Tax infomation

DUNN TAXES

Your taxes DUNN right

Are you cheating yourself out of valuable deductible charitable contributions?

Maybe you are underestimating the value of items you give away, or not hanging onto those receipts. 

Even some mileage to and from charitable events may be deductible.

Here are a few things to keep in mind for declaring charitable deductions:

Keep better records: The charitable contribution will be disallowed for any monetary contributions unless the donor maintains a record of the contribution. This now applies to any contribution of money, regardless of the amount.  Be sure that you have bank records, cancelled checks or written acknowledgements for all cash contributions that show the name of the charitable organization, the date and the amount of the contribution.  For monetary donations or items over $250 in a single donation, the IRS requires an additional written acknowledgement from the organization.  Taxpayers claiming over $500 for all contributed property must complete and file Form 8283, Noncash Charitable Contributions. 

Hold onto your pledge cards: Taxpayers who have had charitable contributions deducted from their paychecks are required to hold onto their pledge cards from the charity, pay stubs, and their Form W-2 or other employer information that states the total amount of donation. Be sure that you have bank records, cancelled checks or written acknowledgements for all cash contributions that show the name of the charitable organization, the date and the amount of the contribution.

How to figure out what donated items are worth: When declaring the value of donated clothing or items for tax purposes, determine the fair market value.  This can be the price the item might sell for at a garage sale or thrift store.  IRS Publication 561 Determining the Value of Donated Property is a good source to use. 

Be sure the charity is recognized as legitimate by the IRS: Check that your donations are made to a charity or non-profit organization that the IRS considers legitimate.  Approved non-profits include those whose focus is religious, charitable, educational, literacy, preventing cruelty to children and animals, or serving military veterans.  IRS Publication 78 lists all approved organizations.  You cannot deduct the value of your time, but if you’re a volunteer, you can deduct your out-of-pocket expenses and volunteer mileage.

Charitable mileage: Charitable mileage is deductible at 14 cents per mile.  If you volunteer for a charitable or non-profit organization, your mileage is deductible to and from meetings and functions.

With gas prices headed up again, it makes even more sense to be sure you’re taking advantage of all tax deductible mileage advantages.  The miles you drive for some business, medical, charitable, moving, and educational purposes are deductible.  Good recordkeeping practices are required to document your deductible mileage, and separate it from commuting and personal mileage.  Be sure to document this mileage by keeping a log or other written record.  The IRS has released these mileage deductions for 2009:

Business mileage: 55 cents per mile. Students who are taking courses that are required by their employer, or are work-related, may also deduct this mileage at the business mileage rate.

Medical or moving mileage:  24 cents per mile. The deductible amount for mileage during a move and for medical mileage is 24 cents per mile.  Medical miles can be claimed for miles driven to and from the doctor or dentist, and to and from a pharmacy to pick up a prescription.

Charitable mileage: stays at 14 cents per mile: If you volunteer for a charitable or non-profit organization, your mileage is deductible to and from meetings and functions.

1. 'Depreciate' land

Depreciation is the deduction you take to expense and recover the cost of a business or investment asset. If that asset has a useful life of more than one year, normally the IRS requires you to write off the cost over that period. Depreciation, in theory, is the way you get to deduct your cost over the life of the asset.

The key words here are "life of the asset." Because land has an unlimited life, you don't qualify for expensing or depreciation. But that doesn't mean you can't suck some tax savings out of the land if you get creative.

Assume you have a piece of residential rental real estate. You know you can depreciate the cost of the building over 27.5 years. But how about the land? Here's what you do:

1.Set up an irrevocable trust with an independent trustee and your kids as beneficiaries.

2.Draft a deed that separates the land from the building. Gift the land only to the trust. You and your spouse each have an annual gift tax exclusion of $13,000 per child, plus a lifetime gift tax exclusion of $5 million each. That means no tax unless the value of the land is in excess of $10 million. In that case, call me -- you can afford my fees.

3.You now own a rental building on property owned by the trust. Legally, the trustee has a fiduciary obligation to offer you a choice: Either get the building off the land or pay a lease rental fee.

Assuming you have an IQ of at least two digits, you're going to pay some rent. But what are you really doing? You're now taking a deduction for the lease rental at your higher bracket while the income is taxed to your kids at their lower rates. You pocket the difference. If we're talking a rental of $1,000 a month and you're in the 28% bracket and the kids are in the 10% bracket, that's an annual family savings of $2,160. Be sure to watch out for the "kiddie" tax.

The same concept works with any land used for business or investment, such as farmland. If you don't have kids, how about parents in a lower tax bracket whom you want to help support?

That's how you "depreciate" land!

2. Make money on charitable contributions

Internal Revenue Code Section 280(A)(g) -- for those who want to look it up -- says you can rent out your house for up to 14 days in a calendar year and all the income comes to you tax-free. Go beyond the 14 days, and everything becomes taxable.

Now this is what you do:

1.Rent out your house to a qualified charity or church for a meeting once a month. Call a local hotel and get their rates for a conference room to establish a fair rental amount. Say that's $5,000 for the monthly use over the year. Since we have only 12 months, this monthly use will add up to less than 14 days out of the year, so all the rental income is tax-free.

2.In appreciation for all the good works the charity or church does, you make a deductible contribution of $6,000. You're in the 25% bracket, so that saves you $1,500 in federal taxes.

What's the result? The charity spent $5,000 and got $6,000. It's up $1,000. You contributed $6,000 and got $5,000 in tax-free cash, plus another $1,500 in tax savings. You're up $500.

Isn't tax magic wonderful?

3. Expense it all, or depreciate 100%

If you're in business, this one's for you. There's a special exception to the general depreciation rules that allows you to deduct the cost of certain assets in a single year rather than over the life of the asset. Legal changes made in 2010 allow as much as $500,000 to be written off in a single year, for 2010 and 2011, falling to $125,000 (indexed for inflation) in 2012. This "election to expense" phases out based on a dollar amount of investment limitation ($2 million, dropping to $200,000 in 2012). Unfortunately, you can't use it to create deductible losses. It's limited to your net income before the deduction.

For qualified property that you depreciate rather than elect to expense, there's a new additional 100% bonus depreciation deduction. Qualified property includes only new assets with useful lives of 20 years or less, including furniture, machinery and other equipment, land improvements and farm buildings, placed in service after Sept. 8, 2010, and before Jan. 1, 2012.

This deduction is not limited by any investment cap and, unlike the election to expense, can generate net operating losses. If you're self-employed or own a business, this is a new opportunity to reduce your total tax liability.

4. Take a remodeling credit

For 2009 and 2010, Congress created an amazing tax credit of 30% of the cost of qualified energy efficiency improvements such as water heaters, furnaces, insulation, roofing, exterior windows and doors, and other items, limited to $1,500. Up to $5,000 in qualified improvements could cost as little as $3,500 after tax.

Didn't take advantage of it? The December tax law change extended the credit through 2011, but at a much lower rate. The prior 30% credit falls to 10%, and the credit dollar ceiling drops from $1,500 to $500. There also will be reduced caps for specific items. No more than $150 can be claimed for water heaters and furnaces, $200 for windows and $300 for biomass fuel stoves. Here's the real hurt: Credits claimed in prior years, including 2009 and 2010, will count against the $500 limit.

Personally, I'd focus on the positive. At least now we have the credits into and through 2011. For a complete list of credits, see the IRS website.

5. Make your estate-tax credit portable

Good news: Congress finally dealt with the estate tax and created a $5 million gift and estate tax exclusion. That means you can gift or bequeath not only an unlimited amount to a spouse, but an additional $5 million to non-spouse beneficiaries. Between husband and wife, a minimum of $10 million can go to the kids.

Better news: The credit that shields these assets from taxation is now portable. That means that any credit not used by the first spouse who dies can automatically be claimed by the surviving spouse upon the second death. If there were multiple spouses, only the last one counts.

Couples no longer have to equalize their assets so that both maximize their credit. It also means that special credit-shelter trusts no longer have to be drafted into wills in order to minimize taxes. They may be appropriate for other reasons, though, such as to protect the assets for the children from a potential successor spouse.