Year End Tax Points And Recent Developments

TaxConnections Member Harold Goedde
Timing of year-end contributions:

Contributions made by check are deductible in 2015 if the check is mailed by year-end. If payment is made by bank credit card, it is deductible in 2015 if the charge is made by year-end.  It doesn’t matter when the credit card payment is made. If the donation is made with a retail store credit card, the deduction cannot be taken until the card is paid, even though it was charged in 2015.

Donations of securities and other property:

This is an excellent way to make a contribution without paying cash. Taxpayers can deduct the fair value of the securities on the date of the gift.  Donating appreciated securities is a good move because if you sold the securities and then donate the proceeds, the gain on the sale is taxable and the amount donated would be taken as an itemized deduction.  If the taxpayer does not itemize, you pay tax on the gain and have no deduction.  Securities with an unrealized loss should not be donated but rather  sold to offset capital gains and ordinary income up to $3,000. Taxpayer should contact their broker and designate the name and address of the charity and the specific securities and number of shares to be donated. The broker will notify the charity of your donation and the charity will send you a letter acknowledging the gift of securities and their value on the date of the gift. If the value of the gift is $250 ($500 for a car or airplane) or more, the charity must state on the acknowledgment that “no property or services were given in exchange for the donation”. If the property is not securities and the value exceeds $5,000 an appraisal must be obtained and attached to the return. If this statement or appraisal is not obtained and your return is audited, the IRS will disallow the deduction even though you have a receipt. The IRS’s authority to do this has been upheld by the courts. Also, for donations of property of less than $250 you must have a receipt from the charity that describes the property and the amount donated.  If the total of all property donations exceed $500, each contribution must be reported on form 8283 and attached to the return.

Substantiation of cash contributions:

All contributions must be evidenced by a cancelled check, bank record, receipt from the charity, electronic funds transfer, or credit card statement, that shows the name of the charity, amount, and the date the contribution was made. If the contribution is $250 or more (for each donation), you must obtain a written acknowledgment (e-mail is OK) from the charity and the charity must designate on the receipt that “no property or services were given in exchange for the donation”. The acknowledgment must be received by the date you file your tax return or no later than April 15 or October 15 if you file an extension.

Property or services received for a contribution:

Many times a charity may hold a fund raiser by a dinner or giving something in exchange for the donation.  For example, public television stations  have a fund raiser a couple times a year and air a concert by a musical group. They offer a CD of the group’s performance in exchange for a certain dollar contribution.  In such cases, you cannot deduct the full amount given; only the excess of the amount given over the fair value of the item or meal received.

Health Flexible Spending Accounts:

All amounts must be used before the end of the year but if your employer has implemented the carryover rule or $500 rule, you have until March 15 to use up the funds.  If these deadlines are not met, all amounts in the account will be forfeited.  All contributions to the plan are considered a medical expense (medical expenses are deductible only if they exceed 10% of AGI (7 ½% for taxpayers 65 and over).

Retailers and Restaurants deduction for remodeling:

The IRS recently announced these business can expense 75% of the costs as a repair. The remaining 25% must be capitalized and depreciated. This safe harbor rule applies for years beginning on or after January 1, 2014. See Rev. Proc. 2015-56 for a list of qualifying expenditures.

Tangible Property Rules:

The IRS issued an announcement stating that for tax years after 2015, a business may now deduct up to $5,000 for improvements and repairs that had to be capitalized in prior years. The $5,000 applies only if the business has audited financial statements.  If they don’t, the deduction is limited to $2,500 (before 2015 it was $500).

Legal costs of an active shareholder:

In a private ruling, the IRS allowed the owner-manager of a closely-held corporation to deduct his legal costs to defend himself after the judge in a jury trial ordered him to pay compensatory and punitive damages. The Service stated that the lawsuit and damages arose from his business as the managing shareholder, so the amounts qualify as a valid business expense.

Health Law Mandate for Employers:

Starting in January 2016, companies with at least 50 full-time-equivalent employees must offer affordable health care coverage to full time (at least 30 hours per week) employees  and their dependents or pay a fine. In 2015, it applied to firms employing 100 people. A dependent is defined as a child under age 26, but not spouses, stepchildren and foster children. Also, starting in 2017, unless Congress changes the law, firms will have to pay a penalty on the value of health care benefits (including flexible health savings plans) that exceed the amount allowed by Obama Care.

Decedents tax refunds.

An individual’s return was filed and a refund was received by the estate after the decedent’s death.  The Tax Court ruled that the refund must be included in the gross estate because the estate had the right to compel the IRS to hand over the refund [Est. of Badgett. TC Memo 2015-226].

ABLE Accounts:

This acronym stands for” Achieving a Better Life Experience” are administered by states that are similar to 529 plans. Contributions  up to $14,000 a year are nondeductible on the federal return but some states may allow a deduction or credit. The account can be set-up by the person holding the disabled individual’s power of attorney if the beneficiary can’t do so or the beneficiary’s parents or guardian may do so if no one has power of attorney. Earnings on the account are non taxable and withdrawals are tax free up to the amount of qualifying expenses. If more is withdrawn, a 10% penalty will be assessed on the excess. The withdrawals can be used to pay for medical care, transportation, assistive technology, housing, personal support expenses, wellness programs, financial management, legal fees, job training, education and quality of life expenses for disabled persons. The IRS indicates that a smart phone is a qualifying expense for a child with autism where it helps the child navigate ad communicate more safely and effectively.  If the withdrawals are used for non-qualifying expenses they are taxable and subject to a 10% penalty.

These accounts can be set-up for people who are blind or disabled before age 26.   At the time the account is set-up, evidence must be presented to the state that the beneficiary became blind or disabled before age 26 and is entitled to social security disability benefits. If this can’t be done, the plan administrator must submit a disability certification, signed under penalties of perjury, and accompanied by a physician’s diagnosis (see new IRS ruling below). Annual recertification of disability must also be made. A beneficiary can have only one account and when the account is established, the plan administrator or beneficiary  must check a box under penalties of perjury that this is the beneficiary’s only account. If a beneficiary moves to another state, the account may remain with the state in which the account was established even though the beneficiary is no longer a resident of that state. However, a rollover to an account to another state is allowed but must be done within 60 days but is not considered as another account. A roll over is not taxable unless it is made within 12 months of a prior ABLE account rollover. The account administrator must report to the beneficiary and the IRS on form 5498-QA the following: contributions during the year (including rollovers), the fair market value of the account, and a code showing the type of disability. Distributions must be reported on form 5498-Q which shows the gross distribution, earnings, total contributions (basis) and whether a program-to-program rollover was made [J.K. Lasser’s Your Income Tax 2016].

The IRS has recently announced that ABLE programs do not have to establish safeguards to categorize distributions between those used to pay for qualified expenses and pay-outs for other things.  Under these rules, this will now be at the discretion of the beneficiary who is the owner of the account. Also, the physician’s statement does not have to be given to the state.  Beneficiaries can now certify that they have the doctor’s diagnosis. [The Kiplinger Tax Letter -December 2015].

(Some information was reported by The Kiplinger Tax Letter – December 2015)

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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