Feeling Generous? Follow These Tax Rules to Ensure Deductions

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following guidelines and reminders about the rules:

Guidelines for Monetary Donations

To deduct a monetary charitable donation, regardless of the amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.

Bank records include canceled checks, or statements from banks, credit unions and credit card companies. Statements should show the name of the charity, the date, and the amount paid and in the case of credit cards, the transaction posting date.

Donations of money include those made in cash, by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements do not change the long-standing requirement that a taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information can meet both requirements.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in "good used condition or better." A clothing or household item for which a taxpayer claims a deduction of more than $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, electronics, appliances and linens.

If possible, for all donations of property, get from the charity a receipt that includes the name of the organization, contribution date, and a description of the donated property.

If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.

Additional rules apply for a contribution of $250 or more.

Special Charitable Contributions for Certain IRA Owners

Under this provision, scheduled to expire at the end of 2009, older owners of individual retirement accounts (IRAs) can give to charity in a different way. An IRA owner, age 70 1/2 or older, can directly transfer tax-free up to $100,000 per year to an eligible charity.

This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. (Employer-sponsored retirement plan distributions, including SIMPLE IRAs and simplified employee pension plans, are not eligible.)

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity.  Amounts transferred are not taxable and no deduction is available for the transfer.

Not all charities qualify. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the account's required minimum distribution. When individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. Your tax adviser can provide more information.

Additional Reminders

• Charitable contributions are deductible in the year made. So donations charged to a credit card before December 31st count for 2009. This is true even if the credit card bill isn't paid until 2010. Also, checks count for 2009 as long as they are mailed by December 31st and clear shortly thereafter.
  
  
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many libraries, lists most qualified organizations. The searchable online version can be found at IRS.gov under "Search for Charities." In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they aren't listed in Publication 78.
  
  
• For individuals, only taxpayers who itemize can claim charitable deductions. They are not available to individuals who choose the standard deduction, including anyone who files a short form.
  
  
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. If the amount of a taxpayer's deduction for all noncash contributions is over $500, Form 8283 must be submitted with the tax return.

There's an old saying that "real charity doesn't care if it's tax deductible or not." That can be true for high income individuals since itemized deductions in 2009, including charitable contributions, begin to phase out for taxpayers with an adjusted gross income of more than $166,800 ($83,400 for taxpayers married filing separately).

 

Taxes: What Congress Hasn't Done Yet

    The focus on health care reform in Congress left lawmakers little time to deal with other important issues before leaving for their holiday recess. The following questions have been left unanswered and are likely to be taken up when Congress returns in the new year:

    1. What's Going on with the Estate Tax? The Senate was unable to agree on the estate tax, which is set to be repealed in 2010. This inaction is causing confusion for wealthy Americans planning their estates.

    On January 1, 2010, the estate tax will be repealed for one year. But key Democrats say they will "repeal the repeal" shortly after they return to Washington in the new year.

    If this isn't perplexing enough, the estate tax is scheduled to come back in 2011 at rates that were in place a decade earlier.

    The chaos dates back to 2001 when a law was passed that would gradually eliminate the estate tax. Under a complex system, the value of estates exempt from the tax increased over the past eight years and the tax rate levied on estates decreased. For 2009, the federal estate tax exemption is $3.5 million per person. Any excess estate tax value is taxed at a 45 percent rate.

    But under the law, the estate tax is supposed to come back with an exemption of just $1 million and a tax rate of 55 percent. This means more estates would be subject to the tax and they would face a higher tax bill.

    Several members of Congress have said they will work to put the estate tax back in place, retroactive to January 1, at 2009 rates ($3.5 million/45 percent). Some lawmakers say they will push for a higher exemption and a lower tax rate.

    Whatever they decide, it seems that even if the estate tax repeal goes through, the tax will be coming back at some point in the future.

    2. Were the "Extenders" Extended? The Senate also did not pass a package of popular tax incentives that are set to expire on December 31, 2009. These temporary business and individual tax breaks are often referred to as the "extenders" because Congress must vote to keep them in place each time they expire. They include the research credit, the state and local sales tax write-off, the tuition deduction and charitable tax breaks for certain businesses.

    However, even if the extenders technically expire, the Senate is expected to pass legislation extending them that would be retroactive to January 1. In the past, Congress routinely extended these tax breaks -- sometimes in the following year.

    The uncertainty of the estate tax and the extenders is making some people unsure about how to proceed. If you have concerns, please contact us.