General Documentation Guidelines for Deductible Charitable Contributions

As the year comes to a close, many people consider making charitable contributions to their favorite organizations by year end.  The following chart outlines in general the required documentation.  Without timely documentation, the tax deduction is lost.  IRS form instructions should be consulted for special rules.

Required Documentation for Charitable Deductions
	Amount	Required Records
Cash	Single cash contribution of less than $250.	Cancelled check, bank record, credit card statement or written acknowledgment from the charity.
	Single cash contribution of $250 or more.	A tax qualified receipt that contains the following elements: ·        Amount of the contribution, ·        Name of the donor, ·        States that either:  i) no goods or services were provided by the charity in consideration for the contribution, or ii) provides a description and good faith estimate of the value of any goods or services provided by the charity, ·        If only “intangible religious benefits,” were received, then the receipt must explicitly state this, and ·        The donor must receive the receipt no later than the due date of the original federal tax return (including any extensions obtained).
	Payroll Deduction	Pledge card, W-2, Paystub etc.
Non-Cash	Non-cash contributions of less than $250.	Written acknowledgment from the charity or other record showing the details of the donation.  Complete Form 8283 Section A Part 1, if the total of such donations exceeds $500 but is $5,000 or less.
	Non-cash contribution of $250 or more.	Tax qualified receipt from the charity.  Complete Form 8283 Section A Part 1, if the total of such donations exceeds $500 but is $5,000 or less.
	Non-cash contribution of publicly traded securities.	Tax qualified receipt from the charity.  Complete Form 8283 Section A Part I even if over $5,000.
	Non-cash contribution of non-publicly traded securities and other property over $5,000.	Tax qualified receipt from the charity.  Complete Form 8283 Section B and obtain a qualified appraisal.

If you are considering donating a vehicle to a charitable organization, consult IRS Publication 4303 which provides specific guidelines on vehicle donations.

The amount of any deductible contribution must be reduced by the fair market value (FMV) of any goods or services received.  If the FMV of the goods received exceeds the amount of the contribution, none of the contribution is deductible.  Many organizations host charitable events which include auctions.  At many auctions the FMV is listed on the bid sheets.  Occasionally individuals will bid on an item simply because they wish to donate to the organization but do not have any intention of ever using the item.  In such a case, the individual should simply donate cash instead of bidding on an item, in order to deduct the full amount of the donation.

For individuals who volunteer for charitable organizations, the cost of the individual’s time and and value of his or her services are not deductible.  However, a volunteer may deduct mileage (at 14 cents per mile) and any unreimbursed out-of-pocket expenses directly connected with services provided.  Documentation of the time, place, date, amount and nature of the expenses is required.

If you are unsure whether or not an organization is eligible to receive tax-deductible charitable contributions, verify the organization’s status by using the IRS’ Exempt Organizations Select Check tool.

Selected 2015 Inflation-Indexed Figures

Many contribution and deduction amounts in the tax law are indexed for inflation.  Many also have statutory adjustments.  While there remains substantial uncertainty about whether the “lame duck” Congress will enact any new tax laws before the end of 2014, some important 2015 inflation-adjusted figures have been released and are as follows:

1.     The top 39.6% ordinary income and 20% long-term capital gain tax rates apply when taxable income exceeds $464,850 for joint filers (up from $457,600 in 2014) and $413,200 for single filers (up from $406,750 in 2014).  For trusts and estates, the top rates apply when taxable income exceeds $12,300 (up from $12,150 in 2014).

2.     Itemized deductions and personal exemptions begin to “phase-out” once adjusted gross income exceeds $309,900 for joint filers (up from $305,050 in 2014) and $258,250 for single filers (up from $254,200 in 2014).  These phase-outs do not apply to trusts and estates.

3.     The personal exemption is $4,000 (up from $3,950 in 2014).

4.     The contribution amount for traditional and Roth IRAs remains $5,500 (the same as in 2014).  For those who are age 50 and older, the additional “catch-up” contribution is $1,000 and is not indexed for inflation.

5.     The modified adjusted gross income phase-out range for contributions to Roth IRAs is from $183,000 to $193,000 for joint filers (up from between $181,000 and $191,000 in 2014); and from $116,000 to $131,000 for single filers (up from $114,000 and $129,000 in 2014).

6.     The contribution amount for traditional and Roth 401(k) accounts is $18,000 (up from $17,500 in 2014).  For those who are age 50 and older, the additional “catch-up” contribution is $6,000 (up from $5,500 in 2014).

7.     The limit on the annual additions to a participant's defined contribution account is $53,000 (up from $52,000 in 2014).

8.     The annual exclusion from gift tax remains $14,000 per donee (the same as in 2014).

9.     The lifetime exemption from estate, gift, and generation-skipping transfer taxes increases to $5,430,000 (up from $5,340,000 in 2014).

10.  The Social Security tax wage base is $118,500 (up from $117,000 in 2014).

11.  The maximum annual contribution to a health savings account is $3,350 (up from $3,300 in 2014) for an individual-coverage-only health plan, and $6,650 (up from $6,550 in 2014) for a family-coverage health plan.  For employees age 55 and older, the additional HSA "catch-up" contribution is $1,000 and is not indexed for inflation.

Update
The business mileage rate increases to 57.5 cents per mile in 2015 (up from 56.0 cents in 2014).  The depreciation component in the business mileage rate is 24 cents per mile in 2015 (up from 22 cents in 2014.  However, the medical care and the moving mileage rates decrease to 23.0 cents per mile in 2015 (down from 23.5 cents in 2014).  The charitable mileage rate remains 14.0 cents per mile as it is not indexed for inflation.

Checklist of Various Tax Matters to Consider Before Year-End 2014

As the end of 2014 approaches, there are many tax matters to consider, including the following (non-exhaustive) list:

1.     Small estates should consider whether to elect portability of the deceased spouse’s unused exemption amount by the December 31, 2014 special extended deadline.  See my January 28, 2014 post here.

2.     Project your 2014 and 2015 income tax rates to see whether it is beneficial to accelerate deductions into 2014 and defer income to 2015, or to do just the opposite.

3.     Determine whether prepaying state income taxes by December 31^st is beneficial.  If the alternative minimum tax applies, prepaying is generally not beneficial.

4.     Be careful of buying mutual funds before their December ex-dividend dates to avoid inadvertently increasing your taxable income simply from your purchase!

5.     Be sure to receive the required minimum distribution (RMD) from an inherited IRA (traditional or Roth) or an inherited qualified retirement plan by December 31^st to avoid a 50% penalty!

6.     If you are over age 70 ½ in 2014, you must also receive the RMD from your traditional IRA or qualified plan by December 31^st to avoid the 50% penalty.

a.      If you make contributions to public charities, consider waiting until further into December to see if Congress and the President will extend the charitable IRA rollover provision that can count as part of your RMD and save you taxes.  See my January 12, 2013 post here for a discussion of this technique.  If you aren’t sure whether the provision will be extended and the end of the year is approaching, make the charitable IRA rollover anyway in case the provision is retroactively extended.

b.     If you turned age 70 ½ in 2014, then your RMDs must begin.  For the first year that you are subject to the RMD, you can choose whether to receive the RMD by December 31, 2014 or by April 1, 2015.  If you choose April 1, 2015, then two RMDs will occur in 2015 as the 2015 RMD must be received by December 31, 2015.  The choice depends upon your income tax rates and the impact upon adjusted gross income (AGI) based deductions and taxes between the two years.

7.     For those employing a program of making annual exclusion gifts of $14,000 each year as part of their estate planning, be sure the checks are cashed early enough in December so that the funds are removed from your bank account by December 31^st, or else use cashier checks.

 8.    Businesses should be sure that their written capitalization policy for 2015 is in place by December 31, 2014.

2015 Health Insurance Marketplace (Exchange) Open Enrollment

On November 15, 2014, the 2015 open enrollment period begins for the Federal Health Insurance Marketplace or Exchange.  This is the second year of the Exchange that infamously had many problems a year ago.  More than seven million people are estimated to have obtained coverage in the first year and that number is expected to grow to 13 million in the coming year.  Utah residents use the Federal Exchange as the state did not build its own, although Utah does have its own small business exchange (SHOP) known as Avenue H.

Open enrollment for 2015 insurance coverage ends February 15, 2015.  This three-month period is only half as long as the 2014 open enrollment period.  You must enroll by December 15, 2014 to have coverage effective January 1, 2015.  If you enroll during December 16-31, coverage won’t begin until February 1, 2015 and you will have a gap in coverage!  So it is important not to delay if you purchase health insurance on the Exchange.  On December 31, 2014, coverage ends for 2014 plans, but you will automatically be re-enrolled in that plan on December 15, 2014 if you take no action.

During the open enrollment period you may change to a different insurance plan or keep your existing plan.  You shouldn’t just blindly accept re-enrollment in your existing plan as premiums and features will have changed from 2014.  So you should shop the Exchange to be sure that you have the most appropriate plan for your circumstances.   Be sure that your doctors and medications will be covered if you change plans.  During the open enrollment period you also apply for premium support subsidies based upon your estimate of your 2015 household income.

Undo a 2013 Roth IRA Conversion by October 15th

In some instances it makes tax and financial sense to convert a traditional IRA to a Roth IRA.  A traditional IRA generally permits tax deductible contributions (but not for certain higher income taxpayers who actively participate in an employer retirement plan), and distributions are taxable income.  A Roth IRA does not permit deductions for contributions, but future qualifying distributions are excluded from taxable income.  In 2014, the ability to contribute to a Roth IRA is restricted once adjusted gross income exceeds $181,000 for joint filers and $114,000 for single filers.  However, there is no income restriction on the ability to “convert” a traditional IRA to a Roth IRA.  A conversion is best handled by means of a direct trustee-to-trustee transfer of funds from the traditional IRA to a Roth IRA.

The amount converted to a Roth IRA is treated as a taxable distribution.  If you converted to a Roth IRA in 2013, and the value of the Roth IRA account has dropped such that the taxable amount on the conversion exceeds the current value of the account, you should consider “recharacterizing” the Roth conversion by October 15, 2014.  To recharacterize means to unwind the conversion so that the balance in the Roth conversion account is transferred back to a traditional IRA by means of a direct trustee-to-trustee transfer.  Recharacterizing eliminates the taxable income from the conversion.  For example, if you originally converted $100,000 to a Roth IRA, but the investments have declined to $70,000; you would pay tax on $30,000 too much income and should consider recharacterizing to avoid paying unnecessary taxes.

You are eligible to make a recharacterization by October 15, 2014 if either:  1) you filed your 2013 income tax return on time by the April 15, 2014 due date, or 2) you timely filed an extension to file your 2013 tax return.  A tax return extension isn’t a requirement for purposes of the October 15^th Roth recharacterization deadline as long as you filed your 2013 tax return by April 15^th.  An amended tax return is necessary if you have already filed your tax return.

Once the amount has been recharacterized back to the traditional IRA, you may “reconvert” once more to a Roth IRA.  However, the reconversion cannot be done before the later of:  1) 30 days from the date of recharacterization or 2) the beginning of the tax year following the year of the initial conversion.  For example, if you originally converted your traditional IRA to a Roth IRA on December 15, 2013, and you recharacterized the conversion on October 15, 2014, then you may not reconvert until November 14, 2014.  On the other hand, if you converted on January 8, 2014 and recharacterized on November 17, 2014, you may not reconvert until January 1, 2015.  Reconversion gives you an opportunity to convert the IRA funds to a Roth IRA at a lower tax cost, assuming that the account value doesn’t increase during the waiting period and assuming no change in the effective income tax rate from the tax year of the original conversion.

IRS Eases Rules for Converting Non-Roth, After-Tax Qualified Plan Savings to a Roth IRA

IRS Notice 2014-54 opens up new Roth IRA planning opportunities for taxpayers who have made after-tax contributions to their employer’s retirement plan.  This issue does not involve 401(k) deferrals, either pre-tax or designated Roth 401(k) contributions, but rather additional after-tax savings that some qualified plans permit.  Taxpayers having after-tax savings in qualified plans have long sought a means of directly rolling over (“trustee to trustee”) the taxable portion of a qualified plan distribution to a traditional IRA and the nontaxable portion (or “basis”) to a Roth IRA.  Previously the IRS announced in Notice 2009-68 that it was not possible to isolate the basis as a separate distribution amount, but that each rollover consisted of a proportionate amount of basis.  Thus, if a taxpayer had $100,000 in his or her 401(k) account to be directly rolled over, and $30,000 of that amount consisted of after-tax (non-Roth) savings, it was not possible to direct only the $30,000 basis tax-free to a Roth IRA.  Instead, $21,000 of the $30,000 rolled over to the Roth IRA would be taxable ($30,000 X $70,000/$100,000).  Taxpayers devised means around this restriction, but it was uncertain whether the strategies would be respected by the IRS, and the strategies were complicated.  The IRS has now responded to taxpayer feedback and has issued this favorable notice.  The notice requires that the taxpayer inform the qualified plan administrator of how to allocate the basis to the rollover IRAs.  The plan administrator is then required to prepare the Form 1099-R’s accordingly.  The new notice is effective beginning in 2015, but it indicates that it is reasonable to rely upon it for distributions made on or after September 18, 2014.  Under Notice 2014-54, the taxpayer in our example would not have any taxable income upon directing the $100,000 rollover distribution as $30,000 of basis to a Roth IRA and as $70,000 of pre-tax amounts to a traditional IRA.

The notice opens up a new tax planning opportunity for individuals who already contribute the maximum permitted to their 401(k).  If the employer retirement plan permits after-tax voluntary employee contributions, then the individual may save additional money in the plan up to the maximum contribution limit of $52,000 for 2014, after taking into account the 401(k) deferrals, employer matching, and other contributions and forfeitures.  Note that so-called “catch-up” contributions (limited to $5,500 in 2014) for those age 50 or older do not count towards the contribution limit.  These additional after-tax contributions are then positioned for a Roth IRA rollover when the employee leaves employment.  This planning opportunity can be viewed as a “back-door” means of contributing to a Roth IRA in the future, and the amounts saved may go well beyond the normal Roth IRA contribution limits.  If your employer 401(k) plan does not permit voluntary employee after-tax contributions, the plan must first be amended.  Depending upon your position in the company and upon the type of qualified plan, there could be non-discrimination testing restrictions on how much can be saved.

Notice 2014-54 does not deal with isolating basis of non-deductible IRA contributions.  Making a Roth IRA conversion of a traditional IRA having tax basis will still be taxable according to the proportionate basis allocation rule.  Therefore, saving after-tax money in a 401(k) plan is a better choice than saving money as a non-deductible IRA contribution when looking forward to a future Roth IRA conversion.

S Corporation Shareholder Loans and Tax Basis

For income tax purposes, the definition of the word “basis” generally means the amount of after-tax investment in an asset.  Basis is a dollar amount that is used in various ways in the tax law, including the following examples:

1.     Basis is subtracted from the selling price of an asset to determine gain or loss.

2.     Basis is the amount that can be depreciated or amortized.

3.     Basis is the tax-free portion of retirement account or annuity distributions.

4.     Basis is the limitation on the amount of tax losses that can be deducted by a partner of a partnership, a member of a limited liability company, or a shareholder of a Subchapter S corporation.  These entities are called “pass-through” entities, meaning that the owner’s allocable share of the entity’s taxable income or loss (as shown on Schedule K-1) is reported on the owner’s income tax return.

Basis generally starts out as the after-tax cost of an asset or investment.  Then adjustments are made to basis depending upon the tax rules that apply.  For example, depreciation deductions reduce the original basis so that a double tax benefit isn’t received when the asset is sold:  once for the depreciation deduction and again in calculating gain or loss if basis isn’t reduced for the depreciation deduction.  When the asset is sold, “adjusted basis” is used in calculating the gain or loss.

For an S corporation shareholder, the original basis in the shares acquired is adjusted upward for allocated income and is adjusted downward for allocated losses and deductions and for distributions.  In addition, a special rule permits a shareholder to increase basis for the amount of loans made by the shareholder to the S corporation.  Unlike for a partnership or an LLC, third-party debt incurred by the S corporation does not increase basis for the shareholder.  Only bona fide shareholder loans to the S corporation create basis.  Loan basis permits the deduction of losses in excess of the shareholder’s basis in the S corporation’s stock.  Loan basis has been a source of controversy between the IRS and taxpayers over the years.  The IRS recently released final regulations governing shareholder loan basis.

The regulations permit loan basis only for bona fide, direct shareholder loans to the S corporation.  Personal guarantees of loans to the corporation made by third parties do not create basis, except when and only to the extent the shareholder actually makes payments under the guarantee.  Taxpayers run into trouble establishing basis when attempting to get around the third party debt limitation on basis if they engage in “circular loans” with a related party or if they do not properly structure “back-to-back” loans with an unrelated third party.  Generally a back-to-back loan will create basis if an independent third party loans money to the shareholder and the shareholder loans that amount to the S corporation in exchange for a promissory note secured with corporate assets.  This promissory note plus collateral of the shareholder is assigned to the third-party lender as security on the loan to the shareholder.  It is critical that the shareholder be directly liable on the third-party loan and not the corporation in order for the back-to-back loan structure to create basis.