Wednesday, August 1, 2018

Tax Benefits of Putting Junior Family Members on the Payroll

As a business owner, you should be aware that you can save family income and payroll taxes by putting junior family members on the payroll. You may be able to turn high-taxed income into tax-free or low-taxed income, achieve social security tax savings (depending on how your business is organized), and even make retirement plan contributions for your child.

In addition, employing a child age 18 (or if a full-time student, age 19-23) may be a way to save taxes on the child's unearned income, as explained below.

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child's salary must be reasonable.

For example, suppose a business owner operating as a sole proprietor is in the 37% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $11,100 during the year (and has no other earnings).

The business owner saves $4,107 (37% of $11,100) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction for 2018 to completely shelter her earnings. The business owner could save an additional $2,035 in taxes if he could keep his daughter on the payroll longer and pay her an additional $5,500. She could shelter the additional income from tax by making a tax-deductible contribution to her own IRA.

Family taxes are cut even if the child's earnings exceed his or her standard deduction and IRA deduction. That's because the unsheltered earnings will be taxed to the child beginning at a rate of 10%, instead of being taxed at the parent's higher rate.

Keep in mind that bracket-shifting works even for a child who is subject to the kiddie tax, which causes the child's investment income in excess of $2,100 for 2018 to be taxed at the trust rates. The kiddie tax has no impact on the child's wages and other earned income.

The kiddie tax doesn't apply to a child who is age 18 or a full-time student age 19 through 23, if the child's earned income for the year exceeds one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19-23 could also help to avoid the kiddie tax on his or her unearned income.

For children under age 18, there's no earned income escape hatch from the kiddie tax. But in all cases, earned income can be sheltered by the child's standard and other deductions, as noted above, and earnings in excess of allowable deductions will be taxed at the child's low rates.

Your business probably will have to withhold federal income taxes on your child's wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year, and expects to have none for this year. However, exemption from withholding can't be claimed if (1) the employee's income exceeds $1,050 for 2018 and (2) the employee can be claimed as a dependent on someone else's return. Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.

If your business isn't incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That's because services performed by a child under the age of 18 while employed by a parent isn't considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.

Note that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do, anyway.

Your business also may be able to provide your child with retirement benefits, depending on the type of plan it has and how it defines qualifying employees. For example, if it has a simplified employee pension (SEP), a contribution can be made for the child up to 25% of his or her earnings but the contribution can't exceed $55,000 for 2018. The child's participation in the SEP won't prevent the child from making tax-deductible IRA contributions as long as adjusted gross income (computed in a special way) is below the level ($63,000 in 2018) at which deductions for IRA contributions begin to be disallowed.

If you have any questions about how these rules apply to your particular situation, please don't hesitate to contact us.

Wednesday, July 18, 2018

Dependent Care – Tax Credit and Flexible Spending Account

If you pay for care for a dependent and have earned income, you should consider the benefits of the dependent care credit and dependent care flexible spending account.

For an expense to qualify for the dependent care credit, it must be an "employment-related" expense, i.e., it must enable you and your spouse to work, and it must be for the care an eligible dependent, who's under 13, lives in your home for over half the year, and doesn't provide over half of his or her own support for the year. It could also be for the care of your spouse or dependent who's handicapped and lives with you for over half the year.

The typical expenses that qualify for the credit are payments to a day-care center, nanny, or nursery school. Sleep-away camp doesn't qualify. The cost of first grade or above doesn't qualify. The rules on kindergartens aren't clearly defined.

To claim the credit, you and your spouse must file a joint return. You must provide the care-giver's name, address, and social security number (or tax ID number if it's a day-care center or nursery school).

You also must include on the return the social security number of the children who receive the care. Omission of the social security numbers while still claiming the credit will result in a summary assessment of tax liability against you.

Several limits apply. First, qualifying expenses are limited to the income you or your spouse earns from work, using the amount for whoever of the two earns less. If one of you has no earned income, you won't be entitled to any credit. However, under certain conditions, when one spouse has no actual earned income and is a full-time student or disabled, that spouse is considered to have monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children).

Next, qualifying expenses can't exceed $3,000 per year if you have one qualifying child, or $6,000 per year for two or more. In most cases, this dollar limit will set the ceiling for you. Note that if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the dollar limits ($3,000 or $6,000) are reduced by the excludable amounts you receive.

Finally, the credit will be computed as a percentage of your qualifying expenses-in most cases, 20%. (If your joint adjusted gross income is $43,000 or less, the percentage will be higher, but not above 35%.)

Example: Lyle and Ellen both work, and place their son in a day-care center. Lyle earns $114,000 but Ellen earns only $6,000. They spend $8,500 on day care. The earned income limitation discussed above limits the qualifying expenses to $6,000, Ellen's earned income. The dollar limitation limits them further to $3,000. Twenty percent of this amount is $600 and that's their dependent care credit. (If the expenses were for two or more children, their credit would be $1,200, 20% of the $6,000 dollar limit.)

Note that a credit reduces your tax bill dollar for dollar. Thus, in the above example, Lyle and Ellen pay $600 less in taxes by virtue of the credit.

If your employer offers a dependent care flexible spending account (FSA), you may wish to consider participating in the FSA instead of taking the dependent care credit. Under a dependent care FSA, you may contribute up to $5,000 on a pre-tax basis. The money is withheld by your employer from your paycheck and placed with a plan administrator in a non-interest bearing account. As you incur dependent care costs, you submit a statement with the plan administrator substantiating the cost, and receive reimbursement.

If your marginal tax rate is more than 15%, participating in the FSA is more advantageous than taking the dependent care credit. This is because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with AGI over $43,000 is limited to 20%.

In addition to a federal income tax savings, participating in a dependent care FSA will result in savings on FICA (social security) taxes, because the amount contributed to the FSA isn't included in wages for FICA purposes. Consequently, you may save up to 7.65% of the amount contributed to the dependent care FSA, depending upon your income and the FICA tax wage base for the year in which the contribution is made.

If your marginal rate is 15% or less, taking the credit may be more advantageous than participating in the FSA. In making the choice, you must consider the effect of the earned income credit, the refundable child tax credit, and Social Security tax.

It should also be noted that residents of some states can save on their state income tax by taking advantage of the dependent care credit or an employer's dependent care FSA.

There are three drawbacks to dependent care FSAs. First, money is deposited in an FSA on a "use it or lose it" basis. If you don't incur dependent care expenses that equal or exceed the amount you deposit in the FSA, you forfeit the surplus. In addition, once you elect to participate in an FSA, and elect the amount withheld, with limited exceptions, you may not change your election. Finally, it often takes several weeks to receive reimbursement for the expenses submitted.

We hope the above clarifies the essential elements of the dependent care credit and dependent care FSAs. If your employer offers a dependent care FSA, we would be more than happy to prepare a comparison of the savings the FSA would afford you with the tax savings afforded by the dependent care credit.

If you have any questions or would like to discuss the subject further, please contact us.

Monday, June 25, 2018

Household Employees

Are you aware of the federal tax obligations for household employees? This tax is also commonly referred to as the “nanny tax.” It applies to nannies, housekeepers, maids, babysitters, gardeners, or other household employees who aren't independent contractors. The tax doesn't apply to a household employee who's also a farm worker.

If you employ someone as a household employee, you aren't required to withhold federal income taxes from the employee's pay. You have to withhold only if your household employee asks you to and you agree to withhold. (In that case, have the household employee fill out a Form W-4 and give it to you, so you can withhold the correct amount.) However, you may be required to withhold social security and Medicare tax (FICA). And may also be required to pay (but not withhold) federal unemployment (FUTA) tax.

FICA: You have to withhold and pay FICA taxes if your household employee earns cash wages of $2,100 (annual threshold) or more (excluding the value of food and lodging) during calendar year 2018. If you reach the threshold, the entire wages (not just the excess) will be subject to FICA.

However, if your household employee is under age 18 and child care isn't the household employee's principal occupation, you don't have to withhold FICA taxes. So, if your household employee is really a student who is a part-time baby-sitter, there's no FICA tax liability for services the household employee provides. On the other hand, if your household employee is under age 18 and the job is the household employee's principal occupation, you must withhold and pay FICA taxes.

You should withhold from the start if you expect to meet the annual threshold; your household employee won't appreciate a large, unexpected withholding from pay later on. If you aren't sure whether the annual threshold will be met, you can still withhold from the start. If it turns out the annual threshold isn't reached, just repay the withheld amount. If you make an error by not withholding enough, withhold additional taxes from later payments.

Both an employer and a household employee have an obligation to pay FICA taxes. As an employer, you're responsible for withholding your household employee's share of FICA. In addition, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% for the employer and 6.2% for the household employee, for a total rate of 12.4%. The Medicare tax is 1.45% each for both the employer and the household employee, for a total rate of 2.9%.

Example: In 2018, you pay your household employee $300 a week, and no income tax withholding is required. You must withhold a total of $22.95, consisting of $18.60 for your household employee's share of social security tax ($300 × 6.2%) and $4.35 ($300 × 1.45%) for your household employee's share of Medicare tax. You would pay the household employee a net of $277.05 ($300 − $22.95). For your (employer's) portion, you must also pay $22.95 ($300 × 7.65%), for total taxes of $45.90.

If you prefer, you may pay your household employee's share of social security and Medicare taxes from your own funds, instead of withholding it from pay. Using the figures from the above example, for each $300 of wages, you would pay your household employee the full $300 and also pay all of the total $45.90 in taxes.

If you do pay your household employee's share of these taxes, your payments aren't counted as additional cash wages for social security and Medicare tax purposes. In other words, you don't have to compute social security and Medicare tax on the payments. However, your payments of the household employee's taxes are treated as additional income to the household employee for federal income tax purposes, so you would have to include them as wages on the Form W-2 that you must provide, as explained below.

FUTA: You also have an obligation to pay FUTA tax if you pay a total of $1,000 or more in cash wages (excluding the value of food and lodging) to your household employee in any calendar quarter of the current year or last year. The FUTA tax applies to the first $7,000 of wages paid. The maximum FUTA tax rate is 6.0%, but credits reduce this rate to 0.6% in most cases. FUTA tax is paid only by the employer, not by the employee, so don't withhold FUTA from the household employee's wages.

Reporting and paying: You must satisfy your "household employee tax" obligations by increasing your quarterly estimated tax payments or increasing your withholding from your wages, rather than making an annual lump-sum payment.

As an employer of a household employee, you don't have to file any of the normal employment tax returns, even if you're required to withhold or pay tax (unless you own your own business, see below). Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H.

On your income tax return, you must include your employer identification number (EIN) when you report the employment taxes for your household employee. The EIN isn't the same number as your social security number. If you already have an EIN from a previous household employee, you may use that number. If you need an EIN, you must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you must include the taxes for your household employee on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes for your household employee.

You're also required to provide your household employee with a Form W-2. If the household employee's 2018 wages are subject to FICA or income tax withholding, the W-2 is due by Jan. 31, 2019. Additionally, you must file a Form W-2 for 2018 with the Social Security Administration by Jan. 31, 2019. Your EIN must be included on the Form W-2.

Recordkeeping: Be sure to keep careful employment records for each household employee. Keep the tax records for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name, address, social security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your household employee; dates and amounts of any deposits of FICA, FUTA or income taxes; and copies of all forms filed.

We realize this is a lot of information to absorb. We’d be happy to go over any questions you still have about how to comply with these employment tax requirements. If you think you might have any problems for earlier years, we can also help.  Please contact us for additional information or to get answers to questions you have.

Thursday, May 10, 2018

Life Insurance Trusts

Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax.

The solution to this problem is to create an irrevocable life insurance trust (sometimes referred to as an "ILIT") that will own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own "excesses," against their creditors, and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here's how the irrevocable life insurance trust works.

You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the trust is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion, so you won't have to pay gift tax on the contributions.

The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee's discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.

If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you and your loved ones. Please contact us if you would like to discuss this further.

Wednesday, April 18, 2018

The Gift Tax Annual Exclusion

Taxpayers can transfer substantial amounts free of gift taxes to their children or other donees each year through the proper use of this annual exclusion, which is $15,000 for 2018.

The exclusion covers gifts an individual makes to each donee each year. Thus, a taxpayer with three children can transfer a total of $45,000 to his or her children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below). (Note, this discussion is not relevant to gifts made by a donor to his or her spouse because these gifts are gift tax-free under separate marital deduction rules.)

Gift-splitting by married taxpayers: If the donor of the gift is married, gifts to donees made during a year can be treated as split between the spouses, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $30,000 a year can be transferred to each donee by a married couple because their two annual exclusions are available. Thus, for example, a married couple with three married children can transfer a total of $180,000 each year to their children and the children's spouses ($30,000 for each of six donees).

Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) the spouses file. IRS prefers that both spouses indicate their consent on each return filed. (Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts.)

The "present interest" requirement: For a gift to qualify for the annual exclusion, it must be a gift of a "present interest." That is, the donee's enjoyment of the gift can't be postponed into the future. For example, if you put cash into a trust and provide that donee A is to receive the income from it while A is alive and donee B is to receive the principal at A's death, B's interest is a "future interest." Special valuation tables are consulted to determine the value of the separate interests you set up for each donee. The gift of the income interest qualifies for the annual exclusion because enjoyment of it is not deferred, so the first $15,000 of its total value will not be taxed. However, the gift of the other interest (called a "remainder" interest) is a taxable gift in its entirety.

Exception to present interest rule: If the donee of a gift is a minor and the terms of the trust provide that the income and property may be spent by or for the minor before he or she reaches age 21, and that any amount left is to go to the minor at age 21, then the annual exclusion is available (that is, the present interest rule will not apply). These arrangements allow parents to set assets aside for future distribution to their children while taking advantage of the annual exclusion in the year the trust is set up.

"Unified" credit for taxable gifts: Even gifts that are not covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,180,000 (for 2018). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Please contact us if you wish to discuss this area further or have questions about related topics.

Saturday, March 10, 2018

Overview of Various Types of IRAs Available

At one time, there was relatively little confusion about IRAs because there was only one type available. Now, however, IRAs have proliferated-there's the "traditional" IRA, which may be funded with deductible and/or nondeductible contributions, Roth IRA, SEP-IRA, and SIMPLE IRA. Some of these IRAs have similar features, but others have features that are unique.

What do all these IRAs have in common? They can help you and your family save significant amounts for retirement on a tax-favored basis. Here's an overview of the different types of IRAs available today.

Traditional IRAs.
Traditional IRAs can be funded with deductible and nondeductible contributions.

Deductible IRA contributions. You can make an annual deductible contribution to an IRA if:

        (1) you (and your spouse) are not an active participant in an employer-sponsored retirement plan, or

        (2) you (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn't exceed certain levels that vary from year to year by filing status.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax-deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty if you withdraw money before age 59 1/2 , unless one of several exceptions apply). You must begin making minimum withdrawals by April 1 of the year following the year you attain age 70 1/2 .

Nondeductible IRA contributions. You can make an annual nondeductible IRA contribution without regard to your coverage by an employer plan and without regard to your AGI. The earnings in a nondeductible IRA are tax-deferred within the IRA, but are taxed on distribution (and subject to a 10% penalty if you withdraw money before age 59 1/2 , unless one of several exceptions apply).

You must begin making minimum withdrawals by April 1 of the year following the year you attain age 70 1/2 . Nondeductible contributions aren't taxed when they are withdrawn. If you've made deductible and nondeductible IRA contributions, a portion of each IRA distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).

If you can't make a deductible contribution to a traditional IRA, you should contribute (if eligible) to a Roth IRA instead of making a nondeductible contribution to a traditional IRA. That's because the Roth IRA offers a better package of tax benefits than you'd get by making a nondeductible contribution to a traditional IRA.

Deductible and nondeductible IRA limits. The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $5,500 for 2018 ($6,500 if you are age 50 or over in 2018). Additionally, your IRA contribution for a year (deductible or not) can't exceed the amount of your compensation includible in income for that year. Deductible and nondeductible IRA contributions can't be made once you attain age 70 1/2 .

Roth IRAs.
You can make an annual contribution to a Roth IRA if your AGI doesn't exceed certain levels that vary by filing status. Annual contributions to Roth IRAs can be made up to the amount that would be allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP IRA or SIMPLE IRA (see below). For example, if you don't contribute to a traditional IRA in 2018, you can contribute up to $5,500 to a Roth IRA for that year ($6,500 if you are age 50 or older in 2018).

Roth IRA contributions aren't deductible. However, earnings are tax-deferred within the Roth IRA and (unlike a traditional IRA) are tax-free if certain conditions are met when paid out. And if a Roth IRA payout doesn't meet these conditions, you're treated as first withdrawing nontaxable Roth IRA contributions; the balance (representing earnings) is taxed and is subject to a 10% penalty for pre-age-59 1/2 withdrawals, unless one of several exceptions apply. Thus, for example, if you contribute $6,000 over the years to Roth IRAs and withdraw $9,000 at age 55 to buy a boat, only $3,000 is taxed (and is subject to the 10% penalty).

You can make Roth IRA contributions even after you attain age 70 1/2 (if you have sufficient compensation income), and you do not have to take minimum distributions from a Roth IRA after you attain that age. That makes Roth IRAs an excellent wealth-building vehicle for your family.

You can "roll over" (or convert) a traditional IRA to a Roth IRA regardless of the amount of your AGI. The amount taken out of the traditional IRA and rolled over to the Roth IRA is treated for tax purposes as a regular withdrawal (but it's not subject to the 10% early withdrawal penalty).

SEP IRAs and SIMPLE IRAs
Small businesses that want to provide employees with a retirement plan, but keep administrative costs low, may be able to set up a SEP (simplified employee pension) or SIMPLE (savings incentive match plan for employees) plan. In either type of plan, contributions are made to IRA-type accounts in the employees' names. Annual contributions to these plans are controlled by special rules and aren't tied to the normal IRA contribution limits. Distributions from a SEP IRA or SIMPLE IRA are subject to tax rules similar to those that apply to deductible IRAs.

Income tax credit for contributions to IRAs
If your adjusted gross income doesn't exceed specified levels, you may be entitled to a credit (saver's credit) against your income tax equal to a percentage of your contribution to any of the above IRAs. If you are entitled to the credit, you get it in addition to any deduction you may be entitled to for the same contribution.

Please contact us for more information on how you and your family may be able to benefit from IRAs in all their various forms.

Tuesday, February 13, 2018

Substantiating Charitable Contributions by Individuals

If you make charitable contributions and deduct them on your tax return, there are requirements to substantiate such charitable contributions. If the contribution is $250 or more, you'll need a written receipt from the charity. If you donate property valued at more than $500, additional requirements apply. Here are the details.

General rules. For each check that is written for less than $250, a copy of your cancelled check will be considered adequate substantiation of your contribution.  For a contribution of cash or other monetary gift, regardless of amount, you must obtain a written communication from the donee organization showing its name, plus the date and amount of the contribution. Any other type of written record, such as a log of contributions, is insufficient.

For a contribution of property other than money, you generally must maintain a receipt from the donee organization that shows the organization's name, the date and location of the contribution, and a detailed description (but not the value) of the property. If circumstances make obtaining a receipt impracticable, you must maintain a reliable written record of the contribution. The information required in such a record depends on factors such as the type and value of property contributed.

If the contribution is worth $250 or more, stricter substantiation requirements apply. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the donee organization. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won't be able to claim the deduction. If you make separate contributions of less than $250, you won't be subject to the written receipt requirement, even if your contributions to the same charity total $250 or more in a year.

The receipt must set forth the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether the donee provided any goods or services in return for the contribution, and if so, must give a good-faith estimate of the value of the goods or services.

If you received only "intangible religious benefits," such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn't reduce the charitable deduction available.

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction isn't allowed.

For donated property with a value of more than $5,000, you're generally required to obtain a qualified appraisal and to attach an appraisal summary to the tax return. However, a qualified appraisal isn't required for publicly traded securities for which market quotations are readily available.

For gifts of art valued at $20,000 or more, you must attach a complete copy of the signed appraisal (rather than an appraisal summary) to your return. IRS may also request that you provide a photograph.

If an item of art has been appraised at $50,000 or more, you can ask IRS to issue a "Statement of Value" which can be used to substantiate the value.

Recordkeeping for contributions for which you receive goods or services. If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70.

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash contribution made through payroll deductions. You can substantiate a contribution that you make by withholding from your wages with a pay stub, Form W-2, or other document from your employer that shows the amount withheld for payment to a charity. You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn't provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold.

Substantiating out-of-pocket costs. Although you can't deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses.

As discussed above, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn't know how much those expenses were. However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Please contact us if you have any questions about these rules that you would like to discuss to help ensure you get all of the deductions to which you are entitled.