Taking advantage of Last Minute Tax Deductions
There is still an opportunity to lower your tax liability before the year ends. This can be accomplished in a few different ways as follows:
Charitable Contributions: If you are electing to itemize your allowable itemized deductions on Schedule A of your 2016 federal income tax return, then charitable donations are an excellent way to accomplish this goal. Whether the contribution is in the form of checks written and deposited into the U.S. Postal Box before midnight on December 31, 2016, or made online with a credit card or direct transfer from a bank account, your tax bill can decrease based on your individual marginal tax bracket. For example, if your bracket is at 25% then you will save 25 cents on each dollar contributed.
When you do make charitable contributions make sure that you have received a written acknowledgment from the charitable organization which specifies that they are a Section 501(c)(3) organization, the amount of your contribution, and language which specifies that you have not received any goods or services in exchange for your donation. If you have received any goods or services in exchange then the amount must be specified on the acknowledgment and the net charitable contribution is the amount which will be allowed to be deducted.
If a check is written or a credit card is used, then the taxpayer must have a written acknowledgment for each individual contribution, which is greater than $249. The law requires that the taxpayer “may deduct a charitable contribution if the taxpayer substantiates the deduction with a contemporaneous written acknowledgment of the contribution by the Donee Organization.” The important item here is that the taxpayer must have this document in their possession by the earlier of the time that the return is filed or the due date of the tax return including extensions. The original due date of the return is April 15 therefore, if the taxpayer files the return on March 27 then that is the day on which they must have the document in their possession. If the IRS audits the return then the taxpayer must be able to prove the day that the document was received. If the document is not in their possession then the return needs to be extended so that it can be received and considered contemporaneous.
Noncash Charitable Contributions: There are charitable contribution deductions allowed for property which is donated to qualifying charities and the rules are specific based on dollar amounts attributed to those donations. The contribution is allowable only if the taxpayer satisfies substantiation requirements.
The law provides that there are separate requirements for all contributions of property with a claimed value of $250 or more, contributions of property with a claimed value exceeding $500, and contributions of property with a claimed value exceeding $5,000.
The rules state that for contributions exceeding $5,000, “similar items of property” are aggregated for purposes of the substantiation rules. The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.
Again the rules state that an individual may deduct a gift of $250 or more only if he substantiates the deduction with “a contemporaneous written acknowledgment of the contribution by the donee organization.” The law provi
des that this acknowledgment must include a description of any property other than cash contributed.
For noncash contributions in excess of $500, taxpayers are required to maintain written records with respect to each item of donated property that include, among other things:
- the approximate date the property was acquired and the manner of its acquisition;
- a description of the property in detail reasonable under the circumstances;
the cost or other basis of the property;
- the fair market value (FMV) of the property at the time it was contributed; and
- the method used in determining its FMV.
One rule states that no deduction is allowed for contributions of clothing or “household items” unless such items are “in good used condition or better.” The rule defines the term “household items” to include furniture, furnishings, electronics, appliances, linens and other similar items.
Of major importance are the rules for contributions of property valued in excess of $5,000. Here the taxpayer must generally satisfy the substantiation requirements discussed above and must also obtain a “qualified appraisal” of the items and attach, to their tax return, a fully completed appraisal summary.
The law provides that a “qualified appraisal” must be performed by someone recognized and designated as a “qualified appraiser” by the IRS.
This issue of noncash items greater than $5,000 is very serious because there are times when a large amount of a home’s contents are being disposed of because of a lifestyle change such as the death of a spouse or parent and the property is not going to be used by the survivors of the decedent. Sometimes the large disposition of property is when there is a relocation from the family home because of a job change, divorce, down-sizing because of empty nest or retirement.
The IRS has challenged several large contributions over the past four to five years which have been major Tax Court cases finding in favor of the government because the strict substantiation rules have not been followed by the taxpayers.
The important issue here is that the greater than $5,000 substantiation and appraisal rule is a cumulative rule. There- fore, if the taxpayer had several noncash contributions during the calendar year then an appraisal would still be needed. It is not just one specific contribution.
As an example if you gave away clothing in January, March, July and December and each one was $1,500, you would need your acknowledgment because each one was greater than $249 and you would have to report the details of each of the contributions on IRS Form 8283 but because the cumulative amount was $6,000 (4 times $1,500) you still need to meet the appraisal requirement. If you would like to discuss these rules on charitable contributions please contact me.