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Paying Zero Tax for Your C Corporation

 

Tax Breaks for 2009

 

2009 Depreciation Limits

 

Steps To Cut Your 2009 Tax Bill

 

New Tax Rules

 

Tax Credits for Individuals

Mileage Rates for 2009

 

Working Families Tax Relief Act

 

American Jobs Creation Act

 

IRS Eases Health Cost Rules

 

Cost Segregation Studies Translate into Money in the Bank

Tax Issues Change As You Get Older

Know the Time Value of Money

Records - What to Keep and What to Toss

Record keeping for Businesses

Shift Income for Family Tax Savings

 

Roth IRA Conversion Rules Changed

 

Tax Benefits From Gifts to Charity

 

CURRENT TAX DEADLINES
 

** The IRS has increased the rate of audits for taxpayers with incomes over $100,000. Corporate audits will also increase, with a projected audit rate by 2009 of 13% for medium-sized companies and 30% for large corporations.

 

Is Paying Zero Tax a Good Idea For Your Corporation?

When you run your business as a regular C corporation, it can make sense to pay a little tax this year to avoid large estimated tax payments next year.

According to the general rule for corporate estimated taxes, the IRS won't charge a penalty as long as a company pays current-year estimated tax of at least the amount that was owed on the preceding year's return. However, this 'safe harbor' is available only when at least some tax was owed for the prior year. If a company shows zero tax liability in a given year, the next year's estimated payments must equal 100% of the expected tax liability for that year. As a result of this quirk in the law, you might want to plan corporate income and deductions so that you always show at least some taxable income and some tax liability.

Example: Your corporation will incur a small operating loss this year. Next year your company is projected to owe about $100,000 in federal income tax. If you do no planning, you may be required to pay next year's tax bill in full via quarterly installments of $25,000 each, creating a potential cash flow crunch just when your company might need liquidity.

However, if your company were to report (say) $10,000 of taxable income this year (perhaps by delaying deductible expenses or selling an appreciate asset(), this year's tax bill would be $1,500 (15% of $10,000). Next year, you would be require to prepay a total of only $1,500, reducing your quarterly installments to $375 each. The remainder of your tax bill would be due on the filing date for next year's return, but in the meantime, you have the use of your cash.

This safe harbor exception is only available to corporations with taxable income of less than $1 million for the preceding three years.

Tax Breaks

Energy Tax Incentives Act

  • Credits for alternative fuel vehicles
  • Credits for energy-conserving home improvements
  • Credits for contractors who build energy-efficient homes
  • Credits for manufacturers of energy-efficient appliances
  • Deductions for energy-efficient improvements to commercial buildings

Work Opportunity Tax Credit

  • Credits for hiring certain disadvantaged workers and veteran groups

 

Steps To Cut Your Tax Bill

  • Max out your 401(K) at work or SEP IRA.
  • Establish a pension plan for your small business.
  • Make gifts to family or others to use your tax free $12,000 per donee gift allowance.
  • Plan year end business equipment purchases to take advantage of the increased expensing limit of $125,000 for 2009.
  • If you plan to deduct sales tax, buy your planned big ticket purchases this year.
  • Invest in dividend-paying stocks. Because of the favorable 5% and 15% tax rates on dividend income, holding stocks that pay dividends can reduce your taxes immediately.
  • Hold stocks long term. Long term capital gains are also taxed at a maximum 15% tax rate. So when you decide to sell stocks, bonds or other investments, remember that meeting the 12-month holding period for long term gains provides significant tax savings.
  • Sell loser stocks to offset gains. Your stock portfolio may include some real losers. If you have some big winners too, sell poor performers to offset capital gains on the winners.
  • Make full use of retirement plans. If you have a 401(k), 403(b) or 457 plan, consider contributing the maximum amount. For 2009, the maximum deductible contribution is $15,000 (An additional $5,000 if you'll be age 50 or older before year-end).
  • Make your home energy efficient You may claim a lifetime credit of up to $500 for making qualifying energy saving improvements to your home including installation of certain insulation materials, exterior windows and doors, electric heat pumps and central air.
  • Go solar. You may claim a 30% credit (with certain dollar limits) for installing solar water heating, photovoltaic, or fuel-cell equipment in your home.
  • Give stocks to kids or grandkids. Instead of a cash gift to a child or grandchild, consider giving stocks. Assuming the kids are in a lower tax bracket than you, then can sell appreciated stocks at a lower capital gains rate.
  • Postpone income and speed up deductions. Some options - If you run a small business, reduce 2006 taxable income by billing customers after December 31. Make your January mortgage payment in December to deduct interest on your 2006 return. Make planned charitable gifts in December instead of January.

New Rules Create Tax-Saving Opportunities

Capital gains taxes beginning in 2009 will drop to zero for taxpayers in the lowest two regular tax brackets. If you're a single filer with income less than about $32,000 or married with income less than about $64,000, the new zero long-term capital gain rate could apply to you.

Higher contribution limits for retirement plans made permanent.

Beginning in 2010, all taxpayers, regardless of their income level, can convert their traditional IRA to a Roth IRA. The conversion is taxable but can be averaged over 2 years.

Roth 401(k)s made permanent.

Saver's credit made permanent and income phase-out adjusted for inflation after 2006.

$500 retirement plan start-up credit for businesses made permanent..

AGI phase-out ranges for IRA contributions indexed for inflation.

Nonspouse beneficiaries allowed to roll over distributions from decedent's retirement plan.

Tax refunds can be directly deposited into IRAs.

No 10% early withdrawal penalty on early retirement plan distributions for certain military reservists and public safety employees.

Section 529 plans favorable tax treatment made permanent.

Cash donations will require bank record or written documentation from charity.

Charitable donation for used clothing and household goods allowed only for items in "good" condition.

Certain IRA withdrawals directly donated to charity temporarily allowed tax-free.

Tax Rates. The new law extends the 2003 lower tax rates through December 31, 2010.

AMT. The new law provides higher exemption amounts. The AMT exemption for married couples filing jointly in 2009 is $62,550, and the exemption for singles $42,50. The new law also extends the benefit of certain personal tax credits in calculating the alternative minimum tax.

Expensing. The new law extends the higher expensing allowance of $108,000 in equipment costs write-off to December 31, 2009.

Roth IRAs. Beginning in 2010, there will be no income limit for converting a traditional IRA to a Roth IRA.

Kiddie Tax. Beginning in 2009, the kiddie tax rules apply to kids up to 19 years of age (to age 24 for full time students).

Mileage Rates for 2009

The IRS has increased the optional standard mileage rates for business miles driven between July and December of 2009. For business miles the rate is 58.5 cents a mile for the rest of 2009.  The mileage rate for January through July 2009 is 50.5 cents per mile. Driving for charitable purposes remains deductible at 14 cents a mile. 

The rate or medical an moving mileage for the last 6 months of 2009 was raised to 27 cents per mile, the rate remains at 19 cents per mile for the first six months.

2009 Depreciation Limits

For passenger cars used as business vehicles first placed into service in 2009, $3060, $4,900 for 208, $2850 for 2009 and $1775 for each year thereafter.

For light trucks and vans first placed in service in 2009, $3,260 for 2009, $5,200 for 2009, $3,050 for 2009, and $1,875 for each year thereafter.

Tax Credits for Individuals

Tax credits are available for environmentally friendly cars.

Tax credits can ease the cost of installing certain energy saving features. Solar hot water heaters are eligible for a maximum credit of $2,000. A 10% credit ($500 limit) is available for improvements such as insulation and energy efficient windows.

Working Families Tax Relief Act

Here are the tax breaks extended via this new law:

Child tax credit. The $1,000 per child tax credit will remain at that level through 2010 instead of dropping back to $700 in 2005 as previously scheduled.

Refundable child tax credit. The law has increased to  15% in the refundability of the child tax credit for low-income taxpayers.

Marriage penalty relief. Married filing jointly? You'll be happy to know two areas of marriage penalty relief have been extended through 2010. One change means the standard deduction for joint returns will continue to be twice as much as the deduction for single filers (for 2005, the deduction is $4,850 for singles and $9,700 for couples filing jointly.) Another provision keeps the size of the 15% tax bracket for couples at double that of singles.

Expanded 10% tax bracket. The new law keeps the wider 10% bracket through 2010. A wider bracket at a lower rate equals less tax for approximately 73 million filers, according to the Joint Committee on Taxation.

Educator expenses. Teachers, keep those receipts! Qualified supplies purchased for classroom use can reduce gross income on your 2009 tax return by as much as $250.

Alternative minimum tax. If you were worried that the alternative minimum tax could affect you in 2009, take heart. The AMT exemption amount will remain at $58,000 for couples and $40,250 for singles for one more year.

Electric and clean-fuel vehicles. The full deduction for the purchase of a clean-fuel vehicle and the full credit for the purchase of a qualified electric vehicle are reinstated for 2009.

Business credits and deductions. The new law retroactively extends a list of credits that had expired. For instance, the research credit  has been extended through 2009, as have credits for hiring certain economically disadvantaged workers.

 

American Jobs Creation Act

In this legislation, Congress's main purpose was the repeal of the foreign sales corporation extraterritorial income tax regime. The law became much more; it's a 650-page document that makes many changes to the tax code, changes that will affect large and small businesses, farmers and individual taxpayers. Among the changes are:

The FSC/ETI rules are gradually being repealed since 2005. The tax break for qualifying extraterritorial income (ETI) is replaced by a new deduction for manufacturers. Initially, the deduction is 3% of the lesser of (a) qualified production activity income for the year, or (b) taxable income for the year. The deduction is gradually phased in until it reaches 9% in 2010. It is limited to 50% of W-2 wages paid during the tax year.

Taxpayers who itemize deductions on their federal income tax returns will be allowed to deduct state and local sales tax in lieu of state and local income tax.

Deferred compensation plans may be amended as late as December 31, 2009, so long as the plan is operated based on a good faith, reasonable interpretation of the statute and its purpose.

The $100,000 first-year expensing allowed for the purchase of business equipment is extended through 2009.

The first-year expensing allowed for sport utility vehicles used in business is limited to $25,000.

The depreciation period for qualified leasehold improvements to nonresidential real property and qualified restaurant property placed in service after date of enactment and before 2006 is reduced from 39 years to 15 years.

Changes are made to the S Corporation rules, including allowing 100 shareholders (up from 75) and treating family members as one shareholder.

The deduction rules are tightened for donations of vehicles and intellectual property to charity.
 

IRS Eases Health Cost Rules

If you have a flexible spending accounts (FSA) to pay for medical expenses with pre-tax dollars, you an use your FSA funds to pay for over the counter drugs such as aspirin, flu medications, allergy pills and cold medicines.
Vitamins and dietary supplements still don't quality nor do toiletries, cosmetics and sundry items.
The cost of over the counter drugs continues to be nondeductible as an itemized medical deduction.

 

Cost Segregation Studies Translate into Money in the Bank

Cost segregation studies are a hot topic in business today, and for good reason. They are strategic tools that allow companies and individuals to increase their cash flow by maximizing depreciation benefits for tax purposes. Recent court rulings, federal legislation and IRS tax code changes have made the studies more valuable than ever before.

"It's a safe way to save a lot of money," says Dave Downie, one of Hill, Barth & King LLC's Tax Principals. "With the recent tax code changes, a business can profit without fearing it is crossing the line. Cost segregation studies are part of playing by the rules." The acquisition of a building, construction of a new building or expansion of an existing facility provides an opportunity to see significant tax dollars through the use of a cost segregation study.

Valuable Tax Savings and Cash Flow

The standard depreciation period for most commercial buildings is 39 years. Building components that support the structure do not qualify for a shorter life. However, those components which support the business operation do qualify for a shorter life. A cost segregation study identifies and reclassifies those parts of a building which can be depreciated at a faster ate, typically 15 years for land improvements and five to seven years for various types of equipment.

Some of the tangible benefits of a cost segregation study include lower taxes, greater cash flow and useful, new information to more effectively and efficiently operate a business. Tax savings can add up to significant dollars.

Unfortunately, many tax preparers, business owners and executive do not take advantage of these tax savings. Dave Downie indicates many have not heard about the studies, while others say hey will lose the tax benefits later. He points out a tax dollar saved now is worth more than a tax dollar saved years down the road. Downie also explains that a growing business will always have tax-saving opportunities.

Tax Guidance and Eligibility Requirements

A 1997 federal court case and 1999 IRS ruling provided better guidance for cost segregation studies. More recent U.S. Treasury rulings and tax law changes ha also clearly defined the benefits.

The Job Creation Worker Assistance Act of 2002 allows for an additional 30 percent in Bonus" deprecation for specific equipment purchases. The Tax Act of 2003 increased the bonus depreciation to 50 percent (from 30%) for qualified property. These recent changes enhance the benefit of a cost segregation study. Finally, IRS Revenue Procedure 2002-19 now allows taxpayers to catch up on any depreciation they may have missed in prior years. Therefore, even buildings purchased or constructed years ago can benefit from a cost segregation study. Some specific examples include:

  • Buildings and facilities constructed since 1987
  • Facilities and buildings built before 1986, but acquired after 1986
  • Building additions and renovations completed after 1986

It is best to begin a cost segregation study before construction or remodeling stars, but eligibility requirements offer tax savings for many types and ranges of businesses. Acquisition of a business which includes a building can also benefit.

Overview of a Study

A cost segregation study combines engineering, construction and tax expertise to develop a document which supports a faster ate of depreciation for the segregated costs. The following components are usually part of a cost segregation study:

  • An analysis of the blueprints and buildings specifications
  • A property inspection to determine the nature and use of the facility
  • A review of cost information and invoices
  • An evaluation of the scope and makeup of various contracts and functions of facility assets.
  • Classifying and segregating property elements
  • Reconciling direct, indirect and installed costs

The cost segregation team conducts thorough examinations and provides full documentation, photographs, legal and regulatory papers and many other important details.

Industries Benefiting From a Cost Segregation Study

Most businesses can benefit room a cost segregation study. There are many diverse examples of eligible properties, such as

  • Manufacturing facilities
  • Warehouses
  • Medical facilities
  • Office buildings
  • Corporate headquarters
  • Hotel/Conference centers
  • Auto dealerships
  • Apartment buildings
  • Grocery stores
  • Restaurants
  • Bank branches
  • Food processing
  • Other properties with special equipment needs

Cost segregation studies are only for depreciation purposes and usually will not impact a property's classification under personal property tax laws.

 

 

 

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Tax Issues Change As You Get Older

As retirement nears, the tax issues you face begin to change. You'll be eligible for new tax breaks, but you will also have to make new tax decisions. Here's an overview of the tax issues you'll encounter in the years from age 50 on:

Retirement Savings

 
-Beginning at age 50, you're allowed to make extra catch up contributions to your IRA and 401(k) savings.

 -
After age 59 1/2 you're eligible to make penalty free withdrawals from your IRAs.

 -
At retirement you'll face choices on your company retirement plan. Generally, your options will be to take a lump sum distribution, roll the total into an IRA, or leave it in the plan. In some cases, you might be able to receive an annuity.

 -
Beginning no later than the year after you reach age 70 1/2, you're required to take minimum distributions from your traditional IRAs each year. Generally, these will be taxable as  ordinary income. There's no minimum distribution required for Roth IRAs.

 -Whatever our age, you should review our IRA beneficiary designations It's important to update them for new rules issued in recent years.

Social Security


 
-At age 62, you'll need to decide whether to take reduced social security benefits early or wait until full retirement age. Note that full retirement age is no longer 65 for many people. If you were born after 1937, it's between ages 65 and 67, depending on your birth year.

 -If you choose to take reduced benefits at age 62, factor in the tax consequences if you also keep working.

 - Social security benefits can be tax-free, 50% taxable, or 85% taxable, depending on your other income. You need to consider this as you prepare your retirement plan.

Your Home


 -As you approach retirement it's likely you'll have paid off your mortgage and will lose the tax deduction for mortgage interest. It may no longer pay to itemize deductions, especially since the standard deduction increases for those aged 65 and older.

 -At some point you may sell your home. You need to be sure it qualifies as a principal residence so you can claim the capital gains exclusion.


Lawsuit Prevention


 
-A thorough estate plan becomes even more essential as you approach retirement. Make sure you have all the supporting documents in place, including living trusts, will, financial power of attorney, medical directives and beneficiary designations.

 

The Time Value of Money

If you have a basic understanding of time-value concepts, you'll be able to make better choices in many business and personal financial situations.

Say you want to sell a piece of property for $10,000. A potential buyer offers $5,000 cash own, and $5,500 one year from now. How does the buyer's offer compare to your terms?

If you receive the entire $10,000 today, let's assume you could earn 5% on the money. A year from now you'll have $10,500, which is referred to as the "future vale" of $10,000. On the other hand, the future of the buyer's offer turns out to $10,750, which is the  sum of the payment 1 year from now ($,500) plus the future value of the down payment ($525). If the buyer has good credit, you may be better off taking the buyer's offer.

Calculate present value. Another way to evaluate this kind of offer is to compare the "present value" of both alternatives. Using a financial calculator or special financial table, and still assuming you can earn 5% on your money, the present value of the buyer's offer is calculated to be $10,238, compared to a present value of $10,000 for a lump-sum cash payment. A higher present value means a better deal for you, so the buyer's offer is more attractive.

If you're one other side of a transaction (buying something) time value concepts can also help you make better decisions. For example, a time value analysis can help you decide whether to buy or lease   car. You can also use time value to analyze investment alternatives, negotiate  a divorce settlement, or hammer out the possible deal between leasing real estate or business equipment.

If you're about to enter into any financial arrangement that requires you  pay money over time, or entitles you to receive periodic payments, time value would be an important issue.

Records - What To Keep Or Toss

Tax records.
You should keep tax records for at least as long as it is possible for tax authorities to audit your return. The IRS has three years after the return is due or filed, whichever is later, to examine your return and assess additional tax. This is called the "statute of limitations". I you've made a major error to your return (defined as omitting more than 25% of your gross income), the IRS has six years to examine your return. There is no statute limitation on fraudulent filing or for returns that are not filed at all.

To be on the safe side, keep your tax records for seven years after a tax return is filed.

The IRS does not require that you keep your records in any particular way. The only requirement is that your records allow you and the IRS to determine your correct tax liability. Keep checks, receipts, and other records that document the income and deductions you report on your tax return. Copies of tax returns themselves should be retained permanently.

Home.
Expenditures for your home fall into two categories: repairs such as routine yard maintenance and painting and improvements usually big-ticket items such as room additions.
|
Discard repair receipts once the warranty period expires, but keep receipts for improvements indefinitely. Improvements add to the tax basis of your property. Despite the $250,000 capital gain exclusion amount ($500,000 for joint filers), substantial increases in market value could make you liable for capital gains tax when you sell your home. Complete records of your home's original cost plus improvements will help reduce any taxes due.

Investment records.
Investment records generally should be kept until the investment is totally liquidated, plus a period of seven years. Keep any records for taxable accounts that show reinvested dividends. You can usually toss monthly or quarterly investment statements if you receive a comprehensive annual statement.

Investment real estate.
Keep all documents relating to purchases of property, along with substantiation for improvements made to the property. Keep written appraisals and tax depreciation schedules.

Individual retirement accounts.
Keep copies of Forms 5498,8606 and 1099R until all money has been withdrawn from your IRAs. Good records are necessary so that you aren't taxed on nontaxable withdrawals.

Insurance.
Keep your current policies and 12 months worth of cancelled checks and statements. Ask your insurance agent about discarding expired policies. Your liability or prior years can vary.

Estate planning documents.
In your home, keep a copy of your current will, any trusts, and any special directives. Give the originals to your attorney, and consult your attorney about destroying all out of date documents.

Keep it simple.
In most cases, you don't need an elaborate recordkeeping system to keep your affairs in order. File tax returns separately by years and file investment records by broker. For expenses even an accordion file tabbed by category works wonders.

Record keeping for Businesses

The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.

What records? All businesses should have a permanent set of books which summarize individual deposits, disbursements and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.

Supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year has passed.

The supporting documents the IRS review include bank statements, cancelled checks, payroll records, invoices and the like. you should also retain documents supporting  deposits which do not reflect income, such as loan documents.

A good recordkeeping system is essential for every business, not only for tax reporting purposes but also for the success of the business. The recordkeeping necessary for any business depends on the size and nature of the business.

Shift Income for Family Tax Savings

You can shift our high tax bracket income to other family members who are in lower tax brackets. The family will then pay lower taxes on this sifted income.

Transfer Gains

If you own stock or mutual funds that you've held for more than one year and that have increased in value, consider gifting them to your kids for subsequent sale. If you claim the gains, you'll generally be taxed at a 15% rate. But it's likely that your kids will be able to realize the gains at a tax rate of 5%or less. As the law currently stands, low bracket taxpayers will pay 0% on long-term capital gains in 2009.

Beware of the kiddie tax if you're gifting assets to kids under age 14, but don't overlook this strategy if you have older children.

Hire Your Children

If you have an unincorporated business, hiring your kids can save significant tax dollars. You'll not only get a tax deduction for the wages you pay your kids, but also you'll avoid the self-employment taxes you'd pay on hat income if it were taxed to you.
Your kids can earn up to $5,150 this year in wage income, completely avoid the kiddie tax, and not pay a dime in income taxes. Because they're working for you in an unincorporated business, they won't pay any payroll taxes on their wages if they're under 18 year old. If your business is incorporated, you'll be required to pay payroll taxes on the kids' wages,

Shift Education Credits

Maybe you're unable to claim either the Hope or lifetime learning credits for your college-age kids because your income exceeds the allowable limits. If that's so and your kids have taxable income from work or investments, consider dropping them as dependents from your tax return. It's possible, depending on your income, that you're losing the benefits of dependency exemptions for your kids anyway. If you elect not to claim them as dependents they can then claim the education credits on their individual income tax returns, even if you pay the college bills.

Establish IRA Accounts

With income from wages, your kid can establish an IRA account and contribute up to $3,000. If it's a traditional deductible IRA, your kid can earn up to $7,850 in wages without paying any income taxes.

You could also consider a non-deductible Roth IRA. While not currently deductible, the contributions can grow substantially over the yeas. The earnings and distributions are completely tax free once the kid reaches age 59 1/2.

In all the above examples, you can substitute other lower income family members for kids in these tax strategies - i.e. retired parents or grandchildren. For example, if you're helping to support your parents, you might consider giving them dividend-paying stocks or mutual funds.

Roth IRA Conversion Rules For Seniors

A little-known tax rule is slated to take effect on January 1, 2005. This new rules, which applies specifically to people over the age of  70-1/2 will make it easier for seniors to convert their IRAs to a Roth IRA.

Roth IRAs were instituted as part of the 1997 Tax Act. Unlike traditional IRAs, Rot IRAs are tax-free, which means that you don't pay taxes on money withdrawn from your Roth as long as certain conditions are met.

Along with the introduction of these tax-free retirement savings accounts came the opportunity to convert your traditional IRAs to a Roth. Yes, you pay taxes on the money converted. But that money grows tax-free from that day forward. Not everyone is eligible to convert their IRAs to a Roth IRA. To quality, your adjusted gross income can't exceed $100,000. That threshold applies to single individuals and to married couples alike.

The new rule

Here's where the new rules helps seniors. Your annual required minimum distribution from your IRAs is excluded when determining if your income exceeds the $100,000 threshold. Let's say you'll turn 75 next year and your IRA accounts are worth $300,000. Based on your life expectancy as reflected in the Uniform Lifetime Table, your RMD for 2006 would be $13,100. While this distribution is taxable to you, it no longer counts when determining eligibility for a Roth conversion.

To convert or not?

Should you consider converting your IRAs? Perhaps you should if you think that the tax rates will be higher in the future and you have enough money set aside to pay the taxes on the conversion without invading your new Roth account.

Another advantage is that you get to keep the money invested within a tax-advantaged account longer. That's because, unlike traditional IRAs, there are no required minimum distributions for Roths.

Converting to a Roth can also help you out with some basic estate planning. By paying all of the income taxes due on your IRAs right now, you'll deplete your estate by the taxes paid. Plus, you reduce the income taxes your heirs will ultimately pay since the Roth distributions are tax-free to other beneficiaries of an inherited Roth as well.

The downside includes the potential of pushing yourself into a higher tax bracket, having your personal exceptions and itemized deductions phased out, and paying taxes on a higher percentage of your social security benefits.

Tax Benefits from Gifts to Charity

You can donate property, as well as cash, to charity - sometimes with significant tax advantage. What kind of assets are appropriate for donations? Almost anything that has some value will do. The most common charitable gifts are thrift shop items, used cars, art and collectibles, publicly traded securities and real estate.

Under $250: Keep receipts showing the date of donation, name of charity, and an estimate of the value of your conation.

$250 to $500. In addition to the above, you should get a letter from the charity for any one item of $250 or more, showing the date of the donation, a description of the item, and its value.

$501 to $5,000. You'll need all the above, plus information on when and how you acquired the items, and your cost basis in them.

Over $5,000: All of the above plus a signed, professional appraisal. An exception this this is the donation of publicly traded securities. Different types of assets have their own reporting peculiarities.

Used household items and clothing. For charity thrift ship donations, always get and save a receipt. Attach a list showing what you donated, and check inside the shop, or line like it, for the prices of similar items. Jot these down.

Real estate and art. Real estate and art, including antiques and collectibles, are most likely to require professional appraisals. In addition, you will need to know how the charity plans to use your gift. It is best to check wit your accountant before you complete gifts of such assets, as well as gifts of business property.

Investments. Publicly traded securities that have appreciated in value can make excellent donations. You are generally allowed to deduct the full fair market value of the asset without reporting the appreciation to the IRS as income or capital gains.

Vehicle Donation Rules Change

If you donate a used vehicle to charity, you are allowed to take a tax deduction but only if you itemize deductions on your tax return. Recent legislation has changed the rules for vehicle donations in an effort to close the gap between what the charity actually receives and what the taxpayer deducts.

Old law

Rule: You could estimate the fair market value of the donated vehicle and deduct that amount.

Application: The deduction was often determined by Blue Book value. Most of the time charities used agents to sell donated vehicles at auction, usually for far less than Blue Book. Charities received a contribution far smaller than what the taxpayer took as a deduction.

New law

Rule: The charity must inform the taxpayer of the price the donated vehicle sold for at auction. This is the amount the taxpayer can claim as a tax deduction. If the charity keeps the vehicle for its use, it must give the taxpayer an estimate of the value. This requirement applies when the claimed value of the vehicle exceeds $500.

Application: If a taxpayer gives a car with a Blue Book value of $3,000 to a charity, that value can no longer be used - even as a starting point - for determining the value of the vehicle and the amount of the deduction. If the charity sells the car for $575, that's the amount that you can take as an itemized deduction.

All Tax information on this page furnished by Hill, Barth and King, LLC, CPAs

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