As you are busy cleaning out the house for the New Year and scrambling to grab those last minute tax deductions, I wanted to point out a change that impacts most of us. The Pension Protection Act of 2006 has provided us with a change in the documentation required for donations of clothing and household items to charitable organizations. Previously, you could claim a deduction for an item that was in fair condition or better. Since the deductions for this line item exceeded $9 billion for tax year 2003, I guess the IRS is paying a little more attention here.
Effective for contributions made beginning on August 18, 2006, charitable contributions of clothing and household items must be in "good used condition or better." In addition, upon audit, the IRS may deny a deduction for any item which has "minimal monetary value" such as used socks or underwear.
Please note that the new law did not define the phrase "good condition or better." Does this mean a shirt with one button missing is in good condition while the one that also has a small hole is in fair condition? Who knows??? This will certainly produce some interesting discussions in the event of an audit. Obviously, it will be difficult, at best, to prove that your donated items were in good condition since you no longer own them. I would suggest that since we now have the benefit of digital cameras, just take pictures of the items you donate and save those along with your records. Talk about airing your dirty laundry!!!! I guess you can always include them in with the family vacation slide show to see if anyone is paying attention.
Generally, you can take a deduction equal to the fair market value of clothing and household items. A deduction is typically allowed for the price you could receive for that item at a flea market, yard sale or a thrift store. I find that the easiest way to handle this deduction is to just keep the pad of paper and pen with the pile of items to be donated and add them up as I go.
Be sure and save the receipts!!!!!!!!
Wednesday, December 20, 2006
Buying Your Tax Deductions????
In reviewing mountains of tax law changes for the year, I found one which struck me as rather amusing. I hope it is not a sign of things to come.
This deduction is very limited in use, but it is worth a laugh. There is a charitable contribution deduction allowed for qualified conservation easements. This deduction is allowed on property located in certain historical districts where the owner agrees to preserve the entire exterior of the building in a manner consistent with its historical character. Of course, there are a zillion ifs, ands and buts related to these provisions.
However, if the deduction exceeds $10,000, the taxpayer is required to pay $500 for the privilege of taking this deduction! Please don't pass this post on to your friends in Congress. It might give them ideas.
This deduction is very limited in use, but it is worth a laugh. There is a charitable contribution deduction allowed for qualified conservation easements. This deduction is allowed on property located in certain historical districts where the owner agrees to preserve the entire exterior of the building in a manner consistent with its historical character. Of course, there are a zillion ifs, ands and buts related to these provisions.
However, if the deduction exceeds $10,000, the taxpayer is required to pay $500 for the privilege of taking this deduction! Please don't pass this post on to your friends in Congress. It might give them ideas.
Tuesday, December 19, 2006
Take a Tax-Free Distribution From Your IRA
In August, 2006, Congress gave us another minor piece of tax legislation - 900 pages of a law known as The Pension Protection Act of 2006. This legislation makes some substantial changes to the rules related to distributions from Individual Retirement Accounts (IRAs). Although many of the changes are extremely complex, there are some fantastic tax saving and estate planning opportunities. I will discuss some of these here and there over the next few months.
There is a change that provides a limited opportunity to make a contribution to your favorite charity for the years of 2006 and 2007 only. Since the law was passed so late in 2006, there is not much time to take action before the end of the year.
The law requires you be at least 70 1/2 at the time of the contribution in order to take advantage of this provision. If you are younger, consider passing this suggestion on to others who may qualify such as your parents, relatives or friends. It is an easy way to minimize some potential estate taxes down the road and provide some current tax benefits.
If you have attained the age of 70 1/2 by the time of the contribution, you may make a charitable contribution DIRECTLY from your IRA to a charity. If you choose to do so, then the amount withdrawn from your IRA to make the contribution will not be included in your taxable income. Likewise, you will not receive a charitable contribution deduction.
Why would you consider this type of transaction? When you are age 70 1/2, you are required to make minimum distributions from your IRA each year. Often, people do not really need the money, but they are required to take the distribution and pay the taxes anyway. So, they are really just moving money from one account to another and paying taxes for that privilege. Often these same people are making substantial charitable contributions.
One big advantage is that the money you take out to donate can be the amount of your required minimum distribution. By handling the transaction in this manner, you can reduce the taxes you may otherwise pay on your Social Security income. If your income is not high enough to take a large charitable contribution deduction in any given year due to the limitation on the deductible amount for charitable contributions, you are not penalized. Please note that while the limitation is $100,000, donations of any amount will work. In some cases, you may just want to contribute the amount of your required minimum distribution which may even be $1,000 or less.
In order for this transaction to work, very specific rules must be followed. The transfer from the IRA to the charity must be made DIRECTLY from the IRA trustee to the charity. If the IRA money is distributed to you so you can personally deliver it to the charity, the transaction WILL NOT QUALIFY. Most of your standard charities such as churches, schools and other organizations qualifying for a charitable contribution deduction are eligible for this transaction. However, there are a few organizations which will not qualify.
The other big caveat here is that you cannot receive any type of benefit from the charity in return for your contribution. So, if you are making a contribution to public television, for example, and they send you a recording of a show (worth all of $25), the entire $100,000 transaction will be disqualified.
If you would like to try this type of transaction, but your money is in a 401(k) plan, instead of an IRA, then you could roll some money into an IRA and then complete the transaction.
If you are interested in pursuing this tax planning strategy, please contact me, and I will provide you with further information.
There is a change that provides a limited opportunity to make a contribution to your favorite charity for the years of 2006 and 2007 only. Since the law was passed so late in 2006, there is not much time to take action before the end of the year.
The law requires you be at least 70 1/2 at the time of the contribution in order to take advantage of this provision. If you are younger, consider passing this suggestion on to others who may qualify such as your parents, relatives or friends. It is an easy way to minimize some potential estate taxes down the road and provide some current tax benefits.
If you have attained the age of 70 1/2 by the time of the contribution, you may make a charitable contribution DIRECTLY from your IRA to a charity. If you choose to do so, then the amount withdrawn from your IRA to make the contribution will not be included in your taxable income. Likewise, you will not receive a charitable contribution deduction.
Why would you consider this type of transaction? When you are age 70 1/2, you are required to make minimum distributions from your IRA each year. Often, people do not really need the money, but they are required to take the distribution and pay the taxes anyway. So, they are really just moving money from one account to another and paying taxes for that privilege. Often these same people are making substantial charitable contributions.
One big advantage is that the money you take out to donate can be the amount of your required minimum distribution. By handling the transaction in this manner, you can reduce the taxes you may otherwise pay on your Social Security income. If your income is not high enough to take a large charitable contribution deduction in any given year due to the limitation on the deductible amount for charitable contributions, you are not penalized. Please note that while the limitation is $100,000, donations of any amount will work. In some cases, you may just want to contribute the amount of your required minimum distribution which may even be $1,000 or less.
In order for this transaction to work, very specific rules must be followed. The transfer from the IRA to the charity must be made DIRECTLY from the IRA trustee to the charity. If the IRA money is distributed to you so you can personally deliver it to the charity, the transaction WILL NOT QUALIFY. Most of your standard charities such as churches, schools and other organizations qualifying for a charitable contribution deduction are eligible for this transaction. However, there are a few organizations which will not qualify.
The other big caveat here is that you cannot receive any type of benefit from the charity in return for your contribution. So, if you are making a contribution to public television, for example, and they send you a recording of a show (worth all of $25), the entire $100,000 transaction will be disqualified.
If you would like to try this type of transaction, but your money is in a 401(k) plan, instead of an IRA, then you could roll some money into an IRA and then complete the transaction.
If you are interested in pursuing this tax planning strategy, please contact me, and I will provide you with further information.
Monday, December 18, 2006
Where's the daily tax update?
Today I spent all day in a tax class. I came home and checked my blog to see if there was anything new. Then I realized that I'm the one who has to do all of the posting!!!
I will provide some new tax law updates as soon as I can get them typed up here. It will take a little while, because I have to translate the tax law into English. Back soon!!
I will provide some new tax law updates as soon as I can get them typed up here. It will take a little while, because I have to translate the tax law into English. Back soon!!
Sunday, December 17, 2006
What's This Blog All About????
Welcome to my blog!!! Since we are more than half way through the first decade of the 21st century, it feels like it is time to get up to speed and take advantage of all the opportunities available in our high tech world. I have also been looking for a way of easily communicating with my clients and keeping them up to date. Many of them have questions that don't get asked simply because there is just no time to pick up the phone. As a practical matter, I have been too busy working on projects to put together a a high quality, customized newsletter. I also realized that even if I did get a newsletter out, it would probably just get lost in all of the junk mail. But - now the Internet offers all types of wonderful opportunities, so here I am!!!
As I have never tried blogging before, I really don't know what to expect. I do suspect, however, that it looks a lot easier than it really is. My intention here is to keep you up to date on many of the tax and financial changes that impact your lives on a daily basis. However, I have no idea if I will even have the time to post something every day-- or even think of something to say every day!!! Since blogging is not my full time job, I will do my best to post something interesting when I am able, but the "real work" comes first.
I am also in the process of developing a web site. The address is basically the same and is noted under the title of the blog. The web site is still under development. It should be up and running within a couple of weeks. I will notify you when it goes "live." I will use the blog to post any late breaking developments as well as reminders and any other news which may be interesting. The web site will provide some more in depth information on a variety of topics.
As this will be a learning experience for me, don't be surprised if anything and everything changes here on a daily basis. I will be constantly experimenting to see what works and what doesn't.
A number of blogs have a box for comments. At the present time, I will be skipping that option (assuming I have pushed the right button!). I am concerned that I may never finish answering questions and not get to the "real work." If you want to tell me the blog looks great, just send your comments to my regular e-mail for now. If you don't like my blog, I am told there are at least 60 million more blogs you can try. There must be one that will work for you. If you have any questions on something and want to discuss it further, just give me a call.
Enjoy, and I hope we all learn something!!!
As I have never tried blogging before, I really don't know what to expect. I do suspect, however, that it looks a lot easier than it really is. My intention here is to keep you up to date on many of the tax and financial changes that impact your lives on a daily basis. However, I have no idea if I will even have the time to post something every day-- or even think of something to say every day!!! Since blogging is not my full time job, I will do my best to post something interesting when I am able, but the "real work" comes first.
I am also in the process of developing a web site. The address is basically the same and is noted under the title of the blog. The web site is still under development. It should be up and running within a couple of weeks. I will notify you when it goes "live." I will use the blog to post any late breaking developments as well as reminders and any other news which may be interesting. The web site will provide some more in depth information on a variety of topics.
As this will be a learning experience for me, don't be surprised if anything and everything changes here on a daily basis. I will be constantly experimenting to see what works and what doesn't.
A number of blogs have a box for comments. At the present time, I will be skipping that option (assuming I have pushed the right button!). I am concerned that I may never finish answering questions and not get to the "real work." If you want to tell me the blog looks great, just send your comments to my regular e-mail for now. If you don't like my blog, I am told there are at least 60 million more blogs you can try. There must be one that will work for you. If you have any questions on something and want to discuss it further, just give me a call.
Enjoy, and I hope we all learn something!!!
