getting some tax advice one would think.

HALL: Exactly. Exactly.

MARTIN: What about giving money to kids? Are there tax implications of that?

HALL: Oh, that's a very good question. There's what's known as the kiddie tax. If your child has an account that generates unearned income, then that money may be taxable. And the numbers are like this. If your child gets up to $950 a year in unearned income, that means from dividends and interest, no taxes are paid. If the amount is between $950 and $1900, then it's taxed at the child's income rate.

However, if the amount is over $1900, then the income is taxed at the greater of the parents' tax rate or the child's tax rate, whichever is greater. And this is designed to prevent parents from dumping huge amounts of stocks and other assets and then having the children sell them off, and then being able to use that money and pay lower taxes on it.

MARTIN: I see. What about giving money to unemployed family members? A lot of people - well, I'll give it that the unemployment rate is 10 percent nationally, and of course, as we know, it's much higher for some groups. I have to assume that there are some people who are giving money to family members to help them over a difficult time.

Does any of that have tax implications, or is it just out of the goodness of your heart?

HALL: It's out of the goodness of your heart and because you know the person needs the money. The government does not recognize gifts to individuals as tax deductible donations.

MARTIN: And what about people who are receiving this money? Do they have to pay taxes on it even though presumably they're getting these monetary gifts because they're having a hard time?

HALL: In general, you can receive up to $10,000 a year as a gift from someone and not have to pay taxes on it. But if it goes beyond that, you have to pay taxes.

MARTIN: Over the course of a calendar year.

HALL: Over the course of a calendar year, exactly.

MARTIN: This is just a hypothetical. This doesn't affect anybody in my house, I'm just letting you know, I just want to ask for people who might be in that situation.

HALL: Because general - if somebody's giving you a large amount of money, it's a relative and they're probably using it to offset some of their state taxes eventually. And the law says that you can give away up to $10,000 a year. I actually think that number has gone up over the past couple of years, but I always remember it as $10,000. You can give that amount away, and it is the giver who has to pay the taxes, not the recipient.

MARTIN: Alvin Hall is TELL ME MORE's regular contributor on matters of personal finance and the economy. He joined us from NPR West in Culver City, California. Happy new year to you, Alvin. Thanks so much for joining us once again.

HALL: Happy new year to you.

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