New England Tax

The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000) from their IRA account to a charity has been reinstated for 2008 and 2009.  The distribution is tax-free, but there is no charitable deduction.  This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.

IMPORTANT! If you are over 70½, you must act quickly to take advantage of this provision for 2008.  This provision can substantially benefit low-income taxpayers, as well as the more wealthy individuals.  Please call if you are contemplating a cash charitable contribution between now and the end of the year to see if it would benefit you to make a direct contribution from your IRA.

The key benefits of this provision lie in the fact that the distribution;

(1) Is not included in the taxpayer’s income for the year,

(2) Counts toward the taxpayer’s minimum required distribution for the year, and

(3) Does count as a charitable contribution for the year. 

How does a taxpayer benefit from this provision?

• By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
• This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI limited deductions.
• For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income.  Thus, excluding the portion of the IRA distribution directly distributed to the charity can reduce the taxable portion of the SS.
• Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Example: Retired couple (both over 70½) file a joint return.  Their income consists primarily of RMD from their IRA accounts totaling $35,500, both of their SS incomes totaling $28,000, and $2,000 of investment income.  They are very active with their church and make a $14,000 contribution each year. They have no other income or deductions.  Compare the 2006 results with and without a qualified charitable distribution:

 

In this example, instead of making a charitable contribution, the taxpayer made a qualified charitable distribution of $14,000, lowering their AGI, reducing their taxable SS, and then using the standard deduction.  Result: Tax savings of $2,901. 

Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations.  Please call this office before attempting to execute this strategy.

Beginning in 2005, Congress has imposed some tough new rules that will substantially limit the deduction for this popular charitable donation. Prior to this change, taxpayers were generally allowed to deduct the fair market value (FMV) of the vehicle.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the FMV claimed as a deduction by the donating taxpayer. Under the law changes taking effect in 2005, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS has developed new Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to the new rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.

Money or property that you donate to "qualified" charitable organizations can be included in your itemized deductions as a charitable contribution. But what is a "qualified" charity? IRS Publication 78 lists all qualified organizations.

• Churches, synagogues, temples, mosques, and other religious organizations. 
  
  
• Federal, state, and local governments, if your contribution is solely for public purposes. This generally includes local government, public schools, Indian tribal government, and governments of U.S. Possessions.
  
  
• Nonprofit schools and hospitals. 
  
  
• Nonprofit volunteer fire companies, public parks and recreation facilities, and civil defense organizations.
  
  
• Organizations organized and operated for charitable purposes, such as the Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, March of Dimes, etc.
  
  
• Certain organizations that foster national or international amateur sports competition.
  
  
• War veterans' organizations, including posts, auxiliaries, trusts, or foundations organized in the United States or any of its possessions.
  
  
• Domestic fraternal societies, orders, and associations operating under the lodge system.
  
  
• Certain Canadian and Mexican charities allowed by treaty - however, generally to deduct your contribution you must have income from sources within the country.

If you have questions regarding a specific charity or charitable contribution, please feel free to inquire with this office.

Charitable deductions are allowed only for travel expenses (meals and lodging included) by volunteers who do charitable work for their organization while away from home on the charity's behalf. Unlike other areas of taxes, meals are not subject to the 50% limitation. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. If the taxpayer's personal vehicle is used for the charitable travel, then the taxpayer may deduct cost of gas and oil, but not depreciation, insurance or repairs. In addition, the current standard mileage rate of $.14/per mile may not be used.

If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

• Away-from-home travel expenses while performing services for a charity, including 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 at 100%. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not 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, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls. If you use your vehicle in providing donated services to a charity for relief related to Hurricane Katrina during the period between August 25, 2005 to December 31, 2006, you can compute your charitable mileage deduction using a standard mileage rate equal to 70% of the business mileage rate in effect on the date of the contribution, rather than the charitable standard mileage rate.
  
  
• You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization. To verify your contribution:

• 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, request a letter from the charity explaining why you're needed at the out-of-town location.
  
  
• You should submit a statement of expenses if you are out-of-pocket for substantial amounts and, preferably, a copy of the receipts to the charity and arrange for the charity to acknowledge in writing the amount of the contribution.
  
  
• 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.
  

Cash Contributions - Beginning in 2007, cash contributions, regardless of the amount, must be substantiated with a bank record or written communication from the donee showing the name of the charitable organization, date and amount of the contribution.

The recordkeeping requirements may not be satisfied by maintaining other written records. Prior to 2007, for cash contributions of $250 or less, a taxpayer only needed to keep a contemporaneous written record as verification. But, no longer! This means that unless the charitable organization provides written communication, cash donations put into a “Christmas kettle,” church collection plate, pass-the-hat collections at youth sporting events, etc., will not be deductible. Donations made by a debit or credit card can be substantiated by a bank record.

These new rules make it easy for the IRS to audit a taxpayer’s charitable contributions by correspondence. They need only request that you provide copies of the required substantiation by mail. If you are unable to provide it, they can make the appropriate tax, interest and penalty adjustments and send you a bill. Most likely, they will also make the charitable contribution audit an automatic companion item for other audit issues.

Non-Cash Contributions - After August 17, 2006, no deduction is allowed for a charitable contribution of clothing or household items unless the clothing or household item is in good used condition or better. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.

Generally, the verification rules for contributions of clothing and household items require that you obtain a receipt from the charity including its name, date and location of the contribution, and a reasonably detailed description of the property. In addition, you must also keep a record of each item contributed, indicating the name and address of the charity, date and location of the contribution, and a description of the property in detail that is reasonable under the circumstances. If the contribution is valued at $250 or more, the acknowledgement from the charity must indicate whether you received any goods or services in return for your contribution and the value of those services. Contributions of property valued at $500 or more must be substantiated by your records that also indicate how the property was acquired, the approximate acquisition date, and your cost or basis in the property. For contributions totaling $5,000 or more, a qualified appraisal is generally required.

If you have questions regarding how these rules may affect your specific situation, please call.

Charitable deductions are limited by income depending upon the type of contribution. Contributions in excess of the deduction limits described (1), (2), and (3) below, may be carried forward for five years. An amount can be carried over even though an individual does not itemize their deductions in the year of the contribution (carryover then equals excess over 50% of AGI).

1. 50% limit: Generally, contributions to specified organizations are deductible to the extent they don't exceed 50% of the taxpayer's Adjusted Gross Income (without any reduction for net operating loss carrybacks). This category includes churches, tax-exempt educational institutions and hospitals, federal, state local governmental units, if the contribution is used for public purposes, community chests, and certain private operating foundations.

2. 30% limit: This limit applies for gifts (other than capital-gain property) made to all other groups other than 50%-limit organizations. 30%-limit organizations include veteran organizations, fraternal organizations, public cemeteries, and private non-operating foundations. However, in a tax court case, the court ruled that a war veteran organization qualified for the 50% limit. 

Contributions are deductible to the extent of the 30% limit only if they are made for the use of a charitable organization. A special 30% limit applies to gifts of capital gain property to 50%-limit organizations that are deducted at FMV.

3. 20% limit: This applies to gifts of capital gain property made to all qualified organizations other than 50%-limit organizations.

Generally, no deduction is permitted for contribution to a foreign charity. However, that does not include contributions to U.S. Charities that perform part of their charitable function outside the U.S. An exception to this rule is Mexican, Canadian and Israeli charities.

Canadian Charities - Certain Canadian charitable organizations covered under an income tax treaty with Canada are deductible. In order to deduct the contribution, the taxpayer generally must have income from sources in Canada. 

Mexican Charities - Certain Mexican charitable organizations covered under an income tax treaty with Mexico are deductible. The organization must meet tests that are essentially the same as the tests that qualify U.S. organizations to receive deductible contributions. To deduct a contribution to a Mexican charity, the taxpayer must have income from sources in Mexico. 

Israeli Charities - Contributions to certain Israeli charities organized under an income tax treaty with Israel may be deductible. The organization must be created and recognized as a charitable organization under Israeli law. The amount deductible is the amount that would normally be allowed under U.S. rules, but not more than 25% of AGI from Israeli sources. 

For further information regarding the charity deduction provisions of the income tax treaties with Canada, Mexico and Israel, please call this office.

Downloadable Forms: Noncash Contribution Statement IRS Form 8283 (Gifts over $5,000)

When you give away household items like clothing, appliances and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's "fair market value" (i.e., the price similar property would sell for in the open market).

Unfortunately, one of the most difficult problems connected with noncash donations is determining their FMV. In fact, when you give away property of high value, the job of determining worth is best left in the hands of a professional appraiser. Or, when you donate property that has increased in value, special tax rules apply and you should consult with this office before you make your donation.

The guidelines offered below are provided as aids for setting value on the most common types of noncash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:

• Used Clothing and Household Items - Effective for charitable contributions of clothing or household items after August 17, 2006, no deduction will be allowed unless the clothing or household item is in good used condition or better. The IRS has been given authority to deny a deduction for any item with minimal monetary value, such as used socks or undergarments.
  
  o Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what you paid for them. A visit to a local thrift shop may help give you an idea of current selling prices for items like yours.
  
  o Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. Photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
  
  
• Cars and Other Vehicles: See Donating Cars to Charity.

Givers may deduct contributions of cash or property, but only to the extent they received no personal benefit from the donation. Often, the IRS attributes at least some (if not total) personal benefit to amounts expended for items like dinner tickets, church school tuition, YMCA dues, raffles, etc. To determine the contribution amount, subtract the FMV of the "personal benefit" item from the cost and deduct the remainder. Most charities now allocate the deductible, nondeductible portions.

Personal Benefit Forfeited - In a Tax Court case, the issue of whether an unused benefit ticket can produce a charitable contribution was raised. The Tax Court made an interesting observation. The taxpayers had purchased tickets to their daughter's school music recital. They did not attend and then claimed the entire expense as a contribution. The Court indicated their failure to attend does NOT increase their contribution. Acceptance of the ticket "creates an expectation that taxpayer will attend and assert the right to be seated." The school is then obligated to prepare for this attendance. The Court said: "Taxpayer receives a material benefit merely by having the right to decide whether or not to attend."

Car Washes, Pancake Breakfasts, Etc. - Taxpayers often want to take deductions for amounts paid for benefit football games, youth-group car washes, parish pancake breakfasts, school plays, etc. The taxpayers have no intention of attending these events, but incur the expense as a direct contribution to the institution. Extending the logic of the Urbauer case to some of these expenses may mean that the IRS would not allow them.

Quid Pro Quo Contributions - Charitable organizations are required to inform donors that "quid pro quo" contributions over $75 are deductible only to the extent that the gift exceeds the FMV of the goods or services provided by the organization. Quid pro quo contributions are payments made partly as contribution and partly as payment for goods or services. Such contributions don't include any payment made to an organization organized exclusively for religious purposes, in return for which a taxpayer receives solely an intangible religious benefit that generally isn't sold in a commercial transaction.

Charities are required to provide a written statement in conjunction with quid pro quo donations. The statement must give the donor a good-faith estimate of the value of the goods or services included with the "gift". Charities who fail to do this are subject to a $10 per contribution penalty (but capped at $5,000 per fundraising event), unless reasonable cause can be shown.

In addition to noncash charitable contributions, taxpayers can make certain donations of property as outlined below.

• Gifts of appreciated capital-gain property held for more than 12 months are subject to special rules. This type of property includes stocks and bonds, artwork, jewelry, coins, land, etc. The deduction amount depends on the kind of property donated, the charitable organization, and the use of the property by the recipient organization. The rules surrounding this type of contribution are complicated and you should consult with this office for the tax ramification of such a contribution.
  
  
• Uniforms - A taxpayer can deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization.
  
  
• Depreciation of Capital Assets - No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles (that's why there is no imputed depreciation in the mileage rate), computer, etc. Example: Kathy volunteers as a member of the sheriff's mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct or depreciate her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work. 
  
  
• Business Expenses of Some Public Employees May Qualify as Charitable Contributions - Normally, employee business expenses are deducted as a miscellaneous itemized deduction. However, miscellaneous deductions are limited to those expenses that exceed 2% of a taxpayer's Adjusted Gross Income. As a result, these deductions may be reduced or eliminated altogether.
  
  However, taxpayers like teachers who work for the public school system, can treat their expenses as a charitable contribution, thus eliminating the 2% of AGI limitation. IRS instructions specifically allow contributions of cash or goods to the U.S. Government or state agencies including political subdivisions such school districts, police departments, etc.