Both 2008 and 2009 have been hard years for charities, at the same time that more and more individuals are seeking charitable help for the first time. Let’s face it; even those of us with jobs have found ourselves scrimping more, perhaps running out of money at the end of the month, or cutting back on luxury items that used to be a mainstay in our households. Maybe this year there has been a salary freeze at your job, or you will not be receiving a bonus that you count on to balance your excel sheets (think Clark Griswald when he found out his boss had suspended Christmas bonuses and goes crazy in National Lampoon’s Christmas Vacation).

Basically, there are two reasons to give to charities: the first is because you would like a tax break. Why give Uncle Sam money when you could instead give some of that money to a charity that supports or helps a cause of your choice? The second is because you genuinely want to help out a cause. Either way will yield you tax savings, and help the growing deficit charities are facing. Here is some information to help you navigate the process.

Calculate your Tax Savings for Extra Motivation

Figuring out your tax savings is simple. Check out this chart to find out what your income tax bracket is for 2009. Each dollar that you contribute (either in cash or in market value of goods donated) will yield you a tax savings of your income tax bracket. For example, if you are in the 25% income tax bracket, then your tax savings is 25% of your contribution amount (for $100, that would be $25 in tax savings).

Timing: Deadline is December 31, 2009

Tax deductions may be made in the tax year that the actual money or goods were donated. So you have until December 31, 2009 to take advantage of tax deductions for this year. If you want to donate money, but do not have it right now, then you can charge that money on your credit card (be responsible; I hope that if you do this it means you have the money next month to pay off your balance in full), and you can still take the donated money as a tax contribution in this year.

Clean Out Your Closets

This is a great cleansing experience. Get out the old, and make room and space for new in your life. Prioritize by choosing what you truly need and use, over what perhaps no longer represents who you are, or was purchased on a consumer binge, or no longer fits (even though you wish it would!) Clean out your closets, your children’s closets, your garage, etc. Make sure whatever you donate is in good or excellent condition, otherwise, the IRS does not allow you to take a tax deduction (and other families or organizations will most likely not be able to use the item).

Choose a Charity

Is there a particular cause you are interested in, or that has some meaning to you? It is best to research organizations and make sure that they are eligible to receive tax-deductible charitable contributions by doing a search on the IRS website (you do not receive a tax deduction if you donate to a charity without this designation) and also to make sure that most of the donated money is spent on the core mission of the organization. Charity Navigator is a great, free tool to look up charities and find out what their rating and statistics are in terms of efficiency in spending money for their mission and fundraising.

Make the Donation and Get a Receipt

The IRS has become more stringent in recent years about documenting the donations that you make, both monetary donations as well as items donated. For example, if you donate an item that is valued at more than $500, or if the sum of all of your items donated are valued at $500, then you need to submit Form 8283. You will see on the form that any one item donated at a value of over $500 will need an official appraisal. You also need to get a receipt for any items donated, or risk being questioned and owing the IRS money if you have an audit one day.

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Cash for Appliances Program

Back in August, Cash for Clunkers was the big news in government relief for taxpayers. The program encouraged consumers to buy nearly 7,000 more fuel efficient vehicles in less than 30 days. A similar program from the Department of Energy through the American Recovery and Reinvestment Act of 2009 is now in the works. The State Energy Efficient Appliance Rebate Program, or “Cash for Appliances,” aims to encourage Americans to upgrade to more energy efficient appliances.

Cash for Appliances Features

• State-Run: Unlike Cash for Clunkers, where the Federal Government ran the program, each state is responsible for its own Cash for Appliances program. That means program rules, dates, and savings vary by state.
• Old Appliances: Your old appliances won’t be exchanged for the rebate on your new appliances. The good news is that those who are buying, for example, a new washing machine and have never had one before, will still be eligible for the rebate. The bad news is that you’re responsible for getting rid of your own old appliances. Be sure to recycle though because some states, like New York, will offer additional incentives for doing so!
• Energy Star: The new appliances must be ENERGY STAR® qualified in order to be eligible for any rebate. Categories eligible for rebates include: central air conditioners, heat pumps (air source and geothermal), boilers, furnaces (oil and gas), room air conditioners, clothes washers, dishwashers, freezers, refrigerators, and water heaters.

Overall Thoughts

As with Cash for Clunkers, this program shouldn’t make you run out and buy a new appliance you don’t need or can’t afford. The rebates can be as little as $50 so that definitely wouldn’t be a wise decision. However, if you’re in the market for a new appliance anyway and your state is offering one of the better incentive programs, it probably makes sense to take advantage of this program while it lasts…remember how quickly Cash for Clunkers ran out of funds!

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You know the drill: once or twice a month you get paid for the time that you have worked, minus a series of taxes that have been conveniently deducted out of your paycheck before you even receive it. Because you never get to deposit that money into your bank account, paying taxes may seem like wasted money. In actuality, taxes are an untapped resource that pay for and subsidize many services and programs in your community.  

Programs Funded By Your Tax Dollars

Below is a list of resources that are free or subsidized by your tax money. Check with your local county or city government to see if these programs and services are available in your own area.

1. Free tax prep service for low to middle income families. Instead of paying for an accountant or tax prep professional next April, use the volunteer tax service your tax dollars have prepaid for.
2. Subsidized compost bins and free compact fluorescent lightbulbs (CFLs). Many local governments, electric companies, and communities have implemented programs to increase environmental awareness and to decrease energy use. Take advantage of this by purchasing a subsidized compost bin for your garden, signing up for a free CFL lightbulb, etc.
3. Free classes. Most communities offer free classes in accounting (for personal finance), Spanish language, ESL (English as a second language), basic computer skills, exercise (outdoor community yoga is always fun!), resume writing and job searches, etc. Some other fun classes I have found are for learning how to compost, local gardening instruction, and cooking. You may be surprised what classes are offered.
4. Parks, and environmental education. Parks are a wonderful opportunity to get outside and enjoy nature. Many parks offer free canoe rentals (or a subsidized cost that is cheaper than a private canoe rental place), tours, environmental education classes, outdoor barbecue pits (bring some foil if you don’t like the idea of cooking after someone else), fire pits, etc. You can use park grounds for birthday parties, anniversary parties, or other parties for free or a small donation, saving you money on event planning. Upkeep of the parks and all of these programs are funded through your tax dollars.
5. Use of facilities­. Community fitness centers are much cheaper than private gyms (memberships are often half the price). Libraries have books to borrow as well as DVDs, and you can take advantage of the Interlibrary Loan System (ILL) to borrow books and DVDs from many libraries around your state, giving you much better variety with a little bit of patience.

What programs have you used that were paid for with your taxes?

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We’re continuing to detail specific benefit options with a look at Health Savings Accounts, or HSAs. Yesterday we looked at High Deductible Health Plans. Because of its lower premiums, an HDHP makes financial sense for many people. If you have an HDHP, you are also eligible to contribute to an HSA and save even more money on medical expenses.

HSA basics

• Definition: An HSA is a special type of savings account – a tax-advantaged way to pay for qualified medical expenses incurred while covered by an HDHP. HSAs can be held in simple interest-bearing savings accounts. Some plans will also allow you to invest in higher-earning instruments, allowing your contributions to grow significantly when invested properly.
• Eligibility: To be eligible to open and contribute to an HSA, you must be over 18 and covered by an HDHP that conforms to IRS standards. You may not have any other kind of medical insurance plan in addition to the HDHP, including Medicare. Finally, you cannot be claimed as a dependent on someone else’s tax return. Employers that offer an HDHP usually offer and manage an HSA as well. If you have individual health insurance you can sign up for an HSA through your insurance company or many banks/credit unions.
• Contributions: If you are an individual covered by an HDHP, you can contribute $3,050 in 2010 and 2011 ($3,100 in 2012). Covered families (including participant plus spouse, children, or both) can contribute $6,150 in 2010-2011 ($6,250 in 2012). Your employer may contribute, but total contributions cannot exceed the above limits. Individuals can also contribute an additional $1,000 per year if they are 55 or over. These amounts are reduced if you do not remain covered by the plan for the entire year. You cannot contribute once you stop being covered by an HDHP due to retirement, employer changes, or plan changes, but the accumulated contributions and earnings are yours to keep.
• Withdrawals: Withdrawals for qualified medical expenses are tax-free. Many HSAs will provide you with a debit card so that you can pay expenses directly. Others will require you to file paperwork for reimbursement. Withdrawals for non-medical expenses will be taxed as ordinary income. A 10% penalty will also apply unless you are over 65 or disabled.
• Qualified Expenses: All normal medical expenses, including anything that your HDHP deductible would apply to, such as prescriptions, are qualified expenses. You can also pay for dental or vision expenses as well as long term care insurance premiums or expenses. Finally, Medicare premiums and COBRA premiums are qualified expenses, as are other health insurance premiums if you are unemployed. Cosmetic surgery cannot be paid for out of an HSA.

How can an HSA work for you?

An HSA is tax-advantaged in three ways:

1. It provides an up-front tax deduction, reducing your taxable income by the amount of your contribution.
2. It allows for contributions to grow with no taxes on earnings.
3. You can make tax-free withdrawals for qualified medical expenses. The withdrawals can be made at any time, even if you are not covered by an HDHP at the time of the expense!

Choosing an HDHP will always save you money in premiums when compared to traditional medical plans. The only downside is meeting your higher deductible. An HSA helps you save to meet that deductible and spread medical expenses evenly throughout the year so that they do not have to impact your everyday budget. In addition, your employer may contribute to your HSA, thus paying a portion of your annual deductible. Employer contributions and tax savings are in addition to other savings you may realize by selecting an HDHP. If your employer does not offer an HDHP option, consider getting quotes on private health insurance- even without an employer subsidy, the HDHP/HSA combined savings might be enough to make it worth it!

Because there are no income limits for HSA eligibility, HSAs are a great way to plan for increased medical expenses in retirement. If you have an HDHP/HSA for multiple years, and choose to pay for medical expenses out-of-pocket instead of an HSA, you can even treat your HSA as a “super Roth” and make tax-free withdrawals later instead of in the year they are incurred – this strategy allows the money to grow tax-free as long as possible!

To open an HSA, select it during open enrollment with your employer or check with your private health insurance company, bank, or credit union. Be aware that non-employer sponsored HSAs may incur management fees. While those fees can be frustrating, they are almost certainly outweighted by the savings!

Final thoughts

If you have the option of choosing an HDHP at work, spend some time running the numbers to see how much the combination of an HDHP and HSA can save you. JP Morgan Chase provides three easy-to-use calculators, including a tax savings calculator. If you are already covered by an HDHP, there is no reason NOT to open and contribute to an HSA. HSA money never expires – the account and any incurred tax benefits are yours to keep throughout your life. Combined with HDHPs, they can save you thousands of dollars over the course of your lifetime.

For more on HSAs, check out this handy guide from The Department of the Treasury.

Update: Health Savings Account Changes are on the way. Check out the new rules and regulations.

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Good news for existing homeowners! You’ll finally be eligible to take advantage of the home buyer tax credit. When the President signed a bill today to Extend the $8,000 First Time Home Buyer Tax Credit, it also included a provision for existing homeowners, referred to as long-time residents.

To qualify as a long-time resident, you must have owned and lived in your current residence for at least five years of the previous eight years.

$6,500 Home Buyer Tax Credit

Here are the requirements for the $6,500 home buyer tax credit:

• You purchased your new home after November 6, 2009, and before May 1, 2010, or you have a signed contract by April 30, 2010 and you must close on the new home by June 30, 2010.Update: The existing home buyer tax credit is extended until Sept. 30, 2010.
• Income phaseouts will begin at $125,000 for single filers and $225,000 for married filing joint.
• The credit is for primary homes that cost $800,000 or less.

For instructions on how to get your tax credit, including the form to file with your taxes and what documentation you need to include, see How to Claim Your Home Buyer Tax Credit.

For more information, see the original First Time Home Buyer Tax Credit.

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