Giving To Concordia

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Sunday June 26, 2016

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IRS Consumer Alert After Orlando Tragedy

After the major tragedy in Orlando, the IRS published IR-2016-89 to remind taxpayers to follow good giving practices.

When there is a serious national event, good-hearted Americans respond with generous gifts to help those in need. This also happened after the Orlando attack. In helping those in need, everyone should follow prudent giving practices. There are several simple steps in the IRS letter that help donors make proper and effective gifts.

1. Recognized Charities – Make your gifts to those organizations with long-standing good reputations. Use and Pub. 526, Charitable Contributions, to learn how you can make effective gifts and qualify for charitable deductions.

2. Similar Names – Be careful to make sure you are giving to the right organization. Some tricksters use common names for phantom charities. Many of these names will be quite similar to those of respected charities. You may find out more about nonprofits on with the “Exempt Organizations Select Check.”

3. Personal Information – A phone solicitor does not need your Social Security number, credit card number or bank number. Do not give out personal information over the phone.

4. Cash Gifts – You should generally avoid gifts of cash. Make your gifts by check or credit card. For gifts of clothing, furniture, household goods or vehicles, you will need specific information to qualify for your deduction. IRS Publication 526, Charitable Contributions, explains how to qualify for a charitable deduction for these gifts.

Clothing and Furniture Gift Deductions Denied

In Perry Walter Payne et ux. v. Commissioner; T.C. Summ. Op. 2016-30; No. 2006-14S (22 Jun 2016), the Tax Court denied charitable deductions for gifts of clothing, furniture, and household goods. The IRS had issued deficiencies for 2010 and 2011 for the two taxpayers. The total of the taxes, interest, and penalties was over $56,000. The Tax Court sustained the deficiency and penalty amounts.

During 2010 and 2011, taxpayers Payne and Kasule resided in a 1,600 square foot Maryland home with a single car garage. Payne was a professor and Kasule was a contract specialist.

They had a modified adjusted gross income over $150,000 for both years. In 2010 they deducted cash gifts of $455 and noncash gifts of $79,000. For 2011, the cash gifts were $1,600 and the noncash gifts were $90,000. The noncash gifts were about 45% of their income each year.

Taxpayers filed IRS Form 8283 for both years. They included receipts for the noncash gifts with amounts in $500 increments ranging from $500 to $5,000. The gifts did not include specific descriptions, but had general descriptions such as “gift of clothes” or “gift of shoes.” There were no bases, costs, dates of acquisition or valuation methods included. The taxpayers did not obtain an appraisal.

The IRS denied all noncash gifts except $1,500 per year.

The Tax Court noted that Sec. 170(f)(8)(A) requires a contemporaneous written acknowledgement for gifts of $250 or more. The receipt must include a description of the noncash property and the statement, “No goods or services were provided.” The taxpayer must make a good faith estimate of the gift value.

If “similar items of property” with value over $5,000 are donated, then an appraisal is required. See Reg. 1.170A-13(c)(7)(iii). The regulations define similar items to include “clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware.”

The Tax Court noted that in 2010 taxpayers claimed deductions for 54 general gifts of clothing or shoes equal to $56,000. For 2011, the 46 gifts of clothing or shoes totaled $50,600. There was no specific description of any of the items and no acquisition dates. The taxpayers presented internet pictures of various items at trial, but these were not deemed effective to substantiate the deduction.

In addition, taxpayers claimed that many of the items had been “found” on the curb. They would then make gifts to charity of those items. Furthermore, taxpayers noted that Amazon and other retailers have many different property categories. Therefore, they contended that the aggregation rule requiring an appraisal for similar property valued over $5,000 did not apply.

The court determined that there was a basic failure to keep the required records to document the gifts. Therefore, there was no need to address the aggregation of similar items issue. The deduction was denied and the Sec. 6662(a) accuracy-penalty was applicable.

Editor’s Note: This case is a good summary of the requirements for noncash charitable deductions. Gifts of clothing, furniture and other household items should be documented by listing a specific number of items. It is also important to be able to state clearly the acquisition dates and valuation methods. If the gift value of various household goods is in excess of $5,000, an appraisal will be required under the “similar items” rule.

Tax Reform Act of 2017?

Since the last comprehensive tax reform in 1986, the Internal Revenue Code and Regulations have grown from 26,000 to 70,000 pages. With the goal of stimulating economic growth, House Ways and Means Chairman Kevin Brady (R-TX) published a tax reform outline on June 24. He proposes a comprehensive reform of individual, corporate and international taxes. Chairman Brady hopes that a bill can be drafted and passed in 2017.

Comprehensive tax reform is designed to simplify the code, reduce rates by eliminating deductions and encourage economic growth. The most politically sensitive areas for tax changes are usually the individual changes. Because most tax reform acts have a goal of revenue neutrality, the bill attempts to raise approximately the same amount of revenue from high, middle and low-income taxpayers.

Brady’s proposal covers numerous provisions for individual taxpayers.

1. Individual Tax Rates – The current seven brackets would be reduced to three brackets of 12%, 25% and 33%.

2. Standard Deductions – These deductions would be increased. The proposed standard deduction is $12,000 for individuals and $24,000 for married persons. This large standard deduction will reduce the number of taxpayers who itemize.

3. Alternative Minimum Tax – There is a second tax system and all taxpayers are required to calculate their tax under both the regular and the alternative system. The alternative minimum tax would be repealed.

4. Dividends and Capital Gains – Brady proposes a 50% exclusion for dividends and capital gains. Taxpayers in the 33% bracket would pay 16.5% tax on these items.

5. Personal Exemptions – The child credit and personal exemption would be combined into a $1,500 amount.

6. Earned Income Tax Credit (EITC) – The EITC would be continued. There will be changes to make EITC more effective and efficient.

7. Higher Education – The various credits and deductions would be simplified and combined.

8. Mortgage Interest – The mortgage interest deduction will be retained. There may be some changes to the current rules that permit deducting interest on a mortgage up to $1 million or a home equity loan up to $100,000.

9. Charitable Deductions – The reform goal is to “encourage donations while simplifying compliance and recordkeeping and making the tax benefit effective and efficient.”

10. Retirement Savings – The large number of different retirement plans will be retained, with some consolidation of the different strategies.

11. Estate and Generation Skipping Taxes – They will be repealed. The bill summary does not state whether the step up in basis rules for estate assets will change.

12. Small Businesses – Active small business owners would pay a top rate on business income of 25% rather than 33%.

Editor’s Note: There have been several efforts in the past decade to pass comprehensive tax reform. The obvious challenge is that reducing the rates requires elimination of deductions. All of the recent reform efforts pay for reduced rates on individuals by eliminating the state and local tax deduction. There is strident opposition to eliminating this deduction by senators from high-tax states. It will be interesting to watch this tax reform process unfold during 2017.

Applicable Federal Rate of 1.8% for July -- Rev. Rul. 2016-17; 2016-29 IRB 1 (17 June 2016)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2016. The AFR under Section 7520 for the month of July will be 1.8%. The rates for June of 1.8% or May of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published June 24, 2016

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