We are always looking for ways to increase our cash flow.  My favorite is receiving non-taxable income by cutting my income tax bill, without actually having to “pay” for any extra cash expenses.  It seems our homes are filled to the brim with things that we have paid $1,000s  for or that we were given & have not used for years.  Now, I am not talking about family heirlooms or something that will have a specific future use to us.  But the Clutter, Clutter, Clutter!  How can we rid ourselves of this great American plague?

One man’s junk is another man’s treasure.  There are many folks less blessed than we and would greatly appreciate the stuff in our garages & attics.  Or perhaps we have moved, lost or gained weight or lost a beloved family member and still have some of  their personal effects that no one else in our family wants.  There are countless charities that receive gifts of personal property:  boats, cars, clothing, appliances, shoes, toys, household furnishings, you name it, even real estate.  Ginger and I have given to the Salvation Army, various churches, private schools, public schools, municipalities, neighborhood organizations, worthy Christian ministries, the Boy Scouts of America, Salvation Army, and others.  I personally prefer the Salvation Army due to their Christian ideals, rather than Goodwill.  Consult their Valuation Guide for Items Donated to the Salvation Army schedule which lists the average prices charged in their thrift stores.  A problem is, when we collect our “junk” we tend to just leave it off at the Salvation Army and do not get with a receipt, not itemize what we gave, and forget all about it at tax time.

It is amazing to me, after 24 years of experience, how many under report their charitable contributions.  I usually hear, “I don’t want to get the IRS mad at me,” like the IRS has emotions?!  There are 2 emotions inappropriate for making investment decisions:  fear and greed; same with determining fair market values.  So, what are things worth?  As usual, when taking an income tax position, there are some objective criteria to follow, and lots of subjective.  Objective criteria are:  using published (e.g. Wall Street Journal) trading ranges for common stocks donated, hiring a qualified appraiser for items valued over $5000, or donating the ownership of, for example, real estate, moments before the sale to an unrelated party, then using that sales price as the fair market value.  As president, Bill Clinton, setting an example for the rest of us by making public his tax return showing his deduction of $2 per pair of used underwear.  However, it is usually not reasonable to hire the expensive, and often over-worked qualified appraisers.  When this is the case, we must rely on the ambiguous, subjective and exciting measurement criteria offered to us by common law:  the gray area, my favorite color!

Tom’s Top Ten Tips for this type of giving:

1. Treat out of pocket charitable expenses for volunteer work, car miles, or amounts you paid for by check or credit card as cash expenses.  They are cash charitable contributions.  No guess work here, they are worth what you paid for them.
2. Know the locations of charities, so when you happen to drive by, you can easily drop off your items.  Sometimes charities like Texas Paralyzed Veterans can pick up your items from your front porch.  Always get and keep a receipt.
3. Amass less than $500 worth each time, then you do not need to keep track of the date you acquired the property, how you acquired the property, and the cost of the property.  Very important:  write down and itemize the property and number of the items given on a separate piece of paper, or on the receipt from the charity.
4. When the gift is made, write down in detail, using lots of adjectives, what the items are, and the cost(s) especially if over $500.  Instead of “radio” write down e.g. “AM/FM portable, stereo, Lafayette model 76XL, with dual 3 1/2 inch compatible speakers, condition: good.”  I frequently have one of my helpful children fill this page out; it gives them a sense of philanthropy; the IRS will not count off for misspellings.  Put this page and charitable receipt in your current year’s “Income Tax File Folder.”
5. On the day given, do not write down the value.  Psychologically, these items are worth the absolute least to you on the day you give them away.  (If they were worth a lot to you, you would likely not yet give them away.  Also you may be embarrassed that you still have them, bought them in the first place, or, how many pairs of shoes can a woman own. anyway!)  And do not value what they are worth to you, value them at what they are worth to someone else who is a “willing, knowledgeable buyer” and desires them.  Write values down much later, perhaps when you compile your data for me to prepare your return.  You would be surprised at how much some things cost in a thrift shop!  Stop in and see, sometime.  Exception:  when giving away large dollar items:  laptops, equipment, cars, etc., right before you give them away, look to see what they have sold on eBay recently.  Click the link below, then type in your item under “basic search” and click “search:”  http://search-completed.ebay.com/search/search.dll?GetResult&query=completed+items&ht=1&combine=y&SortProperty=MetaEndSort Then print out the comparable sale or “completed item,” as eBay calls it, and put this with your charitable receipt.
6. First see my article:  Discrimination Against Car Donators, concerning the new law for 2005 donations of vehicles, boats and planes to charities.  Big dollar items such as cars and boats, if valued less than $5000, currently do not need an appraisal, only the date contributed, acquired, how acquired (e.g. by purchase, gift), your cost and fair market value.  Traditionally Kelly Blue Book has been a good source of determining fair market value:  www.kellybluebook.com, but in January 2004, the Bush administration submitted more restrictions on the deductibility of vehicles to Congress.  http://www.usatoday.com/money/perfi/taxes/2004-01-16-mym_x.htm quotes:  “Conrad Teitell, a tax lawyer at the Stamford, Conn., firm of Cummings & Lockwood, says official ambiguity about the legitimacy of blue book values puts the taxpayer “in a very hard position.” Nonetheless, he says, deducting something close to blue book value for a working vehicle under the $5,000 appraisal threshold is probably defensible.”  Otherwise, for vehicles valued over $5,000, getting and attaching an appraisal to your tax return is greatly advisable, especially for 2003 returns.
7. Do not wait for that “great American spring cleaning.”  It is stressful and seldom happens.  Give frequently in small quantities.  Spring cleaning may work well in the Midwest, but the weather here in Texas allows for cleaning year round.  Have a collection box in your trunk ready.  I like those free blue recycle boxes that you can get from any Austin Fire Department station.
8. If you do have a considerable amount of items to give (e.g. spring cleaning, a death of a family member, etc.), consider separating it into groups of about $500 value each, and give them on separate days, contribute them to your partnership, and have the partnership give it.  Give some in the name of a family member in a higher tax bracket than you (you give it to them, and they give it to the charity) .
9. Gifts of appreciated property, held more than 1 year, will give you a charitable contribution at their fair market value, and you will not have to pay any capital gains tax.  Contributing publicly traded marketable securities, such as stock, is extremely easy.  Simply call your stock broker, have him or her open a separate brokerage account with the name and federal ID# of your favored charity, then simply direct your broker to make the stock transfer.  I have had many clients contribute stocks worth $1000s which they bought, inherited, received from their employer, etc. for very little, get the full deduction, and pay no capital gains tax.   If you give property (not including publicly traded securities) worth more than $5,000, you will need to get an appraisal, and have the appraiser sign Form 8283, Section B, which is filed with your tax return.  If you donate art worth $20,000 or more, you will need to attach a complete signed appraisal.  Real estate that you have trouble selling, and whose property taxes are high make good candidates for gifts.  If you are getting ready to sell appreciated real estate, you can have the title company change the deed just before closing, for an undivided interest (e.g. 10%) in the real estate  to your favored charity, then you and the charity together sell the property to the seller.  Make sure you talk to the seller first, and explain what you are doing!  Old buildings (without the land under them), especially in rural areas, like barns or old farmhouses, that may need to be torn down, make great gifts to the local fire department.  They typically will set it on fire, and practice putting it out, for training purposes.  When they are done with it, they usually have destroyed it for you.  Sometimes they will even haul it off for you as well.
10. Your charities need to be incorporated, and Section 501(c) organizations.  Certain Canadian, Mexican, and Israeli organizations also qualify as deductible if you also have taxable income from that country.  If the charity has a written statement saying that they are a IRC Section 501(c)(3) organization, or words to that effect, that should be sufficient.  Do not ask or expect your favored charity to tell you how much your donated items are worth.  Do not embarrass them with this inappropriate request.  They are a  religious, philanthropic educational organization, etc., not in the appraisal business.  Just simply ask for a written acknowledgement and description of your contribution, signed and appropriately dated.  My Southern grandmother called this a “thank you letter.”  If the item, or group of similar items, such as a silver service, collection of books, etc. is worth more than $5,000, then the charity will need to sign Part IV of your Form 8283 which you will need to attach to your Form 1040.  If they then sell this item within 2 years, the charity will be required to report this sale to the IRS on a Form 8282.  This is commonly used when someone wishes to bless a charity by giving them a part or all of a piece of real estate, just before closing as discussed in #9 above.  The title company should have the charity file the required Form 8282 at closing.  I suggest that the taxpayer also file this Form 8282 with their tax return in these circumstances.

And remember, Jesus said, “It is more blessed to give than to receive.”

For more information:   See IRS Instructions to Form 8283

(under an employee benefit program), by Michael Hengst

We would like to bring to your attention a tax saving plan that is relatively unknown.  This plan is for the sole proprietor of a small business or C Corporation.  A partnership or S Corporation cannot successfully use this plan for its owners.  The plan allows for 100% tax deductibility of health insurance premiums and uninsured medical expenses paid by the business.  The deduction can be taken as an employee benefit program deduction, on Form 1040, Schedule C, Line 14 or on Form 1120, Line 25.  Internal Revenue Code 105 & 106, along with Revenue Ruling 71-588 make this plan legal.  This is not a Medical Savings Account (MSA), which tends to be quite cumbersome, hard to manage, and easily penalized by the IRS.  The taxpayer has or sets up a small business and employs his wife or her husband.  (For a C Corporation there is no spousal employment requirement.)

The employee/spouse performs duties needed to help operate the business and receives a reasonable salary for services performed.  The salary paid to the employee/spouse is included on the couple’s federal individual income tax return.  The spouse and dependents (including the employer/spouse) can also receive non-taxable medical reimbursements for qualified medical expenses.  The reimbursement received is not included in gross income for the recipient (Code Section 105) and is fully deductible by the business.  Although legally these plans do not have to be in writing, it is our opinion that they should be.  We have a simple one page form at our office for you.  This will help insure the law is properly followed.  The plan cannot discriminate in favor of a certain employee(s) over others.

The benefits paid by the business along with the reimbursements make this a 100% tax deduction.  Benefits can include:  all uninsured medical expenses (deductibles, co-pays, uncovered expenses), Health Insurance, Disability Income, Long Term Care, Cancer Insurance, Term Life Insurance (up to $50,000 per year), Medicare Supplement, Indemnity Hospital, Indemnity Medical, and Vision/Hearing Insurance.  The uninsured medical expenses that are not covered by insurance should be for the diagnosis, cure, mitigation, treatment, or prevention of disease.

A physician should prescribe the medications.  Also deductible if not covered by the benefits is lodging while away from home while a spouse is in a licensed hospital or in a medical care facility.  The lodging is limited to $50 for each night for each individual.  A medical expense such as cosmetic surgery is not included unless the surgery is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.  If you feel that you or your business may qualify for this plan, please contact us.

NEW FOR 2003!! According to the IRS’s new Revenue Ruling 2003-102 (9/5/03):

Over-the-Counter Drugs Can Be Covered by Health Care Flexible Spending Accounts.  The Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts.  Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income.  Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee. See: http://www.irs.gov/pub/irs-drop/rr-03-102.pdf Note, that vitamins for “general good health” are not considered as non-taxable or excludable health benefits for these types of plans.

By Michael Hengst,

Michael Hengst