Business & Tax Planning Ideas for Our Clients and Friends
Wishing our clients and friends a joyful holiday season.
If you itemize your deductions, you generally can deduct your contributions of money
or property that you make to, or for the use of, a qualified charitable organization.
Whether your donation is large or small, but particularly if you get something in return
for your donation from the charity, you need to be aware of certain rules.
Contributions that qualify for the deduction. Contributions that qualify for the
deduction include donations to the following types of organizations:
Churches, synagogues, temples, mosques, and other religious organizations.
Contributions made to federal, state, and local governments, if the contribution is
solely for public purposes, such as to reduce the public debt.
Nonprofit schools and hospitals.
Public parks and recreational facilities.
Groups such as the Salvation Army, Red Cross, CARE, Goodwill Industries, United Way,
Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, etc.
War veterans' groups.
Not deductible as a charitable contribution. Donations that are not deductible as
charitable contributions include those made to the following:
Civic leagues, social and sports clubs, labor unions, and chambers of commerce.
Foreign organizations (except certain Canadian and Mexican charities).
Groups that are run for personal profit.
Political groups or candidates for public office.
Cost of raffle, bingo, or lottery tickets.
Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar
Value of your time or services.
Value of blood given to a blood bank.
Limitation. Your deduction for charitable contributions is generally limited to 50% of
your adjusted gross income, but in some cases, 20% or 30% limits may apply.
Types of contributions
Contributions from which you benefit. If you receive a benefit as a result of making a
contribution to a qualified organization, you can deduct only the amount of your
contribution that is more than the value of the benefit you receive. If you pay more
than fair market value to a qualified organization for merchandise, goods, or services,
the amount you pay that is more than the value of the item is considered a charitable
contribution. For the excess amount to qualify, you must pay it with the intent to make a
Example A: You pay $65 for a ticket to a dinner-dance at a church. All of the proceeds
of the function go to the church. The ticket to the dinner-dance has a fair market value
of $25. When you buy your ticket you know that its value is less than your payment. To
figure the amount of your charitable contribution, you subtract the value of the benefit
you received ($25) from your total payment. You can deduct $40 as a contribution to the
Example B: At a fund-raising auction conducted by a charity, you pay $600 for a week's
stay at a beach house. The amount you pay is no more than the fair rental value. You have
not made a deductible charitable contribution.
Athletic events. If you make a payment to, or for the benefit of, a college or
university and, as a result, you receive the right to buy tickets to an athletic event in
the athletic stadium of the institution, you can deduct 80% of the payment as a charitable
contribution. If any part of your payment is for tickets (rather than the right to buy
tickets), that part is not deductible. In that case, subtract the price of the tickets
from your payment. Of the remaining amount, 80% is a deductible contribution.
Charity benefit events. If you pay more than fair market value for the right to attend
a charity ball, banquet, show, sporting event, or other benefit event, you can deduct only
the amount that is more than the value of the privileges or other benefits you receive.
Whether or not you use the tickets or other privileges has no effect on the amount you
can deduct. However, if you return the ticket to the qualified organization for resale,
you can deduct the entire amount you paid for the ticket. Even if the ticket or other
evidence of payment indicates that the payment is a "contribution," this does
not mean you can deduct the entire amount. If the ticket shows the price of admission and
the amount of the contribution, you can deduct the contribution amount less the admission
Example: You pay $50 to see a special showing of a movie as a charitable event. The
ticket states, "Contribution $50." If the regular price to see the movie is $8,
your contribution is $42.
Token items. Often, charitable organizations send or present to donors a small item or
something with a token value for making a contribution. Generally, you can deduct the full
amount of the contribution without taking into account the value of the small item if the
organization: 1) correctly determines that the value of the item or benefit you received
is not substantial, and 2) informs you that you can deduct your payment in full.
Written statements from the
Generally, the organization must give you a written statement if you make a payment to
it that is more than $75 and is partly a contribution and partly for goods or services
received. The statement must tell you that you can deduct only the amount of your payment
that is more than the value of the goods or services you received. It must also give you a
good faith estimate of the value of those goods or services. There are a few exceptions to
this rule, such as if the goods you receive are token items.
If you have expenses related to giving services to a charity, you may be able to
deduct some of them. The expenses must be unreimbursed, directly connected with the
services, not personal, living or family expenses, and must have been incurred only
because of the services you gave. These might include car expenses such as gas and
mileage, or uniforms that are not suitable for everyday use. Travel expenses may also be
deductible. For example, if you are chosen to be a representative at a convention of the
organization, you can deduct actual unreimbursed expenses for travel and transportation,
including reasonable amounts for meals and lodging. However, there must be no significant
element of recreation or vacation in the travel.
If you contribute property to a qualified organization, the amount of your charitable
contribution is generally the fair market value of the property at the time of the
contribution. However, if the property has increased in value, you may have to make some
adjustments to the amount of your deduction.
Fair market value. Fair market value (FMV) is the price at which property would change
hands between a willing buyer and seller. For example, if you donate used clothing or
household goods, the FMV is usually far less than the original cost. The value of such
donated items is the price that buyers of used items actually pay at used clothing stores
or thrift shops.
Property that has decreased in value. If you donate property that has an FMV that is
less than your basis in it, your deduction is limited to the FMV. You can't claim a
deduction for the difference between the property’s basis and its FMV. (Generally, your
basis is what you paid for the property.)
Property that has increased in value. If you contribute property with an FMV that is
more than your basis in it, you may have to reduce the FMV by the amount of appreciation
when you figure your deduction. Different rules apply to figuring your deduction depending
on whether the property is ordinary income property, or capital gain property.
Ordinary income property is property that if sold would have resulted in ordinary
income or in short-term capital gain, such as capital assets held one year or less. The
deduction amount is the FMV of the property less the amount that would be ordinary income
or short-term capital gain if you sold the property for its FMV.
Example: You donate stock you purchased for $800 and held for five months to your
church. The FMV on the day you donate it is $1,000. The $200 appreciation would be
short-term capital gain if you sold the stock, so your deduction is limited to $800 (FMV
Long-term capital gain property. Capital assets include most property items that you
own and use for personal purposes or investment, such as stocks, bonds, jewelry, and coin
or stamp collections. The general rule is that when calculating your deduction for a gift
of long-term capital gain property (held for more than one year), you usually can use the
FMV of the gift. So in the above example, if you had held the stock for two years, your
deduction would be $1,000.
There are exceptions to this rule, however. In certain situations you must reduce the
FMV by any amount that would have been long-term capital gain if you had sold the property
for its FMV. For example, if the contributed property is tangible personal property that
is put to a use by the charity that is unrelated to its exempt purpose.
Rules regarding what records you keep depend on whether your contribution is less than
$250, or $250 or more.
Contributions of less than $250. If you make a contribution of less than $250, you
must keep one of the following: 1) a canceled check or a legible and readable account
statement that shows if the payment was made by check, electronic transfer, or credit
card; 2) a receipt or other written communication from the charity showing the name of the
charity, the date of the contribution, and amount of contribution; 3) Other reliable
written records that were made at or near the time of the contribution, or tokens that are
regularly given to persons making small cash contributions.
Contributions of $250 or more. You can claim a deduction for such a contribution only
if you have a contemporaneous, written acknowledgement of your contribution from the
organization or certain payroll deduction records. The acknowledgement must also state the
amount contributed, whether the organization gave you any goods or services as a result of
the contribution, and a description and good faith estimate of the value of any goods or
services given in return.
In previous months, we've talked about preparing for Y2K and have suggested some
precautions to take, such as having enough cash on hand. Some experts have said a month's
worth, while others suggest a few days' worth. Such conflicting information has left many
people confused and unsure what to do. The Federal Reserve suggests that you have enough
cash as you would normally for a long weekend. The Federal Reserve, along with federal and
state regulators, has been closely monitoring the progress of institutions it supervises
to make sure Y2K issues are being addressed.
According to the Federal Reserve, all federally insured financial institutions have
been working hard to make sure their computer systems will operate smoothly in 2000, and
no major problems are expected to occur. But even the Federal Reserve admits that despite
the best efforts of the industry and the regulators, no one can guarantee that everything
will work perfectly. That's why financial institution customers may want to consider
taking a few precautions in anticipation of the date change. Here are some steps the
Federal Reserve suggests you may want to take just in case some minor Y2K glitches do
Educate yourself about Y2K. Don't worry about what you think might happen. Instead,
find out what your financial institution is doing to address Y2K and consumer concerns. If
you have questions, speak with a representative who knows about the institution's Y2K
program. Chances are your institution has been working hard to ensure that no problems
Make prudent preparations. Remember that cash is not your only payment option. Checks,
credit cards, debit cards, ATMs, and tellers will be available in case one payment method
does not work as planned. The Federal Reserve has plans to ensure that there will be
sufficient cash available for consumers. If you do decide to withdraw money, make
reasonable decisions based on solid information. Again, if you are going to withdraw
money, consider withdrawing just enough cash as you would for a long weekend. Don't put
yourself at risk of being robbed or losing valuable interest payments by withdrawing large
sums of money.
The same prudent rule can apply to other aspects of your life that may be affected by
Y2K. Take a few reasonable steps to prepare for possible minor glitches or delays whether
at your office or your home, but don't panic. Chances are, even if a problem does occur,
it will be minor.
Be on guard against Y2K scams. Be skeptical if someone asks for your account
information or tries to sell you a product, service, or investment that is supposedly Y2K
"safe." Protect your personal information, including your bank account, credit
card, and Social Security numbers.
Pay attention to your finances. As always, balance your checkbook regularly. When you
receive a transaction receipt from an institution, check it for accuracy and save it to
compare against your statement. It’s also smart to review your credit report to make sure
it doesn't contain inaccurate information.
Keep copies of financial records. You should always keep good records of your
financial transactions, but especially for the last few months of 1999 and until you get
several statements in 2000.
Review your deposit insurance coverage. The federal government's protection of insured
deposits will not be affected by Y2K. You will still be insured. If you
have more than $100,000 in an insured bank, thrift, or credit union, you may want to
make sure you understand the insurance rules. Check with your financial institution, or
call the Federal Deposit Insurance Corporation at 1–800–934–FDIC (for banks and savings
institutions) or the National Credit Union Administration at 703–518–6330 (for credit
Back to Menu
Make sure you have paid the proper amount of estimated taxes throughout the year,
either through withholding or estimated tax payments. Before the year ends, figure out
your likely tax bill, using last year's tax return as a guide. By estimating your taxes
before December 31, you can also determine whether your tax payments are on target and
take actions necessary to avoid an underpayment penalty. This is particularly important
for those who may have large capital gains this year. Compare what's already been withheld
and any estimated tax payments you've made with your expected bill. If you haven't
withheld a sufficient amount, add to your employee withholding by revising your W-4 form
or make an estimated tax payment.
Claiming a child as a dependent
For new parents, make sure your child has a Taxpayer Identification Number (TIN).
Generally, an individual's Social Security number is his or her TIN. The IRS can deny a
personal exemption or the dependent care credit if a tax return is filed without a TIN for
a claimed dependent.
If you are self-employed and are thinking about a retirement plan, consider a Keogh.
Keoghs are available to individuals with any amount of self-employment income. Depending
on the type of plan you choose to open, you can contribute as much as 20% of net earnings
(to a maximum of $30,000 a year). One advantage of a Keogh is that while it must be opened
by the end of the year, you can make a deductible contribution up until the due date of
your tax return, including extensions.
Employees who work for tips. If you received $20 or more in tips during November,
report them to your employer. You can use Form 4070.
Employers. For Social Security, Medicare, withheld income tax, and nonpayroll
withholding, deposit the tax for payments in November if the monthly deposit rule applies.
Corporations. Deposit the fourth installment of estimated income tax for 1999. A
worksheet, Form 1120-W, is available to help you make an estimate of your tax for the
(At the time we went to press, the IRS had not yet released the Tax Calendar for
Editor's Note: The November issue, regarding health insurance deduction, the last
sentence should have read, "If the total of your medical expenses exceeds 7.5% of
your AGI, then all of your expenses that surpass 7.5% of your AGI are deductible."