3 Ways to Maximize Charitable Tax Deductionsby
When I chat with clients about revised tax rules, I’m careful not to tell them more than they would ever want to know. Instead, I focus on what's important to them.
To enliven those conversations, I sprinkle them with what I call “tax tidbits.” Some discuss amusing and relevant court decisions, while others alert clients to perfectly legal, easy-to-understand strategies that trim their taxes.
The shorter ones usually take under 30 seconds to tell, and I use them for brief chats. I save the meatier ones for lengthier conversations and talks with groups like retirees, homeowners, self-employed persons and investors.
My creditors beam when I tell them that some audience members will decide that it would be prudent to seek my advice before they implement one or more of those strategies.
Intrigued? Want to try what I do when you schmooze or give talks? What follows are representative tidbits that were well received, a continuation of the four articles on the same subject that I wrote back in February of this year.
Gone with the Wind is a romantic, panoramic portrait of the Civil War and Reconstruction periods in Georgia, not taxes. But in her 1936 novel, Margaret Mitchell observed, “Death and taxes and childbirth! There's never any convenient time for any of them!”
Then there's Leo Tolstoy’s most popular work, Anna Karenina, which is the story of Anna, a fashionable, married woman who has an affair with Count Vronsky, a liaison that ends horribly when she throws herself under the wheels of a train. What if a film adaptation retains one of the most famous suicides in literary history, but shifts the locale from nineteenth-century Russia to contemporary America? A suicidal Anna might tell the Count, "Oh, Vronsky, not another April 15th. I just can't bear it. Where is the train?"
Well, nyet probleney, Annichka. The law makes it easy to get additional time to file Form 1040. It authorizes an automatic four-month extension to August 15.
It’s not just Scarlet O’Hara and Anna Karenina who are clueless about extensions. The Wall Street Journal of January 11, 1985, tells of the woman who asked the IRS for more time to file her return, saying, "My husband and my forms have been misplaced. Please send replacements." Unfortunately, the IRS says, "We could only replace the tax forms."
Here are a couple of bits of advice I give out frequently:
1. Tote Up Out-of-Pocket Costs of Doing Good: The Internal Revenue Service gives its unqualified blessing to charitable deductions of 14 cents per mile for volunteers who use their cars to perform chores on behalf of schools, religious institutions, hospitals and other charitable organizations. They’re also entitled to deduct parking fees and tolls. A special break for volunteers permits them to fully deduct away-from-home meals, unlike business meals, which are only 50 percent deductible.
Q. We’re congregants at a church that has agreed to sponsor refugees from such countries as Syria and Iraq; a group of us has been collecting food, clothing and money for their support. Is any of what we give tax deductible?
A. Because your church is sponsoring the refugees, donations are considered contributions to the church in carrying out its charitable purpose. You can take an itemized deduction on Form 1040’s Schedule A for what you give, including the fair market value of donated goods.
Q. Am I entitled to deduct magazine subscriptions if they’re donated to a church?
A. Magazine subscriptions may be deducted if they’re made to religious institutions, schools, hospitals or other qualified organizations.
2. Organize Your Receipts: Whether it’s charitable contributions or business deductions, the IRS wants to see proof of your expenses. These expenditures must be documented in order to be deducted. What’s proper documentation? Receipts, bank records, letters from a charity confirming your gift and even electronic records like emails can be sufficient. Failing to substantiate expenses is a surefire way to lose an audit with the IRS. Proper organization can save you time, money and heartburn.
3. Nail Down Bad Debt Deductions for Loans to Friends and Family: These being the troublesome times they are, friends or relatives who are strapped for funds may try to tap their lines of credit at the Bank of You. Before doling out dollars, do the paperwork necessary to establish that the transactions actually are loans. Be sure to have debtors sign agreements or notes stipulating amounts advanced and repayment provisions as well as when they must make interest payments. Charge a realistic rate of interest—say, whatever your money would earn in a savings account if it weren’t out on loan.
At Form 1040 time, you’ll be rewarded for your foresight: Loans that later become worthless are deductible under the rules for short-term capital losses. What if you just shake their hands and skip the paperwork? Expect skeptical tax collectors to throw out write-offs for “loans” that really were nondeductible gifts.
Additional articles: A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting).