Monthly Archives: February 2018

Getting The Full Tax Benefit From Your Charitable Donations

money-652560_960_720There are many reasons why individuals donate to charitable organizations. Some people donate simply because they are passionate about the mission of the charity they are contributing to. Others like to show their gratitude knowing that they are helping the community to be a better a place, while some enjoy establishing a legacy to be remembered by for the part they played in enhancing the lives of others. No matter the reasons for peoples’ generosity, individuals can personally benefit from their charitable acts by receiving a tax-deduction; however certain conditions must be met in order to receive the tax benefit.

To make sure their donation qualifies for the tax benefit, the donor must do some recordkeeping. This includes maintaining proper bank or credit card records of the contribution(s) and most importantly obtaining correspondence/receipt from the charity for any single contribution of $250 or more. The document from the charitable organization acknowledging the donation should be obtained by the donor before their 1040 tax return is filed. Donors will want to be sure that they read the document from the organization carefully since it will usually state what portion of the donation is tax deductible.

Donations are not always made in the form of cash, sometimes donors give property, publicly traded securities or other non-cash items. The documentation can vary depending on the type and amount of donation. For instance, some documents acknowledging a donation might state that “no goods or services were provided by the organization in return for the contribution,” if that is the case. If goods or services were provided by the charity in exchange for the contribution, the charity will state a good faith estimate of the value of the goods or services provided which reduces the amount of the donation that is tax deductible.

Additionally, when non-cash contributions over $500 are made an additional tax form must be filed detailing the donation. Furthermore, for most non-cash contributions in excess of $5,000, a qualified appraisal needs to be obtained and submitted with the tax return. If communication does not include the required information, if the necessary support for the donation is not received and/or the necessary tax forms are not filed, it is unlikely that the tax deduction will hold up under audit or tax court and will be disallowed.

A recent tax court case proves that the IRS is strict about following the above requirements. For example, a $64.5 million contribution that was made to a charitable organization was disallowed in a recent tax court case simply because the correspondence/receipt did not include the words “no goods or services were provided in exchange for your contribution” on it. Yes a $64.5 million charitable contribution was disallowed because the donor did not make sure their documentation was sufficient pursuant to tax laws.

As a donor, it is always important to check with a CPA to ensure that the necessary support and documentation is obtained so you can claim and substantiate your charitable deduction.

Lenore C. Sanchez, CPA

 

 

Race to the (Divorce) Finish Line

game-finish-lineAs preliminary versions of the new tax bill were released, it was apparent that big changes were on the horizon in the spousal support (alimony) arena. The prospect had attorneys scrambling to have divorces completed by December 31, 2017 in order to insure that the deductibility of alimony payments was “grandfathered” under the old tax law. A slight reprieve was granted under the final bill that was ultimately signed into law. The deduction for alimony now ends for divorces completed after December 31, 2018. Now there is a race to a new finish line.

Under current tax law, the payer can deduct the full amount of alimony paid and the recipient must include the full amount in their taxable income. Under the new law, alimony paid by one spouse to another will no longer be deductible and the spouse receiving the alimony no longer has to pay taxes on it. In theory, that sounds good for the payee. However, that will probably prove not to be the case. Since the amount will not be deductible by paying spouse, the courts will most certainly look to a lower amount (the net out of pocket cost) when they award spousal support. Having no deduction, will significantly reduce the net amount, available from the paying spouse. Hence, expected lower payments to the payee.

As an example (in simplistic terms):

If a high income spouse was paying alimony of $90,000, assuming a marginal tax rate of 39.6%, the net out of pocket cost to that spouse would be assumed to be $54,360. Assuming the recipient’s only income is the alimony, the net received after taxes (all other things being equal – no consideration given to other deductions) would be approximately $70,000 (assuming a blended tax rate). The courts will now probably use the net out of pocket (or some similar variation thereof) for the payer in computing the affordable support.   You can see how this could be a very large potential decrease in income for the payee (almost $16,000 in this example), even though the income is no longer taxable to the payee.

The most recent data I have found (from 2015) shows that around 600,000 taxpayers took the alimony deduction amounting to more than $12 billion. Even a 10% rate disparity between the payer and recipient in the tax rate from higher payer individual to lower tax rate individual represents over a billion dollars in tax revenue having been lost (and, in all likelihood, the rate differential is even higher). The IRS, in essence, was subsidizing alimony payments. No more! It’s no surprise that this was an easy target to raise revenue to try to offset some of the tax cuts.

In NY, there is a calculation to determine appropriate payments. So time is of the essence. In other states there may be more negotiations needed which could prove to be quite contentious.

The law does not take effect until 2019. That could set up a wild 2018 year as divorcing parties, and their attorney alike, race to the finish.

Tracy Badgley, CPA, CGMA, CDFA