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The Do’s and Don’ts of Charitable Donations

As we gather with friends and family to celebrate the end of 2013 and the beginning of 2014, many will take a moment to donate to charity.  There are a few guidelines to follow in order to ensure you obtain the best tax treatment for your donation.

Donate Your Appreciated Securities

If you donate stock to a qualified charity which has appreciated in value and which you have owned for greater than 12 months you can obtain a deduction for the fair market value of that security on the donation date.  If you held the stock for less than 12 months your tax deduction is limited to your cost basis or purchase price, not the fair market value.

What about securities that have declined in value?  If you wish to donate securities that have declined in value from the date that you purchased them, you are better off selling the securities to obtain a capital loss and donating the cash proceeds to charity.  The capital loss will offset any other capital gains during the tax year.  If the capital losses exceed the capital gains, up to $3,000 of losses will offset your ordinary income ($1,500 for married filing separate individuals).

Obtain Contemporaneous Substantiation

The Internal Revenue Service requires that taxpayers obtain a contemporaneous acknowledgement from the charity for all charitable donations.  The acknowledgement letter should be obtained shortly after making the donation to be considered contemporaneous.    The acknowledgement will not be considered contemporaneous if you obtain it years later when you are selected for audit.

The acknowledgement should address whether you received any goods or services in exchange for your donation and include the value of those goods and services.  If no goods or services were received the acknowledgement should note that.  If any goods or services were received, your charitable donation amount is limited to the difference between the amount donated and the amount of goods received.

Acknowledgement letters or receipts should be obtained when a donation of used clothing and household goods is given to charity.  The acknowledgement letter should identify what goods were donated and the fair market value of those goods.  A valuation guide that can be used to determine the fair market value of used clothing and household goods is provided by the Salvation Army on their website. 

Without an acknowledgement, no deduction can be taken for a charitable donation.

When Do You Need An Appraisal

If a single donated item is valued at $500 or more, or if the total of a type of non-cash item, such as furniture or clothing, exceeds $5,000, you will need to obtain a certified appraisal from a qualified appraiser in order to obtain a tax deduction for that value.  These specific items includes the donation of antiques, artwork, real estate, businesses, vehicles and conservation easements.

Direct Donations from an IRA

A taxpayer who is over age 70 ½ can make a direct donation from his IRA to a qualified charity.  This donation will not provide the taxpayer with a charitable deduction but rather, will count towards the taxpayer’s required minimum distribution amount for the respective tax year without the taxpayer recognizing income of that amount.  The ability to make a charitable donation in this manner may be a valuable tool for taxpayers who are managing their adjusted gross income to avoid a higher tax bracket or the net investment income tax.  Taxpayers wishing to take advantage of this rule must act quickly as the law is set to expire at the end of 2013.

Donating a Car

If you plan to donate a vehicle you are limited to a $500 donation value unless you obtain a qualified appraisal of its fair market value and a Form 1098-C from the organization accepting the vehicle donation.  If you obtain a qualified appraisal for the fair market value of the vehicle, you may be limited to a reduced deduction if the charity chooses to sell the vehicle after receiving it.  If they sell a car for half of its fair market value, you are limited to a tax deduction of the sales price received by the organization.  If the organization chooses to use the vehicle for charitable purposes, your donation will not be limited.

IRA Investments in Real Estate – What You Should Know

Occasionally, we are asked whether a taxpayer is able to invest their IRA funds in real estate assets.  If this is something that you are considering for your own account, we recommend scheduling a discussion with us prior to entering into the transaction.  There are many complex tax rules and regulations to be aware of before contemplating such a transaction.  The benefit of holding real estate in an IRA is that you may be able to obtain tax deferred treatment from the sale of the property or from renting it.  A taxpayer will need to consider the transaction costs of the purchase and their effect on the value of the account, along with whether they can buy the property for cash rather than hold a mortgage in the IRA.  Buying the property for cash will reduce the complexity of the transaction. 

The second and more important consideration is the do’s and don’ts of holding real estate property in an IRA.  In order to maintain the tax deferred status of the IRA, the taxpayer cannot do business with the assets in the account.  This means that the taxpayer cannot rent the property to him/herself, cannot assist with renovations or make any renovations themselves. 

The IRS Eases Up on the ‘Use-It-Or-Lose-It’ Rule of Flexible Spending Accounts

The IRS has modified the ‘Use-It-Or-Lose-It’ rules for flexible spending accounts to allow participating employees to carry over up to $500 of unused expenses to the following year.  Prior to this amendment, unused funds were forfeited.  In order to take advantage of this option, which can be as early as 2013, the plan must be amended by the plan sponsor to incorporate the change.

If you have questions about any of the topics discussed in this newsletter, please feel free to call us. 

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