By Chelsea Minogue and Robert Loe | Published: September 23, 2010 – 4:22 pm

For Cash Donations

No cash donation should be deducted without a receipt, and donations of $250 or more require an acknowledgement letter from the recipient organization. 

Some cash donations result in the donor receiving something in return, such as purchasing an item at a charity auction or buying tickets to a benefit dinner.  In such cases, the deduction is the donation amount less the fair market value (FMV) of the item received.  The organization hosting such an event will usually provide you with an itemized list of your bids and the FMV of the items you received.

For Noncash Donations

When total noncash donations exceed $500, a Form 8283 must be attached to the tax return.  This form lists details about property donated, how and when it was acquired, the method used to assign value, and other details.  For items with a FMV exceeding $5,000, an appraisal must be included with the Form 8283.  Household and clothing items with a FMV exceeding $500 require an appraisal.  

Many taxpayers have a tendency to overestimate the value of noncash donations.  It is important to remember, for household goods and clothing especially, that once used, an item loses much of its value.  The IRS offers some guidance on how to assign a FMV to noncash donations in Publication 561, which can be found at: http://www.irs.gov/publications/p561/ar02.html#d0e545

Limitations on Deductions

A deduction for charitable contributions may only be taken if the taxpayer elects to itemize their deductions, that is, fill out a Schedule A.  Additionally, donations must be made within the tax year to be deductible.  If a donation is pledged in December 2010 but paid in January 2011, it is deductible in 2011.

Charitable contributions that exceed 50% of a taxpayer’s adjusted gross income (AGI) for the year are not deductible.  For contributions to private foundations and certain other types of organizations, the deduction is limited to 30% of the taxpayer’s AGI.  However, amounts that are not deductible in one year may be carried over to future years.

Only contributions made to qualifying organizations are tax deductible.  Contributions made to political and other types of organizations may not be deducted.  The IRS maintains an exhaustive list of approved organizations, which may be searched at: http://www.irs.gov/app/pub-78/

Filed under: Tax Deductions

By Chelsea Minogue and Robert Loe | Published: September 21, 2010 – 8:48 am

One of the most common tax deductions taken, especially by self employed individuals, is the deduction for business miles driven.  This deduction is calculated one of two ways:

(1)  Standard Mileage Rate: This method is based on the number of business miles multiplied by the IRS standard rate per mile, which changes each year.  The 2010 rate is 50 cents per mile.

(2)  Actual Expenses: This method is based on the full cost of operating the vehicle multiplied by the business use percentage (i.e. business miles divided by total miles driven for the year).

The IRS tends to be skeptical of these deductions, largely because they know that most taxpayers do not have sufficient records or proof for them.  There are two simple steps to take to help get the maximum deduction you are entitled to, as well as ensure that your documentation would stand up to the IRS’ rigorous standards in the event of an audit.

1)  Keep Track of All Auto Related Expenses for the Year

In most cases, taxpayers can elect to deduct a percentage of actual auto expenses if this yields a larger deduction.  These expenses include depreciation, lease payments, registration fees, gas, insurance, repairs, oil, garage rent, tires, tolls, and parking fees.  Keeping receipts for these items will keep the ‘actual expense’ option open and potentially increase the allowable deduction.

2)  Create and Maintain a Log of Business Miles Driven

Keeping a log of all miles driven for business is required whether the actual expense method or standard mileage rate method of calculating your deduction is used.  The IRS does not care about your non-business miles, and will disallow your deduction if your business miles figure is arrived at by subtracting non-business miles from total miles, or by the use of any estimation method.  The log should include the date, number of miles driven, and purpose of each trip.  It is also important to record the total (business and non-business) number of miles driven during the year, in order to calculate the business use percentage. 

It is important to have documentation of business mileage if your return is selected for audit, because the IRS takes a dim view of deductions not clearly supported by facts.  By following these two easy steps you can maximize your auto expense deduction, and rest easy knowing that it is fully supported.

For more details, refer to IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

http://www.irs.gov/publications/p463/index.html

Filed under: Tax Deductions