by NFS | Dec 10, 2009 | Archives
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, 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. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. 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 IRA’s required minimum distribution. Where 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.
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 over $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, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of 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, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or 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 for the deduction of monetary donations do not change the long-standing requirement that a taxpayer 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 may meet both requirements.
Reminders
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
- Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2009 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 in 2009 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 public libraries, lists most organizations that are qualified to receive deductible contributions. 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 are not listed in Publication 78.
- For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2009 Form 1040 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
- For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed 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.
- 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. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
- If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
To figure the value of items you have donated, please contact me so that we can put together accurate valuations.
by NFS | Dec 9, 2009 | Archives
NFS December Estate Ideas
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by NFS | Dec 8, 2009 | Archives
The severe bear market has pounded away at almost everyone’s investment portfolios and retirement plan accounts. But those aren’t the only investments that have been mauled. The turbulence on Wall Street has also hammered Section 529 plans designed to build up savings for college. The problem is especially acute for those who need to withdraw funds within the next few years.
A Section 529 plan is a tax-favored way to save for a student’s college education. For starters, you can set aside generous amounts in a state-sponsored savings plan. There’s no current tax on accumulations within the account, and distributions are tax-free if used to pay for tuition, room and board, and other qualified college expenses.
There are two basic types of Section 529 plan: the prepaid tuition plan and the college savings plan. With the former, you can lock in payment for future tuition by purchasing credits at a specified rate. Suppose this year’s tuition at a public university in the state sponsoring the plan is $6,000. Invest $3,000 now for a four-year-old child, and you’ll be guaranteed a credit for half a year’s tuition when the student matriculates, even if costs have doubled or tripled by then. This type of plan protects you from investment downturns because the school assumes the risk—not you. You’re essentially buying tuition inflation insurance, which can be a pretty good deal at a time when college costs are rising much faster than the overall cost of living. In fact, some states offering such plans are having trouble making good on their end of the bargain.
With college savings plans, however, you’re the one taking investment risk. These plans, also sponsored by states but generally available to out-of-state investors as well, let you spend your money on any public or private college. And though the investment menus vary widely from one 529 to the next, many plans offer a range of options similar to those in a 401(k) retirement plan. Most provide age-adjusted accounts that shift from more aggressive, stock-dominated portfolios when a child is young to more conservative, largely fixed-income allocations when college age approaches. But investors also may be able to choose all-stock accounts. Those seemed like a good deal when share prices were rising, but the recent market plunge has hit such accounts particularly hard.
The question, of course, is what to do now if your child’s account has suffered deep losses. You may need to reconsider your investment allocations, and a new IRS rule, in effect only for 2009, permits you to shift investments within a plan twice rather than just once during the year. Your first step, as painful as it may be, is to look at your current 529 account balances and project what they’ll be when your student starts school. Then consider possible changes to your strategy.
- If your child is graduating from high school soon, damage control is in order. It may be tempting to roll the dice on stocks, hoping to recoup some of your losses, but at this point preservation is much more important than growth. An allocation dominated by bonds or cash investments probably makes sense.
- If you have younger children too, consider changing the 529 plan beneficiary to someone who won’t need the funds until the markets have had a chance to recover. Or simply delay making withdrawals until the later years of college. These strategies assume you have other funds available to pay near-term expenses.
- If college is still years in the future, having much of your plan invested in stocks could still be a good idea. Share prices have taken a big hit and may fall further, but being patient and staying invested for the eventual rebound may reward you nicely. Even so, choosing a diversified investment option could minimize volatility and increase potential gains.
- Switching to a prepaid tuition plan now could relieve you of future investment risk. But it will lock in your 529 plan’s losses and also limit your child’s choice of college.
- Increasing current contributions to college accounts could also help make up for the market plunge. With college costs rising quickly and potential sources of financial aid shrinking, having personal savings to draw on will be more important than ever in the years ahead.
Of course, education savings is only one of your many financial priorities. We can help you assess your current situation and work with you to make sure your overall financial strategy remains on track. We can also assist you in filing FAFSA forms.
by NFS | Dec 7, 2009 | Archives
The Internal Revenue Service has issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
50 cents per mile for business miles driven
16.5 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.
by NFS | Dec 4, 2009 | Archives
During these uncertain economic times, financial planning has become a challenge. Here are a few financial planning suggestions that can add to your peace of mind about financial matters and simplifying your life:
- At least once a year, write down your investment goals and what strategy you will use to reach them. This will keep you focused.
- Instead of giving money to many different charities, pick a few that are important to you, and give them a larger amount. This type of directed giving not only makes more sense, but will make it easier to track your donations at tax time.
Related Financial Guide: CHARITABLE CONTRIBUTIONS: How To Give Wisely
- Inventory your household possessions, with a camera or camcorder if you desire. Keep the inventory at work or in a safe-deposit box. This inventory will help should you need to submit a homeowner’s insurance claim.
- Use one insurance agent and one financial adviser for your transactions.
- If you have doubts about entering into a transaction, don’t do it. You will probably save yourself money, time, and aggravation.
by NFS | Dec 3, 2009 | Archives
NFS December Financial Facts
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To deduct any charitable donation of money, regardless of 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, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
