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- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Tax season is upon us once again, which means it’s time to start working on compiling all those annual tax documents for clients, such as 1099-Rs, 1099-DIVs, 1099-INTs and others. As you and your clients begin preparing for the 2012 tax filing season, I recommend discussing what I believe is a strategy that is vitally important for all taxpayers to know, as it just might save your clients some money should a tax audit ever come their way.
It’s important to note that any charitable contribution of cash for $250 or more to a qualified organization requires specific documentation for the deductibility to be legal. These points of discussion come directly from the IRS tax code publication 526.
1) Cash contributions less than $250 require one of the following to be legally deductible:
a) Bank record showing the name of the qualified organization, date and amount including:
i. Canceled check
ii. Bank or credit union statement
iii. Credit card statement
b) A receipt from the qualified organization
c) Payroll deduction record including:
i. A pay stub
ii. Form W-2
iii. Other employer documentation
iv. Pledge card from the qualified organization
2) A contribution of $250 or more requires an acknowledgement of your contribution from the qualified organization for the deduction to be legal. A copy of the bank statement including all mentioned listings in Point #1 does not fulfill the documentation rules when claiming a deduction for contributions of $250 or more.
Furthermore, each acknowledgement received has to meet the following content test:
a) It must be written
b) It must include the amount, date, and a statement that no goods or services were received as a result of the gift
c) The acknowledgment must be received before the earlier of the date you file your return or the due date, assuming an extension was filed.
3) However, note that each contribution is considered a separate contribution for determining the $250 or more recording requirements, regardless of how much was given in total to one organization throughout the year.
I know many taxpayers today follow the premise that a contribution by check is all the documentation needed to legally deduct the amount gifted. However, while that is somewhat true for all gifts under $250, it will not hold up in court for gifts of more than that.
Hopefully, this one point of emphasis on supporting documentation for charitable contributions might help in discussing taxes this season with your clients. Charitable gifts should be documented by qualified organizations, acknowledging the required language of the date, amount and a statement that no goods or services were received. Otherwise, if audited, your clients will pay higher taxes and possibly accrued interest, as the deduction will be disallowed.
Of course, one way to avoid this possible documentation shortfall altogether is by writing charitable gift checks for no more than $249.99, even if one has to write five, six or even 10 separate checks to get the total desired contribution completed. By handling contributions in this manner, your clients will meet their required documentation for legal deductibility with a canceled check, whether they receive acknowledgement or not.