Archive for the ‘household’ Tag

Back to Basics Part XXIV – Form 8283 – Noncash Charitable Contributions

Originally published in the Cedar Street Times

October 2, 2015

The donation of noncash charitable items such as clothing, furniture, toys, books, etc. to thrift shops run by organizations such as Goodwill Industries or The Salvation Army are nearly ubiquitous with people who itemize deductions.  We all have stuff we no longer use or enjoy, and in lieu of the effort involved with a garage sale we find it extremely convenient to drop it off or have it picked up, and hopefully get a tax benefit from it as well.  Note that as of a few years ago, the IRS requires that the items be in “good” condition or better to get a deduction – so no more deducting your junk!

Noncash donations do not just include household items, but could also include the house itself – real estate!  Other examples would be donations of stocks, bonds, vehicles, as well as intangible items such as copyrights or patents.  Essentially anything you give to a qualified charitable organization other than money would be a noncash charitable donation.  If your aggregate noncash charitable donations for the year are below $500, you can deduct them directly on Schedule A.  If they aggregate more than $500, you have to use Form 8283 to report them.

Depending on the type and amount of donation, you may need a qualified appraisal by a licensed appraiser, and you may or may not need to attach it to the tax return.  There are also many very specific details about appraisal requirements to review should you be donating a high value item.  (My experience has been that licensed appraisers sometime do not even know what the IRS technically requires for certain appraisals.)

For household items, the threshold to require an appraisal is $5,000.  Unless you are trendy and have expensive tastes you probably will not have this problem.  But people sometimes cleaning out an entire house for a move or after someone passes away could run into this issue.  The rub is that it is a cumulative limit through the whole year.  So theoretically if you gave away things in the early part of the year, and then do a major clean-out at the end of the year, putting you over the threshold, the IRS would expect you to have an appraisal covering the items you already gave away – good luck!

Knowing this rule, you might plan to split large donations between two tax years instead of giving the items away all at once.

The standard for donation value is generally fair market value at the time of the gift, although there are exceptions to this, especially when you give away things that are worth more than what you paid for them or you are donating depreciable assets.   If you give away property, that if sold, would have resulted in ordinary income, such as donating inventory you bought at wholesale or donating self-created works of art, or if you give away a capital asset held for a year or less that would have resulted in a short-term gain, you have to back out the amount that would have been taxable if you had sold it.  Essentially you are limited to deducting your adjusted cost basis in the property.

For instance, an artist, cannot paint a painting, donate it, and then take a deduction for the price he or she would have listed it for in a gallery.  The deduction is essentially limited to the cost of the canvas and oils, since anything in excess of that would have been ordinary income.  Another way to think about this, is that charitable deductions are typically available for donations of after-tax dollars or things purchased with after-tax dollars.  The government is essentially rebating you for tax you already paid when you donate to a charity.  So if you haven’t ever paid tax on the money, as in the case with the artist, there is no tax to rebate, so no deduction available.

Sometimes you can have your cake and eat it too.  If you give away property that would have resulted in a long-term capital gain, you can generally deduct the fair market value in full (such as a piece of jewelry that has appreciated, or appreciated stock held more than a year), but you are subject to a 30 percent limit of your adjusted gross income instead of the normal limitation of 50 percent.  Most working-class people are not giving away 30 percent of their adjusted gross incomes every year, so that is a non-issue for most.

However, later in life, people will sometimes give away substantial assets.  Since excess charitable contributions can only carry forward for five years, this limit becomes a bigger problem.  The IRS allows you to make an election to choose the 50 percent limit instead of the 30 percent limit, but if you do, you give up the ability to deduct it at its fair market value, and are instead limited to the adjusted cost basis.  But this can still be useful given the right circumstances.  For instance, recently inherited assets that are given away will often have a cost basis similar to the fair market value, so it could be an easy decision to make the election in such a case.

The donation of vehicles was tightened up substantially a few years back after the IRS noticed a huge gap between the aggregate amount of deductions taxpayers were claiming for vehicle donations versus what charities were reporting as received.  Now your deduction is limited to the amount the charity actually sells the car for, and you must report specific information from a Form 1098-C which must accompany the tax return.  Pretty much the only time you can use a Blue Book price is when the charity uses the vehicle internally, instead of selling it, and you get a certification of this fact.

The Form 8283 is a two page form.  Part I of the first page handles most small donations.  Part II handles  donations when you have attached strings to the donation, such as conditions that must be followed for the donation to be considered complete.  Page two handles larger donations which typically require an appraisal. Parts I and II handle the details of the item(s). Part III is a signature block for the appraiser, and Part IV is a signature block for the donee organization.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Unmarried with Children – Head of Household

Originally published in the Cedar Street Times

March 8, 2013

Article on Unmarried People Living Together with Children

I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate.  With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!

When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married.  Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.

Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children.  This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.

For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.

A qualifying child is someone who must generally be under 19 (24 if full-time student).  The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child.  The child cannot provide over half of his or her own support, and the child cannot file a joint return.

Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption.  (If they cannot decide, tie-breaker rules exist.)  Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household.  You cannot split up the benefits between parents.

If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent.  Or maybe one or both have children from prior partners that live with them and could qualify them as well.  (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B.  This also qualifies B for head of household.)

Let us assume both unmarried people living together each have a qualifying child.  Can they both claim head of household?  If their households are maintained in separate dwellings, the answer is almost always yes.  But what if they live under the same roof?  Can you maintain separate households in the same house?

The answer to this depends on whether they are acting as a family unit or not.  IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts  and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single.   But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household.  If you share a biological child as well, it will be nearly impossible for you to make this argument.  But never say never!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.