Archive for Charitable Contribution

Lessons From Mitt Romney’s Tax Return

January 30, 2012 John R. Dundon II Abusive Tax Shelter, Accounting Method, Alternative Minimum Tax (AMT), Asset Classification, Audit Technique Guide, Basis, Business Expense, Business Income, Charitable Contribution, Cost Basis

Check out Mitt Romney’s 2010 tax return and learn how he does it. The most important lesson I learned in perusing his return (besides the significance of sheltering your $$ outside of the USA) is the immediate impact of targeted charitable contributions. In my professional opinion the absolute best way to reduce your tax liability is to make charitable donations of money or property. Also you can try to:

  • Avoid salary, wagesand tips if you can. Instead generate income from long-term capital gains

  • Avoid Muni-bond interest. It triggers Alternative Minimum Tax (AMT) making this investment vehicle laughable at best for the truly wealthy

  • Pursue Qualified dividends.  They are essentially ordinary dividends that meet the requirements to be taxed as net capital gains. Check out Publication 550, Investment Income and Expenses

  • Avoid the home-office deduction. It offers a small tax benefit requiring large tax prep effort (aka $$). Usually not worth the time and effort.

  • Itemizing deductions is probably not worth the personal disclosure required

  • Beware that capital gains and dividends can also trigger the AMT

  • Offshore investments are abusive because they rob the US Treasury of much needed tax revenue. Basically the US Tax Code encourages the wealthy to invest OUTSIDE OF THE UNITED STATES which is so backwards it makes my head spin.

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IRS Publication 78 – Online Tool for Researching Charitable Organizations

December 22, 2011 John R. Dundon II Charitable Contribution, Gift Tax, Taxable Income

Now is a GREAT TIME OF YEAR TO MAKE A CHARITABLE DONATION if you are so fortunate. When you make a donation to a charity you may be able to take a deduction for it on your tax return as long as you secure the proper documentation substantiating the donation and its subsequent value. In route to making your charitable contribution decisions ….

  1. Make sure the organization qualifies Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations.

  2. Check for the list of organizations whose Tax Exemptions have been Revoked

  3. What you can deduct You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats. This is done on page 2 of Schedule A of IRS Form 1040.

  4. When you receive something in return If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

  5. Record keeping Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization.

  6. Pledges and payments Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, you can only deduct $200.

  7. Donations made near the end of the year Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

  8. Large donations For any contribution of $250 or more, you need more than a bank record. You must have a written acknowledgment from the organization. It must include the amount of cash and say whether the organization provided any goods or services in exchange for the gift. If you donated property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.

  9. Tax Exemption Revoked Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization’s automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.

Other Links Worth Checking Out:

  • Publication 526, Charitable Contributions (PDF)

  • Publication 561, Valuing of Donated Property (PDF)

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IRS Request for Miscellaneous Determination – IRS Form 8940

December 15, 2011 John R. Dundon II Charitable Contribution, IRS Examination, Non-profit, Tax Guidance & Preparation, Tax Relief, Uncertain Tax Position

The IRS has released Form 8940, Request for Miscellaneous Determination that tax-exempt organizations will use to request certain determinations about their tax-exempt status.  In addition to foundation status issues, organizations will use this new form to obtain advance approval of certain activities and exemption from IRS Form 990 filing requirements.  Organizations applying for recognition of exemption and at the same time requesting advance approval of scholarship procedures or exception from filing Form 990 should include their request with their Form 1023, Application for Recognition of Exemption Under Section 501(c)(3), rather than file Form 8940.

The simple one-page form is accompanied by instructions that specify what information is required to support each of the nine types of requests that may be submitted.  A user fee must accompany most requests.

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Trusts and Charitable Contributions CCA 20104202

September 13, 2011 John R. Dundon II Charitable Contribution, Trusts

Under IRC §170(c)(2)(A) generally speaking when a trust uses its income to buy an asset and in a later year gives that asset to a charity it is allowed a charitable deduction. Chief Counsel Advice 20104202 stipulates however that if the deduction was not limited to the trust’s basis in the assets, the contribution of low-basis property would yield a double tax advantage because the trust would be able to avoid tax on the potential gain and it would be able to deduct not only the basis but also the gain from gross income.

In other words trusts generally speaking may take a charitable deduction for real property donated equal to the trust’s cost basis in the property assuming that the property in question was purchased with income generated from the trust.

 

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What is a Church?

August 11, 2011 John R. Dundon II Charitable Contribution, Tax Guidance & Preparation

The IRS developed 14 criteria to evaluate applications for church foundation status. If a church does not meet these criteria, it will not receive tax exempt status. The criteria are weighted with the four most important of these being:

• A complete organization of ordained ministers ministering
to their congregations.
• The provision of regular religious services and religious
education for the young.
• A formal code of doctrine and discipline.
• Regular congregations and regular religious services.

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IRS Mileage Deduction Rate Increases: $0.55.5-Business; $0.23-Medical or Moving; and, $0.14-Charitable

August 1, 2011 John R. Dundon II Business Expense, Charitable Contribution, Highway Tax, Tax Guidance & Preparation, Tax Problems & Requests

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

Purpose

Rates 1/1 through 6/30/11 

  Rates 7/1 through 12/31/11 

Business

51

55.5

  Medical/Moving

19

23.5

Charitable

14

14
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Charitable Contribution: Donated Real Estate

July 18, 2011 John R. Dundon II Charitable Contribution, Rental Real Estate

I have a new case involving donated rental real estate and in preparation for appeal I stumbled across the US Tax Court case of Theodore R. Rolfs, et ux. v. Commissioner 135 TC No. 24 in which the taxpayer donated a lake house with conditions to the local Volunteer Fire Department (VFD) for training purposes.  The following are my notes from reviewing the case.

The US Tax Court held that the taxpayers were not entitled to any charitable contribution deduction for the lake house because they failed to prove that the fair market value (FMV) of the lake house as donated exceeded the FMV of the demolition services foregone not withstanding the conditions of the donation that the lake house could not remain on the land on which it was sited, could not be used for residential purposes, had no value as a structure to be moved, and had no salvage value.

In 1998 the taxpayers claimed a charitable contribution deduction of $76,000 on their tax return for what they believed to be the fair market value (FMV) of their lake house as determined by a qualified appraisal which was attached to the return. The IRS denied the deduction and claimed that the taxpayer did not make a charitable contribution because the FMV of the lake house as donated with conditions did not exceed the FMV of the demolition services they received from the VFD in exchange for the donation. This is commonly referred to as the ‘quid pro quo argument.’

The Court determined that the taxpayers saved at least $10,000 in demolition costs as a result of their arrangement with the Volunteer Fire Department (VFD) in question and subsequently received a benefit with a FMV in that amount in exchange for the donation. As a result, the FMV of the lake house as donated had to exceed $10,000 for the taxpayers to claim a charitable contribution deduction for the difference.

FMV is determined at the time of the donation, measured by the willing buyer/willing seller standard. However, the FMV must take into account any restrictions or conditions limiting the property’s marketability. In this case the taxpayers had several restrictions on the property and their appraisal treated the value of the donated property as equal to the difference between the FMV of the property with the lake house and the FMV of the property without the lake house.

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Deductibility of Charitable Contributions – IRS Form 8283

March 24, 2011 John R. Dundon II Charitable Contribution

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.  To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all non-cash contributions for the year is over $500, you must complete and attach IRS Form 8283, Non-cash Charitable Contributions, to your return.  Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser. Instructions for Form 8283, Noncash Charitable Contributions are here ->(PDF)

The biggest problems that I’ve run into lately occur when the donor also serves as an Officer of the qualified 501(c)3 organization receiving the donation and defining the degree to which benefit was received in return for the donation.  So be sure to document everything in a journal, or donate to another qualified organization.  As part of this process I also recommend checking out IRS Publication 561, Determining the Value of Donated Property (PDF 101K).

To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.  Donations of stock or other non-cash property are usually valued at the fair market value of the property on the date of the donation. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. You cannot deduct contributions made to specific individuals, political organizations and candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.  Or, Search for Charities or download Publication 78

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