NO DOCUMENTATION EQUALS NO DEDUCTION FOR NON-CASH DONATIONS

by Andrew D. Schwartz, CPA

Don't let this happen to you.  "We are disallowing the [non-cash charitable donation] receipt dated 05/12/07 and one item on the receipt dated 10/15/09.  The reason these are being disallowed is because we need a list of the items that were donated," explains the IRS to a taxpayer being audited.

Determining the value of non-cash contributions is quite subjective.  While pretty much every other tax break is calculated based on the amount of money spent during the year, contributions of clothing and household items are claimed based on an estimate of the fair market value of each item donated.  Since this provides taxpayers with an opportunity for exaggeration, non-cash contributions are definitely on the IRS' radar screen.

A few years back, the federal government took steps to reign in these potentially overstated values.  On August 17, 2006, President Bush signed the Pension Protection Act of 2006 into law, which contained a provision limiting the deduction to donated goods that are in good condition or better.  As part of this change, the IRS now requests a list of each item donated, including its condition and fair market value, from most taxpayers who are being audited.

Please don't panic and stop claiming a tax deduction for your donated goods.  Simply remember to document the clothing and household items given away during the year.  Plus, make sure to complete and attach a Form 8283 to your federal tax return in any year that the total value of donated goods exceeds $500.  For non-cash donations totaling more than $5,000 in one calendar year, you'll need to obtain and include a written appraisal with your federal return.

Let's take a look at the guidelines provided by the IRS to help taxpayers comply with this new standard.  According to the instructions to the Form 8283 - Non-cash Charitable Contributions:

The FMV of used household items and clothing is usually much lower than when new. A good measure of value might be the price that buyers of these used items actually pay in consignment or thrift shops. You can also review classified ads in the newspaper or on the Internet to see what similar products sell for.

More information is available on  IRS Publication 526 - Charitable Contributions, where the IRS states:

The fair market value of used household items, such as furniture, appliances, and linens, is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.

You should support your valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. Do not include any of this evidence with your tax return.

UDoGood Can Help

Properly valuing your donated clothing and household items has become more important in the post August 17, 2006 "Good or Better" world.  If you ever get audited, there is a good chance that the IRS will use this new higher standard as a way to greatly reduce the deduction they will allow you to claim unless you can:

• Substantiate that the donated goods were in good condition or better, and

• Demonstrate how you came up with the Fair Market Value you claimed

To help you put a value on the donated goods, we recommend that you check out UDoGood, an easy (and fun) App for the iPhone and iPod touch that helps you document, photograph and record your charitable donations of clothing and household goods.

Hopefully this new tool will help you provide sufficient documentation to the IRS if you ever get audited.  While we don't recommend that you exaggerate the value you claim for the items you're donating, we do believe you should take the full deduction based on the fair market value of the stuff you gave away.

Understanding the new rules and documenting what you give away will help ensure that the deduction you claim on your tax return will withstand reasonable scrutiny from our friends at the IRS.

More About UDoGood

UDoGood is an easy (and fun) App for the iPhone and iPod touch that helps you document, photograph and record your charitable donations of clothing and household goods.  UDoGood includes suggestions to help you determine the fair market value of your donations.  If you have an iPhone, UDoGood also lets you take photos of your donations to provide a visual record of your contributions.  Plus, with UDoGood, you can e-mail your list of donated goods to your tax preparer or to yourself.   And finally, if you're wondering, yes, I helped out with the development this App.

For more information about this App, please visit www.UDoGoodApps.com.  Or, you can download this App onto your iPhone or iPod touch.

Apple, the Apple logo, iPod, and iTunes are trademarks of Apple Inc., registered in the U.S. and other countries. iPhone is a trademark of Apple Inc.

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TAXPAYER ADVOCATE SERVICE IS YOUR VOICE AT THE IRS

If you are at your wit's end trying to get a tax issue resolved with the IRS, then consider contacting the Taxpayer Advocate Service (TAS).  Below is the information about TAS available at www.irs.gov:

Taxpayer Advocate Service (TAS) Mission:  As an independent organization within the IRS, we help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.

Here are six things every taxpayer should know about TAS:

1. TAS is your voice at the IRS.

2. Our service is free, confidential, and tailored to meet your needs.

3. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 

4.  TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.

5.  TAS employees know the IRS and how to navigate it. We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.

6.  TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico.  You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service -- Your Voice at the IRS, and on our website at Contact Your Advocate.  You can also call our toll-free case intake line at 1-877-777-4778.

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SHOW ME THE MONEY

by Andrew D. Schwartz, CPA

It used to be that people would come to my office each winter to have their taxes prepared, and we would not only discuss ways to save some taxes for the prior calendar year, but would also explore ways to minimize their tax burden going forward.  Now, when my clients meet with me, it's more like meeting with Tom Cruise's character Jerry Maguire.  "Show me the MONEY!  SHOW ME THE MONEY!!!" is what they are saying.

During the past year, Washington has gone crazy giving away money.  Here are some of the lucrative tax breaks available to taxpayers in connection with filing their 2009 tax returns:

$8,000 First Time Homebuyer Credit: 

Did you buy a home recently?  If so, the government wants to give you up to $8k if you haven't owned a home for at least three years or $6.5k if you owned a home for five consecutive years during the eight year period leading up to the purchase date.  Read more about this tax break on our December 2009 newsletter.

$1,500 Energy-Efficient Tax Credit:

Did you make any energy efficient improvements to your primary home?  If so, the government wants to give you up to $1,500 if you spent at least $5k on energy efficient exterior doors, windows, insulation, central A/C, heat pump, furnace, water heater, or biomass stove.  Read more about this tax break on our June 2009 newsletter, or at www.energystar.gov.

$800 Social Security Tax Credit:

Do you work and pay social security taxes?  Well, the government is now refunding single individuals the first $400 of social security taxes paid during the year.  Married couples get a refund of up to $800 - even if only one spouse works.  Read more about this tax break in our March 2009 newsletter.

Sales Tax Deduction On New Car Purchase:

Are you driving around in a new car that you purchased after 2/16/09?  If so, don't forget to write off the sales tax you paid on that vehicle.  Read more about this tax break in our March 2009 newsletter.

Increased and Improved Undergraduate Tax Credit:

Do you have a child in college?  Well, if so, the government wants to give you up to $2,500 per child who is still an undergraduate.  And for the first time since these education credits were introduced back in 1998, up to $1,000 of this credit is refundable per college student - which means you get some money back from the government for each child's undergraduate tuition even if you pay no income taxes.  Read what the IRS says about the new American Opportunity Tax Credit.

$20 Per Month For Riding Your Bike to Work:

Do you ride your bike to work most days?  If so, the government allows your employer to give you $20 per month, completely tax-free to you.  Read about what the IRS says about the Qualified Bicycle Commuting Reimbursement. 

Show Me The Money:

As you can see, I wasn't kidding.  Good tax planning is taking a back seat to these lucrative government giveaways.  Every day this winter, my clients are telling me, "Show Me The MONEY!  SHOW ME THE MONEY!!!"

**

Listen to Andrew's February 2010 Radio Interview - Show Me The Money (on Greater Boston Media) (9 minutes)

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2009 & 2010 TAX FACTS

• For 2009, the standard deduction for a single individual is $5,700 and for a married couple is $14,400. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2009, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009 and 2010.
  
• The standard mileage rate is $.50 per business mile as of January 1, 2010, down from $.55 per mile for 2009.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010. And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2009 and 2010.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 

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