In the News: Couple Loses $18.5 Million Deduction on Technicality

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If you donate noncash items to charity, make sure you file the proper paperwork, or you could lose your deduction.

A blog on the Wall Street Journal recently ran a story about a couple who lost an $18.5 million charitable contribution deduction because they failed to include the correct paperwork at the time they filed their tax return. Below is a summary of what happened, or visit the WSJ blog to read California Couple Loses $18.5 Million Charitable Deduction on Technicality by Laura Saunders.

  • The Sacramento couple donated property, which they valued at $18.5 million, to charity
  • The IRS challenged the value, and the couple hired an outside appraiser to asses the property (which he valued at $20.3 million)
  • The couple lost the right to the deduction because a.) they didn’t attach the appropriate paperwork at the time they filed, b.) the taxpayer wasn’t a qualified appraiser, c.) the independent appraiser was not hired in a timely fashion (from the time they filed)

This story is unfortunate because the couple lost on a technicality, but it reminds us how important it is to follow the IRS reporting guidelines. Below are record keeping guidelines to keep in mind for noncash donations:

Information to Keep

  • Name of the charitable organization
  • Date and location of the contribution
  • A reasonable, detailed description of the property you contributed
  • The fair market value, as well as, the method you used to determine the value
  • Cost or other basis of the property
  • Although it is not required, it is a good idea to keep photographs of the items donated (ie if you donate 10 items to Goodwill, photograph the 10 items before you drop them off)

 

If the donation is worth less than $250

  • Keep a receipt or similar documentation, unless you are unable to obtain such information (ie you brought your donation to an unattended drop-off site)

 

If the donation is worth $250-$500

  • You will need written acknowledgement from the organization, containing the following information: name and address of the organization, date and location of the contribution, description of the property, as well as, whether any ‘perks’ were provided to the donor and the fair market value of ‘perks’

 

If the donation is worth $501-$5000

  • The same requirements as $250-500 level apply, as well as, records indicating how the property was obtained, the date it was acquired, and the adjusted basis of the property

Remember, the forms and reporting guidelines are complicated and vary based on what you are donating/ how much it is worth. The IRS is starting to crack down more on charitable contributions, so as you make donations throughout the year, be sure to keep the appropriate documentation. If you have any questions, contact an H&S tax professional.

 

Sources:
2011 Quickfinder (Tax Regulation Guide)
California Couple Loses $18.5 Million Charitable Deduction on Technicality by Laura Saunders

 

Still Haven’t Had Your Taxes Done? Time is Running Out!

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The tax deadline is quickly approaching; make sure you get your paperwork in. (photo credit: office.microsoft.com)

Taxes are due tomorrow! So, what do you do if you still haven’t had your taxes done? It’s best to be proactive, and work to avoid penalties. At this point, it is probably too late to have a tax professional complete and file your taxes by the deadline, but there is still action you can take.

  • File for an extension This will extend the amount of time you have to file your tax paperwork, however, it WILL NOT extend the amount of time you have to pay if you owe money. You can file for an extension on the IRS website.
  • Send the estimated amount you owe by April 17th Remember it’s best to err on the side of caution, because if you owe more than you send, you will still be penalized. If you are going to receive money back then you have three years to file (and with the extension you have 3 years and 6 months).
  • Have your taxes completed as soon as possible Be sure to file your paperwork as soon as possible, so you can receive any money back you deserve.

Still have questions? Contact an H&S tax professional today.

Tax Planning Tips: Taxable Gifts

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taxable-gifts

Many people give gifts throughout the year, but they don’t realize certain gifts are taxable. Make sure you know the rules. (Photo Credit: office.microsoft.com)

Many people give gifts throughout the year, but they don’t realize certain gifts are taxable. On Monday we reviewed keeping your charitable donations organized for next tax season. Today we’ll discuss taxable gifts and what you’ll need to know for next tax season.

What is a Taxable Gift?
What most people don’t realize is that the IRS’ general rule of thumb is ALL gifts are taxable, but there are several exemptions. The primary exemption being, gifts that do not exceed the annual exclusion for the calendar year are not taxable. For 2011 and 2012 the annual exclusion is $13,000.  The following items also are not taxable:

  • Tuition or medical expenses paid directly to an education institution or a medical institution on behalf of someone else.
  • Gifts for your spouse, political organizations, and charity.


Can My Spouse and I Each Make a Gift Up To The Annual Exclusion?
You and your spouse are each able to make a gift up to the annual exclusion without paying the gift tax. So, for 2011 and 2012, you could gift $26,000 to a third party and then each claim half of the amount. You must file Form 709, if you do this.

Takeaway
Most gifts will not be taxable under the IRS’ exclusions, but if you do exceed the limit remember to file Form 709. If you have any questions throughout the year regarding whether a cash or property gift will be taxable, contact your H&S tax professional at 800.924.6891.

Forms + Sources
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return

This Tax Season is Almost Over, But Stay Organized for the Next!

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charitable_contributions

If you plan to make charitable contributions throughout the year, you’ll want to be sure to keep your records organized for next tax season. (Photo Credit office.microsoft.com)

Tax season is almost over, but you’ll want to stay organized for next year! If you plan to make charitable contributions throughout the year here are a few tips regarding what you’ll need in order to deduct those contributions:

Which Organizations Qualify?
You may only deduct contributions if they are made to legitimate qualified organizations. Donations to political organizations, candidates, or specific individuals don’t count. IRS Publication 526 can help you determine if an organization qualifies.

How do I Claim a Charitable Contribution?
How you claim your charitable contribution depends upon how much you donated. If noncash contributions exceed $500, then you must complete Form 8283, Noncash Charitable Contributions. If they are below $500 then you complete Form 1040, and itemize donations under Schedule A.

If your donation is valued at $5,000 or more, you must complete Section B of Form 8283.

What if I Received ‘Perks’ Because of My Donation?
If you received any perks in exchange for a donation (ie baseball tickets, merchandise, discounted or free services, etc.) then you may only deduct the amount that exceeds the fair market value of the perk you received.

So, if you donated $50 and, as a result of that donation you received two baseball tickets with a fair market value of $30, you may only deduct $20.

Do I Need to Keep Any Records of My Donations?
Yes! You must keep records of the items you donated. Below are examples of acceptable records:

  • Cash, Check, Monetary Gifts Under $250 – You must keep a bank record, payroll deduction record, or written communication from the organization (this written piece must contain the name of the organization, as well as, the date and amount of the contribution).
  • Cash, Check, Monetary Gifts Exceeding $250 – In addition to the items listed above, you also need documentation from the organization detailing whether you received any benefits or perks as a result of your donation.
  • Text Message Donations – A phone bill is acceptable documentation, as long as, it details the date, the name of the organization, and a transcript of the donation amount.

Remember, keeping track of these items now will help reduce stress next year.  If you have any questions, or need any additional information, please contact your H&S tax professional at 800.924.6891.

Forms + Sources
IRS Publication 561, Determining the Value of Donated Property
IRS Publication 526 (2011) Charitable Contributions
Form 8283, Noncash Charitable Contributions

New Exemption for Some Nonprofit Housing

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The Department of Treasury is now able to grant an exemption to nonprofits that provide housing for the elderly or disabled for 2012 (Photo Credit office.microsoft.com)

The Department of Treasury is now able to grant an exemption to nonprofits that provide housing for the elderly or disabled for 2012. Additionally, the exemption is available for the three preceding years, assuming the property would have met the requirements for the exemption, had the taxpayer filed by the deadline in 2010.

If you are eligible to take advantage of this exemption, and it results in overpayment of taxes, you will receive a rebate including any interest paid within 30 days of the date the exemption is granted.

If you have any questions or would like further information on this matter, please contact your H&S tax professional at 1.800.924.6891.

Tax Tip: Guidelines for Handling a Child’s Investment Income

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child's investment income

They grow up so fast! Make sure your child’s investment income is being taxed at the correct rate. (Photo Credit: office.microsoft.com)

Does your child have investment income? If so, there are tax rules that affect their investments and their tax rate. Several factors are used to determine whether a child’s investment income will be taxed at the child’s rate or the parents’ rate.

Investment Income
Interest, dividends, capital gains, and other unearned income are considered investment income. All or part of a child’s investments could be taxed at the parent’s tax rate.

Guidelines for Taxing at Parents’ Rates
If a child has investment income of more than $1,900 and meets one of three of the following age requirements, then the child’s tax must be figured using the parent’s tax rate.

  • The child was under age 18 at the end of 2011
  • The child was under age 18 at the end of 2011 and did not have earned income that supported more than half of their living expenses.
  • The child was a full time student over age 18 but under age 24 at the end of 2011, and did not have earned income that supported more than half of their living expenses.


Figuring the Child’s Rate at the Parents’ Rate
If you do need to figure the child’s tax rate at the parents’ rate you will need to complete Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to their federal income tax return.

Guidelines for Including Child’s Investment Income on Parents’ Tax Return
Under certain conditions, a parent may be able to include their child’s investment income on their tax return. If eligibility is met, then the child does not need to file a return. The conditions are as follows:

  • The child was under age 19, or under age 24 if they are a full-time student, at the end of 2011. (Please note a child is considered to be 19 at the end of 2011 if they were born on January 1, 1993, and 24 if born on January 1, 1988.)
  • The child’s only income was from interest and dividends, and their gross income was under $9,500.
  • If you report your child’s investment income, then they will not have any returns to file.
  • The child does not file as a joint return for 2011.
  • The child did not make an estimated tax payment for 2011, and no overpayment was received for 2010 under their name and social security number.
  • Federal income tax was not taken out of the child’s income due to the backup withholdings rule.
  • You are the parent whose return must be used when applying for the special tax rules for children.

 

If your child meets these qualifications you may claim their investment income by completing and attaching Form 8814, Parents’ Election to Report Child’s Interest and Dividends, to your 1040.

For More Information
If you need more information contact your H&S tax professional at 1.800.924.6891.

Sources & Forms (External Links)
Tax Topic 553 – Tax on a Child’s Investment Income
Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900
Form 8814, Parents’ Election to Report Child’s Interest and Dividends target=”_blank”>
 Publication 929 (2011), Tax Rules for Children and Dependents

Tax Credit: Residential Energy Efficient Property Credit

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residential energy efficient homes

If you made energy efficient home improvements you may be eligible for a tax credit. (Photo Credit: office.microsoft.com)

If you installed certain qualified residential alternative energy equipment in your home you may be eligible for the Residential Energy Efficient Property Credit. With this credit you are able to claim up to 30% of the cost of the qualifying equipment (including labor costs in most cases). Please note this is a non-refundable credit not a deduction, so it will reduce the amount of tax you owe, rather than give you cash back.


Conditions to Receive the Credit

  • The equipment must have been installed in your home in the United States.
  • Fuel cell property only qualifies if it was installed in your primary home located within the United States.
  • Be sure you have the manufacturer’s tax credit certification statement because not all energy efficient improvements qualify.

If you are eligible for this credit complete Form 5695, Residential Energy Credits.

Sources & Forms (External Links)
Form 5695, Residential Energy Credits

 

Child and Dependent Care Expense Tax Credit

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Remember to check if you are eligible for the Child and Dependent Care Expense tax credit!

Did you pay someone to care for your child, spouse, or dependent last year? If so, you may be eligible for the Child and Dependent Care Expense tax credit. Below are a few things you need to know:

    • The care must have been provided to a qualifying person, which is defined as:
      • Your child, age 12 or younger (that is claimed as a dependent)
      • Your spouse, who is physically or mentally ill
      • Certain other individuals who are physically or mentally ill (ie: a dependent parent)The people you claim for this credit must be named on your tax return.
    • The care must have been provided so you could go to work or look for work. If you are married filing jointly, your spouse must have gone to work or looked for work, as well.
    • You must have earned income. This may be from your salary, tips, wages, earnings from self-employment, or other taxable employee compensation. If you are married filing jointly, one spouse may be considered to have earned income if they were a full-time student or were physically and/or mentally unable to work.
    • The payments for care may not have been paid to the following:
      • Your spouse
      • The parent of your qualifying person
      • To a person you claim as your dependent (ie your teenage son/daughter who cared for your younger child)
      • To your child if they will not be 19 years old by the end of 2012 (provided they’re not claimed as a dependent)
    • The person you claim for the credit must have lived with you for over half the year; except for those individuals who died, were born, or children of divorced (or separated) parents.
    • The credit may be up to 35% of your qualifying expenses, depending on your gross adjusted income.
      • You may claim up to $3,000 of expenses paid for one qualifying person or $6,000 for two or more, less any dependent care benefits provided by your employer.
    • Those individuals filing as married filing separately do not qualify for this credit.

 

Also, keep in mind that if a care provider was paid to work in your home, you may need to pay Social Security and Medicare tax, as well as, federal unemployment tax.

 

Do You Cover Part of Your Employees’ Healthcare Costs? You May be Eligible For…

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The Small Business Health Care tax credit is available to employers who pay at least half of the cost of health care for their employees. (Photo Credit: office.microsoft.com)

The Small Business Health Care tax credit, which is designed to help small businesses and tax exempt organizations provide healthcare to their employees, is available to employers who pay at least half of the cost of health care for their employees. To qualify you must:

  • Have fewer than 25 full time employees (FTE). 2 part time employees = 1 full time employee.
  • You must cover at least 50% of the premium for single health care coverage for each of your employees.
  • Your employees must have an average wage of less than $50,000 per year. This number is the average! So, if you have 9 full time employees, and 2 part time employees that together make $250,000 you would divide 250,000 by 10, which equals $25,000. Your 10 FTEs (remember 2 part time employees = 1 full time employee) make an average of $25,000 a year. Even if Joe makes $40,000; Sue makes $35,000; Bill makes $30,000; etc.

If you have any questions, or would like additional information regarding this credit please contact your H&S tax professional.

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