There are a lot of pressures surrounding our voluntary tax system. There are deadlines and then there is honesty, to name a couple. What, however, is most important is your portrayal of your taxes to the IRS. This is the empowering moment of taxpaying Americans. At this moment you have the liberty to express your capitalist side as a business. You take the liberty to deduct business expenses in that regard while reporting the winnings of your entrepreneurial spirit. Tax is very much a positive vote for your future, so as you disclose and pay your tax, note to yourself that you are investing in your future and your family’s future.
The U.S. Tax Court issued a decision concerning tax deductions of charitable contributions in Thad Deshawn Smith v. Commissioner of the Internal Revenue, October 2, 2014. The case is a great way to discuss what the IRS and Tax Court require as far as documentation.
Mr. Deshawn attempted to deduct a whopping $27,277 in noncash charitable contributions in 2009. He donated clothes, electronics, etc to AMVETS. AMVETS wrote Mr. Deshawn blank “tax receipts”. Have you ever noticed this practice when donating to Goodwill? Goodwill just hands you a blank receipt. Well that practice does not cut it.
The critical failure was that the receipts did not specify the items donated. Mr. Deshawn made a valiant effort to document the donation by creating spreadsheets. However, because there was no evidence that the spreadsheets were submitted (hint – signed) by AMVETS, no deduction was allowed.
Here is some technical background.
Contributions of $250 or More:
Section 170(f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with a contemporaneous written acknowledgment of the contribution by the donee organization. This acknowledgment must:
- include “a description (but not value) of any property other than cash contributed”;
- state whether the donee provided
any goods or services in exchange for the gift; and
- if the donee did provide goods or services, include a description and good-faith estimate of their value. Sec. 170(f)(8)(B); sec. 1.170A-13(f)(2), Income Tax Regs.
The acknowledgment is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of:
- the date the taxpayer files a return for the year of contribution; or
- the due date, including extensions, for filing that return. Sec. 170(f)(8)(C).
Contributions exceeding $500
For noncash contributions in excess of $500, taxpayers are required to maintain reliable written records with respect to each item of donated property. Sec. 1.170A-13(b)(2) and (3), Income Tax Regs.
These records must include, among other things:
- the approximate date the property was acquired and the manner of its acquisition;
- a description of the property in detail reasonable under the circumstances;
- the cost or other basis of the property;
- the fair market value of the property at the time it was contributed; and
- the method used in determining its fair market value. Sec. 1.170A-13(b)(2)(ii)(C) and (D), (3)(i)(A) and (B), Income Tax Regs. The taxpayer must include with his return “a description of such property and such other information as the Secretary may require.” Sec. 170(f)(11)(B).
Contributions Exceeding $5,000
For contributions of property (other than publicly traded securities) or similar items of property valued in excess of $5,000, the taxpayer must generally satisfy the substantiation requirements discussed previously and must also:
- obtain a “qualified appraisal” of the items; and
- attach to his tax return a fully completed appraisal summary. Sec. 170(f)(11)(C); sec. 1.170A-13(c)(2), Income Tax Regs.;
I came across this today in passing while working on a tax case.
Most homeowners deduct home mortgage interest on Schedule A of their 1040. Actually, this is usually a taxpayer’s largest deduction. Well, what if the taxpayer is not liable for the mortgage can taxpayer still take the deduction?
For example, taxpayer’s parents transferred title of a home to taxpayer. The mortgage remained the obligation of parents. Taxpayer does not refinance. Taxpayer pays mortgage. May taxpayer deduct the interest paid on schedule A? I have to admit that the IRS is pretty generous on this one. The IRS permits taxpayer to take the deduction on schedule A. Thank you IRS!
What follows is the background and legal support.
1.163-1(b), Income Tax Regs., provides: “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”
However, “title” to the real estate is required. Real estate title can include legal, equitable, and beneficial title. Hynes v. Commissioner, 74 T.C. 1266, 1288 (1980); Song v. Commissioner, T.C. Memo. 1995-446; Bonkowski v. Commissioner, T.C. Memo. 1970-340, affd. 458 F.2d 709 (7th Cir. 1972). This is where it can get complicated and you would need to seek a tax pro, such as myself, on this point.
I will point out that the 1098 will not be in your name but the IRS has spoken: deduct, deduct, deduct!
For Individuals, Small Businesses, Corporations, Partnerships, and Limited Liability Companies
Tax Compliance Checkup-Up by Philip Falco, CPA, Juris Doctor – Honors
We have IRS e-services. We can quickly find out what is not making you or your company tax compliant.
For example, an old unfiled tax return, a quarterly filing, or an IRS Form 940 might not have been filed at some point in time. You might not even know that the IRS has the non-compliance flagged until it is too late. We can nip this in the bud and get you in 100% compliance. We also provide tax preparation services so we can actually prepare your unfiled returns for you.
Give us a call if you would like us to do a tax check-up for you (303) 626-7000.
By Philip Falco, CPA, Juris Doctor – Honors. In an opinion penned in 1934, Judge Learned Hand endorsed the use of tax planning. In Helvering v. Gregory, 69 F.2d 809, Judge Learned Hand wrote:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
To put it another way, there is no patriotic duty to pay more tax than the least tax payable under the tax code. This is the essence of tax planning in a nutshell.
A solid understanding of the tax code is what it takes to navigate to the least tax payable under the tax law.