December 1999

In This Issue

ABCs of Charitable Contributions
Y2K and Your Money: Some Prudent Precautions
Taxes: Last-Minute Reminders
Tax Calendar

Wishing our clients and friends a joyful holiday season.

 ABCs of Charitable Contributions

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.  

Basics

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.

  • Homeowners' associations.

  • Individuals.

  • 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 groups.

  • Tuition.

  • 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 charitable contribution.

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 church.

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 price.

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 organization

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.

Out-of-pocket expenses

If you have expenses related to giving services to a charity, you may be able to deduct some of them. The expenses must be un-reimbursed, 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 un-reimbursed 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.

Donating property

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 appreciation).

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.

 Record keeping

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. 


Y2K and Your Money: Some Prudent Precautions

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 occur.

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 will occur.

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 1800934FDIC (for banks and savings institutions) or the National Credit Union Administration at 7035186330 (for credit unions).


Taxes: Last-Minute Reminders

Withholding taxes

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.

Retirement plans

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.


Tax Calendar 

December 10

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. 

December 15

Employers. For Social Security, Medicare, withheld income tax, and non-payroll 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 year. 

(At the time we went to press, the IRS had not yet released the Tax Calendar for 2000.) 


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."

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