I spent quite a bit of time in December talking about charitable contributions and the deductions that taxpayers can take for those contributions. Today, I'm going to talk about several tax credits that are available for certain charitable contributions made by Iowans.
School Tuition Organization Tax Credit
Certain donations made to "School Tuition Organizations" may be eligible for a credit of up to 65% of the donation. This credit is for contributions to qualifying private-school tuition organizations. Chances are, you'll only consider taking this credit if your child attends a private school. The school tuition organization will issue you a certificate, which must be attached to your tax return when you claim the credit.
Endow Iowa Credit
Donations made to certain community foundations in Iowa can be eligible for a tax credit of 25% of the donation. The credit is non-refundable but any unused credit in the current year can be carried forward for up to 5 years. This credit is administered by the Iowa Department of Economic Development and you have to file forms with them in order to claim it. It is probably best to talk to a tax advisor before trying to claim this credit.
Charitable Conservation Contribution Credit
This credit definitely requires some planning and thought before it is claimed. Iowans who donate land to a qualified organization for conservation purposes (such as donating land to a county conservation board) can claim a credit of up to 50% of the fair-market value of the land. The maximum credit allowed is $100,000. The credit is nonrefundable but any unused credit in the current year can be carried forward for up to 20 years. It should be noted that the donation of land for conservation purposes is NOT always better than a sale of the land, in terms of net "cash in hand" after the transaction, even with the credit. For this reason, it's important to talk to your tax advisor about your goals to make sure the transaction accomplishes what you want it to accomplish.
Showing posts with label Charitable Contributions. Show all posts
Showing posts with label Charitable Contributions. Show all posts
Friday, January 7, 2011
Wednesday, December 22, 2010
The Importance of Documenting Charitable Contributions
The Dinesen Tax Times has been providing a series of articles about charitable contributions this month (in between the updates on the Congressional debate over taxes ... and of course, Wesley Snipes!). A recent Tax Court case fits in nicely with that series of articles, in particular this article about documenting charitable contributions.
The Tax Court case involved a couple (a Mr. and Mrs. Murphy) from California who had more than $27,000 of charitable contributions disallowed by the IRS on their 2006 tax return. The Court ruled against the couple, costing them nearly $11,000 in taxes and penalties.
The case centered around a lack of documentation for the contributions. According to the Court report, the Murphys had no receipts for any of the contributions they made. In one instance, the couple donated items to the Salvation Army and could have gotten a receipt, but chose not to because they "didn't want to wait in line to get one."
Mr. Murphy told the Court that he kept a journal that detailed all of the contributions, but the journal was stolen when his car was broken into in 2007. When things like that happen, a taxpayer can reconstruct their deductions using credible evidence. In this case, though, the only evidence offered was the testimony of Mr. Murphy. The couple also tried to invoke the "Cohan Rule," which allows for the use of reasonable estimates (the Cohan Rule is another blog post for another day), but again, the taxpayer has to have credible evidence on which to base the estimates.
In the end, the Murphys lost $27,000 in deductions for charitable contributions, amounting to additional tax owed of $9,011. The Tax Court also found the couple to be subject to the 20% "negligence penalty," which tacks on another $1,802 in penalties. In ruling that the couple was negligent, the Court said:
The Tax Court case involved a couple (a Mr. and Mrs. Murphy) from California who had more than $27,000 of charitable contributions disallowed by the IRS on their 2006 tax return. The Court ruled against the couple, costing them nearly $11,000 in taxes and penalties.
The case centered around a lack of documentation for the contributions. According to the Court report, the Murphys had no receipts for any of the contributions they made. In one instance, the couple donated items to the Salvation Army and could have gotten a receipt, but chose not to because they "didn't want to wait in line to get one."
Mr. Murphy told the Court that he kept a journal that detailed all of the contributions, but the journal was stolen when his car was broken into in 2007. When things like that happen, a taxpayer can reconstruct their deductions using credible evidence. In this case, though, the only evidence offered was the testimony of Mr. Murphy. The couple also tried to invoke the "Cohan Rule," which allows for the use of reasonable estimates (the Cohan Rule is another blog post for another day), but again, the taxpayer has to have credible evidence on which to base the estimates.
In the end, the Murphys lost $27,000 in deductions for charitable contributions, amounting to additional tax owed of $9,011. The Tax Court also found the couple to be subject to the 20% "negligence penalty," which tacks on another $1,802 in penalties. In ruling that the couple was negligent, the Court said:
Even if Mr. Murphy's journal was in fact stolen, there is no evidence that he made a reasonable attempt to reconstruct his contributions. We therefore hold that the petitioners failed to meet their burden of showing that the reasonable cause and good faith exception applies. Accordingly, the Court concludes that the petitioners are liable for the ... accuracy-related penalty....The moral? Keep good records, and if your records are lost, destroyed or stolen, do all you can to reconstruct them! The IRS will not rely on your "word" alone. That goes for all your tax-related records, not just records of charitable contributions.
Thursday, December 16, 2010
Deducting Charitable Mileage (And Other Miscellaneous Charitable Deductions)
An often overlooked charitable deduction is the deduction for mileage driven for charitable purposes.
Taxpayers can take a deduction -- 14 cents per mile in 2010 and 2011 -- for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.
Iowa taxpayers are allowed to take 39-cents per mile as a deduction. (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction. The net effect is 39-cents per mile.)
Example
You volunteer to answer the phones once a week for a charitable organization. The organization's office is 10 miles from your home. You can claim 20 miles (10 miles each way) as a deduction each week. If you do this 52 weeks a year, that would be 1,040 miles. At 14-cents per mile, the charitable mileage deduction would be $146. If you live in Iowa, your total deduction on your Iowa return would amount to $406.
Taxpayers can also deduct certain other out-of-pocket expenses incurred while giving services to a charity. For example, if the organization you volunteer for requires you to wear a special uniform, the cost of the uniform and the cost of dry-cleaning the uniform would be deductible.
The "value of your time" is NEVER deductible. In the example above, if a receptionist would be paid $10 per hour to answer the phones, you CANNOT claim a deduction of $10/hour for the time you spend doing that work.
Special rules apply to travel expenses other than mileage. Generally, you can't deduct travel costs (airplane expenses, motels, etc.) for charitable work if there is any element of recreation to the travel. If you are planning to travel for charitable work, I would suggest consulting a tax advisor to determine if any of your travel expenses are deductible.
Taxpayers can take a deduction -- 14 cents per mile in 2010 and 2011 -- for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.
Iowa taxpayers are allowed to take 39-cents per mile as a deduction. (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction. The net effect is 39-cents per mile.)
Example
You volunteer to answer the phones once a week for a charitable organization. The organization's office is 10 miles from your home. You can claim 20 miles (10 miles each way) as a deduction each week. If you do this 52 weeks a year, that would be 1,040 miles. At 14-cents per mile, the charitable mileage deduction would be $146. If you live in Iowa, your total deduction on your Iowa return would amount to $406.
Taxpayers can also deduct certain other out-of-pocket expenses incurred while giving services to a charity. For example, if the organization you volunteer for requires you to wear a special uniform, the cost of the uniform and the cost of dry-cleaning the uniform would be deductible.
The "value of your time" is NEVER deductible. In the example above, if a receptionist would be paid $10 per hour to answer the phones, you CANNOT claim a deduction of $10/hour for the time you spend doing that work.
Special rules apply to travel expenses other than mileage. Generally, you can't deduct travel costs (airplane expenses, motels, etc.) for charitable work if there is any element of recreation to the travel. If you are planning to travel for charitable work, I would suggest consulting a tax advisor to determine if any of your travel expenses are deductible.
Tuesday, December 14, 2010
Donating a Car to Charity
In the good old days (before 2005), taxpayers could donate a car to charity and claim a deduction for the fair-market value of the car. It didn't matter if the charity only sold the car for a few-hundred dollars. The taxpayer could claim a deduction for the fair-market value of the car. That all changed in 2005.
You can still claim a deduction for donating a car to charity, but there are limits on the amount you can deduct. If you donate a car to charity and the charity sells the car as a fundraiser, your deduction is limited to the lesser of the car's fair-market value or what the charity sold the car for.
Example:
You donate a car with a fair-market value of $2,000 to a charity. The charity sells the car at a fundraising auction, but only gets $800 for the car. Your charitable contribution deduction is limited to $800.
You can still claim the fair-market value as a deduction if the charity uses the car as part of its "stated cause" rather than selling it as a fundraiser.
Donating a car to charity is not always a straightforward tax situation, and there are recordkeeping requirements that must be met. It's best to consult with a tax pro before making such a donation.
You can still claim a deduction for donating a car to charity, but there are limits on the amount you can deduct. If you donate a car to charity and the charity sells the car as a fundraiser, your deduction is limited to the lesser of the car's fair-market value or what the charity sold the car for.
Example:
You donate a car with a fair-market value of $2,000 to a charity. The charity sells the car at a fundraising auction, but only gets $800 for the car. Your charitable contribution deduction is limited to $800.
You can still claim the fair-market value as a deduction if the charity uses the car as part of its "stated cause" rather than selling it as a fundraiser.
Donating a car to charity is not always a straightforward tax situation, and there are recordkeeping requirements that must be met. It's best to consult with a tax pro before making such a donation.
Friday, December 10, 2010
Recordkeeping Requirements for Charitable Contributions
We've explored the basics of charitable contributions and which organizations qualify for tax-deduction purposes. Today, I'll explore the recordkeeping requirements for documenting your charitable contributions.
Documentation for contributions by cash, check or credit card is straightforward enough. Maintain receipts or other records that show the amount donated and when.
If you donate more than $250 in cash to an organization at any one time, the organization must provide you with a written confirmation of the donation.
What if you donate property, such as used clothing to Goodwill? In that case, you should try to obtain a receipt from the organization.
If you donate more than $500 worth of property to charities during the year, you have to file Form 8283 and include more detail to the IRS about who you made the contribution to, what type of property was donated, and how you determined the value of the property.
If you donate $500 or more of any single item of clothing or household items that are not in "good condition," you must include a report from a qualified appraiser.
If you claim a deduction for more than $5,000 worth of property donations, you also must include a report from a qualified appraiser.
The rules for donating a car to a charity are even more complex, and will be explored in a future blog post.
If you donate more than $5,000 worth of property, even more detail is required, such as (possibly) a report from an appraiser.
Documentation for contributions by cash, check or credit card is straightforward enough. Maintain receipts or other records that show the amount donated and when.
If you donate more than $250 in cash to an organization at any one time, the organization must provide you with a written confirmation of the donation.
What if you donate property, such as used clothing to Goodwill? In that case, you should try to obtain a receipt from the organization.
If you donate more than $500 worth of property to charities during the year, you have to file Form 8283 and include more detail to the IRS about who you made the contribution to, what type of property was donated, and how you determined the value of the property.
If you donate $500 or more of any single item of clothing or household items that are not in "good condition," you must include a report from a qualified appraiser.
If you claim a deduction for more than $5,000 worth of property donations, you also must include a report from a qualified appraiser.
The rules for donating a car to a charity are even more complex, and will be explored in a future blog post.
If you donate more than $5,000 worth of property, even more detail is required, such as (possibly) a report from an appraiser.
Monday, December 6, 2010
What is a Qualified Organization for Charitable Deductions?
In a post last week, I explored the basics of charitable contributions, and I mentioned that not all "not-for-profit" organizations are qualified organizations for purposes of getting a tax deduction for a donation. In general, 501(c)(3) organizations qualify, as do churches.
Officially, the Internal Revenue Code, at Section 170(c), defines a charitable organization as:
Officially, the Internal Revenue Code, at Section 170(c), defines a charitable organization as:
- A state or city, as long as your donation is used exclusively for public purposes.
- A community chest, corporation, trust, fund or foundation organized for any of the following purposes: religious, charitable, educational, scientific, literary or the prevention of cruelty to animals.
- A post or organization for war veterans.
- Fraternal societies, as long as the gift is used for the same purposes as described under bullet-point 2 (religious, charitable, educational, etc.).
- Nonprofit cemetary companies or corporations.
Friday, December 3, 2010
IRS Announces Mileage Rates for 2011
The IRS has released the mileage rates for 2011. The regular mileage rate increased by 1 cent; the rate for medical mileage increase by 2.5 cents; and the rate for charitable mileage remains the same as in 2010.
- Mileage rate for 2011: 51 cents per mile (up 1 cent from 2010)
- Medical mileage rate: 19 cents per mile (up 2.5 cents from 2010)
- Charitable mileage rate: 14 cents per mile (same as 2010)
Wednesday, December 1, 2010
Major Tax Changes Proposed in Debt Commission Report
President Obama's "Debt Commission" released a report today (Wednesday) with recommendations on how to cut the federal deficit. The Commission says its recomendations would reduce the federal debt by $4 trillion over the next 10 years. The Commission is made up of 6 Republicans, 6 Democrats and 6 others appointed by the President. In order for any of these recommendations to be put before Congress, at least 14 members of the Commission need to approve the plan. The Commission is set to conduct a vote on Friday.
Major changes to the tax code are a part of the plan. The Commission proposes repealing the alternative minimum tax, creating three tax brackets for individuals (12%, 22% and 28%), and eliminating all itemized deductions (everyone would take a standard deduction, but certain tax credits would be allowed for mortgage interest and charitable contributions).
Corporate taxes would have one flat rate of 28%.
The proposal includes much more than just tax reform. You can read the entire proposal here, and a CNN article about the proposal here.
Major changes to the tax code are a part of the plan. The Commission proposes repealing the alternative minimum tax, creating three tax brackets for individuals (12%, 22% and 28%), and eliminating all itemized deductions (everyone would take a standard deduction, but certain tax credits would be allowed for mortgage interest and charitable contributions).
Corporate taxes would have one flat rate of 28%.
The proposal includes much more than just tax reform. You can read the entire proposal here, and a CNN article about the proposal here.
Tuesday, November 30, 2010
Basics of Charitable Contributions
The end of the year is a good time to make charitable contributions, not only because the holidays are a season of giving, but because there can be tax advantages to giving to charities.
In general, charitable contributions are deductible in the year paid. If you make a donation with your credit card, you take the deduction in the year the expense was charged to your card, even if you don't pay the credit card bill until the next year. For donations made with a check, you can take a deduction in the current year as long as you get the check in the mail before the end of the year, even if the charity doesn't cash the check until the next year.
Only donations to qualified charities are deductible. I'll explore qualified charities in more detail in a future post.
In general, charitable contributions are deductible in the year paid. If you make a donation with your credit card, you take the deduction in the year the expense was charged to your card, even if you don't pay the credit card bill until the next year. For donations made with a check, you can take a deduction in the current year as long as you get the check in the mail before the end of the year, even if the charity doesn't cash the check until the next year.
Only donations to qualified charities are deductible. I'll explore qualified charities in more detail in a future post.
Monday, November 8, 2010
Donating a House to a Fire Department
Can you claim a charitable deduction for donating a house to a volunteer fire department? The answer is yes, but it's hard to strucure the transaction in such a way that you can get a big deduction.
The U.S. Tax Court recently ruled against a Wisconsin couple that had claimed a charitable contribution deduction of more than $235,000 for donating a house to a fire department to burn down in training exercises.
The couple had been planning to demolish the house, anyway, and build a new house on the land. The main reason why the Tax Court ruled against the couple is because, in the Court's eyes, the couple received a benefit from the donation. The benefit being - the free demolition of their house.
The Internal Revenue Code prohibits a taxpayer from taking a deduction if they received a benefit from the donation, unless the dollar amount of the contribution exceeds the dollar amount of the benefit received. In this case, the Tax Court ruled that the house had NO value as a donation to the volunteer fire department, because the underlying land still belonged to the couple, and all the department could do with the house was burn it down.
The Tax Court ruling is precedent-setting.
Like I said in the opening paragraph, donating a house to a fire department may result in a charitable contribution, but generally only if the transaction is structured in such a way that the fire department receives the underlying land and can use the property as it sees fit.
DISCLAIMER: This article does not constitute tax advice and is presented for informational purposes only. Each taxpayer should seek the counsel of a qualified tax advisor to discuss their unique tax situation.
The U.S. Tax Court recently ruled against a Wisconsin couple that had claimed a charitable contribution deduction of more than $235,000 for donating a house to a fire department to burn down in training exercises.
The couple had been planning to demolish the house, anyway, and build a new house on the land. The main reason why the Tax Court ruled against the couple is because, in the Court's eyes, the couple received a benefit from the donation. The benefit being - the free demolition of their house.
The Internal Revenue Code prohibits a taxpayer from taking a deduction if they received a benefit from the donation, unless the dollar amount of the contribution exceeds the dollar amount of the benefit received. In this case, the Tax Court ruled that the house had NO value as a donation to the volunteer fire department, because the underlying land still belonged to the couple, and all the department could do with the house was burn it down.
The Tax Court ruling is precedent-setting.
Like I said in the opening paragraph, donating a house to a fire department may result in a charitable contribution, but generally only if the transaction is structured in such a way that the fire department receives the underlying land and can use the property as it sees fit.
DISCLAIMER: This article does not constitute tax advice and is presented for informational purposes only. Each taxpayer should seek the counsel of a qualified tax advisor to discuss their unique tax situation.
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