Fundamental Charitable Giving Tax Requirements

In addition to considering the Advantages and Disadvantages of Bequests and Outright Gifts, it is important to examine some of the legal and tax requirements compelled by the Internal Revenue Service and State taxing authorities:

Organization Must Qualify to Receive Charitable Contributions – IRS Publication 526 provides assistance as to what sorts of organizations are allowed to receive charitable contributions. While this may seem obvious, it is the Donor who will actually pay the penalty if a receiving organization turns out not to qualify.

Proper Documentation Must be Filed with the IRS – Donors may only deduct a charitable contribution that exceeds $250.00 if he or she is given an Acknowledgment from the qualified organization or certain payroll deduction records. If more than one gift exceeding $250.00 is made, a Donor must obtain either separate acknowledgments for each gift that exceeds $250.00 or one verification that shows their total contributions.

Fair Market Value of the Donated Property must be Determined – For cash or publicly traded securities, this requirement is relatively easy to accomplish. Less clear, however, can be the fair market value of assets that are more difficult to evaluate (i.e. works of art, real estate, etc).

More innovative giving practices also involve tax and legal requirements.

A result of the considerable nature of these requirements, we always encourage seeking qualified legal counsel to assist you when making donations over $250.00.

For additional guidance and requirements, refer to these IRS Publications:

IRS Publication 561: Determining the Value of Donated Property

IRS Publication 526: Charitable Contributions

Essential Tax Requirements Of Charitable Giving

In addition to considering the Advantages and Disadvantages of Bequests and Outright Gifts, it is vital to examine some of the legal and tax requirements imposed by the IRS and State taxing authorities:

Organization Must Qualify to Receive Charitable Contributions – IRS Publication 526 provides direction as to what kinds of organizations are eligible to receive charitable contributions. While this may seem clear, it is the Donor who will actually pay the penalty if a receiving organization ends up not to qualify.

Proper Documentation Must be Filed with the IRS – Donors may only deduct a charitable contribution that exceeds $250.00 if he or she obtains an Acknowledgment from the qualified organization or certain payroll deduction records. If more than one gift exceeding $250.00 is made, a Donor must obtain either separate acknowledgments for each gift that exceeds $250.00 or one acknowledgment that shows their total contributions.

Fair Market Value of the Donated Property must be Assessed – For cash or publicly traded securities, this requirement is reasonably uncomplicated to carry out. Less clear, however, can be the fair market value of assets that are more difficult to evaluate (i.e. works of art, real estate, etc).

More advanced giving techniques also involve tax and legal requirements.

Because of the the serious nature of these requirements, we consistently advise seeking qualified legal counsel to assist you when making donations over $250.00.

For additional information and requirements, check with these IRS Publications:

IRS Publication 561: Determining the Value of Donated Property

IRS Publication 526: Charitable Contributions

Basic Tax Requirements Of Charitable Giving

In addition to considering the Advantages and Disadvantages of Bequests and Outright Gifts, it is very important to examine some of the legal and tax requirements exacted by the Internal Revenue Service and State taxing authorities:

Organization Must Qualify to Receive Charitable Contributions – IRS Publication 526 provides assistance as to what kinds of organizations are entitled to receive charitable contributions. While this may seem clear, it is the Donor who will actually bear the burden if a receiving organization turns out not to qualify.

Proper Documentation Must be Filed with the Internal Revenue Service – Donors may only deduct a charitable contribution that exceeds $250.00 if he or she receives an Acknowledgment from the qualified organization or certain payroll deduction records. If more than one gift exceeding $250.00 is made, a Donor must obtain either separate acknowledgments for each gift that exceeds $250.00 or one verification that shows their total contributions.

Fair Market Value of the Donated Property must be Assessed – For cash or publicly traded securities, this requirement is relatively straightforward to accomplish. Less clear, however, can be the fair market value of assets that are more difficult to evaluate (i.e. works of art, real estate, etc).

More advanced giving approaches also involve tax and legal requirements.

A result of the important nature of these requirements, we regularly strongly recommend seeking qualified legal counsel to assist you when making donations over $250.00.

For additional information and requirements, check with these IRS Publications:

IRS Publication 561: Determining the Value of Donated Property

IRS Publication 526: Charitable Contributions

Caring for an Elderly or Incapacitated Individual

Tax Attorneys at Ainer & Fraker, LLP Discuss the Tax Issues Relating to Caring for an Elderly or Incapacitated Individual

With individuals living longer, we frequently find ourselves in the position of caregiver for elderly or incapacitated individuals. Whether you’re caring for an incapacitated or elderly spouse, an elderly parent, or even a child, understanding potential tax advantages can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual.

Dependency Exemption

You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption deduction. To qualify:

  • You must provide more than 50% of the individual’s support costs,
  • The individual must either live with you or be related,
  • The individual must not have gross income in excess of the exemption amount ($3,900 for 2013),
  • The individual must not file a joint return for the year (unless neither spouse would have a tax liability if separate returns were filed and the joint return is filed only to claim a refund), and
  • The individual must be a U.S. citizen or a resident of the U.S., Canada, or Mexico.
  • If the support test can only be met by a group (several children, for example, combining to support a parent), a “multiple support agreement” form can be filed to grant one of the group members the exemption, subject to certain conditions.

Medical Expenses for Dependents or Medical Dependents

If the cared-for individual qualifies as your dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction.

Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is medical in nature, as opposed to custodial or other care. If a person is not in the nursing home principally to receive medical care, only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. However, if the individual is chronically ill(3), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible.

  • A medical dependent is an individual who doesn’t qualify as your dependent only because of the gross income or joint return test; you can still include these medical costs with your own.
  • A chronically ill individual is one certified by a physician or other licensed healthcare practitioner (e.g., nurse or social worker) as unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (e.g., memory loss or disorientation). Of course, a person with Alzheimer’s disease qualifies.

Filing status – If you aren’t married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household, (b) you pay more than half of the household costs, (c) the individual qualifies as your dependent, and (d) the individual is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he or she does not need to live with you as long as you provide more than half of your parent’s household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half of the cost, you are considered as maintaining the principal home for your parent.

Household Employee Issues

If you hire individuals to help you care for an elderly or incapacitated individual in your home, you must treat them as employees, issue them a W-2 form, and withhold and remit certain payroll taxes to the IRS and your state. If you use a service company that sends its employees to provide care services, the service company will handle the payroll issue for these employees, relieving you of that responsibility. If you plan to hire help, please call this office to discuss your options in more detail.

Dependent care credit – If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of him or herself, you may qualify for the dependent care credit for costs you incur for this individual’s care to enable you and your spouse to go to work. However, the same expense cannot be used as both a medical expense deduction and for the dependent care credit.

If you experience financial difficulties in funding the care, the tax code provides some specialized relief as described below. Generally, these forms of relief should be considered only when no other reasonable alternatives exist.

Reverse mortgage as alternative to nursing home – It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don’t forget that household help is deductible in the same manner as nursing home expenses. In addition, household employees must be paid by payroll.

Exclusion for payments under life insurance contracts – Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.

The tax benefits and regulations related to caring for someone are complicated. If you are a caregiver and would like to discuss your situation and options further, please Contact a Tax Attorney at Ainer & Fraker, LLP.

Tax Issues Relating to Renting Your Home or Vacation Home

Tax Attorneys at Ainer & Fraker, LLP Discuss the Tax Issues Relating to Renting Your Home or Vacation Home

If you own a home in a vacation locale – whether it is your primary residence or a vacation home – and are considering renting it out to others, there are complicated tax rules referred to as the “vacation home rental rules” that you need to be aware of.

Generally, the tax code breaks a “vacation rental” into three categories, each with a different treatment for income and expenses:

  • Rented Fewer than 15 Days – If you rent your home for fewer than 15 days during the tax year, the tax code says that you do not need to report the income and that you can still deduct 100% of the property taxes and qualified mortgage interest as an itemized deduction. Yes, you heard me correctly: the government is actually allowing you to ignore the income, regardless of the amount, if you rent the home for fewer than 15 days during the year. This rule offers some opportunities for substantial tax-free income, especially for more expensive homes. Here are some examples:

o Rental as a film location – Typically, film production companies will pay substantial amounts (thousands per day) for the short-term use of homes as movie sets. Individuals with unique properties can register with a local film location company.

o Home in a vacation locale – Individuals with homes in popular tourist or vacation locales can rent their homes out to vacationers in their area while they are on vacation themselves.

o Home in the area of a special event – When a one-time or special event such as a major sports event (think the Super Bowl) or convention comes to town, hotel rooms may be scarce or even fill up. Homeowners in these locations may want to rent their homes short-term during the activity while getting out of town to avoid the crowds.

However, be careful – if the rental goes over 14 days, the income is no longer tax-free. When calculating the number of days, the definition of a day is generally “the 24-hour period” for which a day’s rental would be paid. Thus, a person using a dwelling unit from Saturday afternoon through the following Saturday morning would generally be treated as having used the unit for seven days even though the person was on the premises on eight calendar days.

Even though the income is tax-free, the property tax and interest for the period is still deductible, directly related rental expenses such as agent fees, utilities, post-rental cleaning, etc. are not deductible.

  • Rented 15 Days or More – When the home is rented 15 days or more, the income must be reported. However, the tax treatment depends upon how many days you used the home personally:

o Personal Use More Than 10% of the Rental Days – In this scenario, no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest; if, after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but not more than will offset the remaining income. If there is still a profit, you can take depreciation, but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The other personal 20% of the interest and taxes is deducted as an itemized deduction subject to mortgage interest and Alternative Minimum Tax (AMT) limitations. Take note that if the rental income becomes less than the business portion of the interest and taxes, the balance of the interest and taxes is still deductible as home mortgage interest and taxes.

o Personal Use 10% or Fewer of the Rental Days – In this scenario, the home’s use would be allocated into two separate activities, a rental and a second home. Let’s say that the home is used 5% for personal use: 5% of the interest and taxes are treated as home interest and taxes that can be deducted as an itemized deduction. The other 95% of the interest and taxes are rental expenses, combined with 95% of the insurance, utilities, and allowable depreciation and 100% of the direct rental expenses. The result is a deductible tax loss, which is combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with adjusted gross incomes (AGI) of $100,000 or less. This loss allowance is ratably phased out between $100,000 and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot be deducted; it is carried forward until the home is sold or there are gains from other activities that can be used to offset the loss.

When figuring the personal use days, include days used by an owner, co-owner, or family member of the owner/co-owner as well as days used under a reciprocal arrangement. However, you can exclude “fix-up” days, which are days spent repairing and maintaining the property.

Word of Caution – Beginning in 2013, passive rental income is subject to the new 3.8% tax on net investment income that is part of the Affordable Care Act (“Obamacare”). So if the net result from renting the home is a profit, in addition to being subject to regular tax, the profit will also be subject to the net investment income tax. The gain from the sale of your primary home (in excess of the allowable home gain exclusion) and the gain from the sale of your second home (even if you never had rental income from it) are also subject to the 3.8% tax on net investment income in addition to the capital gains tax.

A number of other rules apply to special situations not covered here. If you have questions about how the vacation rental rules will apply to your unique circumstances, please Contact a Tax Attorney at Ainer & Fraker, LLP.

Tax Tips for Newlyweds

Tax Attorneys at Ainer & Fraker, LLP Discuss Tax Tips for Newlyweds

This time year is popular for weddings. So if you are a newlywed there are some important issues that need be taken care of – after the honeymoon. Now that you are married, your tax filing status has changed, and there are a number of steps you’ll need to take, to make a smooth transition into married life, such as…

Notify the Social Security Administration – It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5 is the Application for a Social Security Card. This form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or by visiting a local SSA office. Failure to complete this simple step could lead to delays in processing your tax return for 2013 and, assuming you have a refund coming, delay the refund.

Notify the IRS if you move – It is important for the IRS to have your current address since they may send you some correspondence, and if the correspondence is not dealt with promptly, it can make it significantly more difficult to deal with the matter. Plus, the IRS will meet its legal responsibilities of notifying you by sending the correspondence to your last known address. That’s why it is so important to keep your address current with the agency. Use IRS Form 8822, the Change of Address form, to update the IRS of your address change.

Notify your employer of any change of address – If one or both of you are using a new address, it is important that your employer have the updated address information. This will help to ensure that you receive your Form W-2, the Wage and Tax Statement, after the end of the year. It also ensures that you receive important pension plan and health care notices from your employer which will affect your benefits.

Both working? If you and your spouse both work, you should check the amount of federal income tax withheld from your pay, and revise one or both of your Forms W-4, Employees Withholding Allowance Certificate, if necessary. Your combined incomes may move you into a higher tax bracket and your expected refund could be substantially reduced; or even worse, you could end up owing tax when you were expecting a refund. Adjusting your withholding now could prevent an unwanted surprise when you file your 2013 tax return next year.

Filing status has changed – Even if you were married on the last day of the year, you must either file a joint return or file as married separately for the entire year. There are many situations in taxes where the benefits afforded to joint filers are less than those of two single filers, and that could increase your tax liability. It may be appropriate, especially for higher income individuals, to project their taxes for 2013 so withholding adjustments can be made and there are not any shocks at tax time. Please call if you need assistance.

Itemized or Standard Deductions – If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. The standard deduction for a married couple filing jointly in 2013 is $12,200. So if you anticipate your deductions will exceed that amount you should begin keeping receipts for items such as medical expenses, charitable contributions, and job-related expenses.

If you need assistance in determining your projected tax liability for 2013 and your refund or tax due, please Contact a Tax Attorney at Ainer & Fraker, LLP.  Also, please call us if you need assistance preparing new W-4s for your employer(s).

Incorrectly prepared W-4s can lead to problems down the road.

Claiming the Child and Dependent Care Tax Credit

Tax Attorneys at Ainer & Fraker, LLP Discuss the Child and Dependent Care Tax Credit

The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent, or disabled spouse. Here are some facts you may need to know about this tax credit.

If you pay someone to care for one or more “qualifying individuals,” you may qualify for the Child and Dependent Care Credit. A qualifying individual includes your child under age 13. It also includes your spouse or a dependent who lived with you for more than half the year and was physically or mentally incapable of self-care.

The care must be provided so that you can work or look for work. If you are married and filing jointly, the care must be provided so that both of you can work or look for work. In addition, you must have both earned income (both must have earned income if married and filing jointly, but see the exception below), such as income from a job or profits from self-employment. An exception applies if a spouse is a student or is unable to care for him- or herself. In that case a monthly imputed amount is used for earned income. That amount is $250 for one qualifying person and $500 for two or more.

Example: Bob and Jerry, who are married and filing jointly, have two children under the age of 13. Jerry worked all year while Bob attended school all year finishing up his college education. For purposes of computing the credit, Bob would use $6,000 as his income.
The payments for care cannot go to your spouse, the parent of your qualifying person, or to someone you can claim as a dependent on your return. Payments also cannot go to your child who is under age 19, even if the child is not your dependent.

This credit is a percentage, ranging from 20% to 35%, of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals, you can claim up to $6,000 of your costs. Taxpayers with an AGI of $15,000 or less use the 35% credit rate, while those with an AGI over $43,000 use the 20% rate. The credit rate declines between AGIs of $15,000 and $43,000.

If your employer provides dependent care benefits, those benefits are pre-tax and will reduce the $3,000 and $6,000 cap on expenses for computing the credit. If you and your spouse have dependent care benefits at work and your employer contributes more than the $3,000 expense limit for one qualifying individual or $6,000 for two, then the amounts contributed in excess of the $3,000/$6,000 limits will be taxable on your return.

You must include the name, address, and Social Security number (individuals) or Employer Identification Number (businesses) of your care providers on your tax return.

Where the care is provided in your home, the caregiver will generally be considered your employee. Unless you are using a caregiver service that handles the employee’s payroll, you may need to pay unemployment tax, your share of the employee’s FICA, and file state payroll returns, depending on the amount you paid the caregiver(s). The IRS will usually check on this if auditing the credit. Of course, the payroll taxes you pay will count as childcare expenses.

The credit is a non-refundable credit that can be used to offset both your regular tax and your alternative minimum tax; but if the amount of the credit is greater than your tax, you cannot get a refund of the difference.

If you have questions related to how this credit applies to your specific situation, please Contact a Tax Attorney at Ainer & Fraker, LLP.

FLIP-CRUT Basics – Unmarketable Assets Defined

In a prior post, we discussed the FLIP-CRUT concept in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Standard Charitable Remainder Trust at a fixed percentage distribution.

We also discussed various Treasury Department definitions of Triggering Events, which are deemed not to be under the control of the Trustee or any other person.

One of the most common types of Triggering Events is the sale of Unmarketable Assets, such as the sale of a Personal Residence, other real or commercial property, securities or business holdings that are not publicly traded, and lack any formal marketplace to value and sell.

In Treasury Regulations §1.664-1(a)(7)(ii), the definition of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. For example, unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Using a FLIP-CRUT to Sell Appreciated Real Estate

Why this definition is important:

If you have a piece of real estate that is highly appreciated in value, and selling it outright would trigger substantial capital gains, a Charitable Remainder Trust is an excellent way to defer the tax on sale.

If you contribute the real property to a Charitable Remainder Trust after a binding commitment to sell exists, then the IRS will disallow the deduction based on the Step Transaction Doctrine.

However, placing real property in a Standard Charitable Remainder Trust – with its fixed annual commitment to pay the income to the Donor – may also not be feasible.

If the real property takes a longer time to sell (certainly more than a year) then a Standard Charitable Remainder Trust will not work.

This is why the Treasury Department’s inclusion of Real Property as not readily marketable is critical.  It allows you to contribute the asset immediately, take the appropriate deductions, and then convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is the preferred vehicle when selling appreciated assets that are not readily marketable, such as real estate.

Contact a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away to learn more about the incredibly powerful tax benefits of a FLIP-CRUT.

FLIP-CRUT Basics – Triggering Event Defined

In a prior post, we discussed the FLIP-CRUT concept in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Standard Charitable Remainder Trust at a fixed percentage distribution.

Obviously, the entire FLIP-CRUT concept hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT converts to the Standard CRT, with its annual payout requirement.

So let’s examine this Triggering Event concept by exploring some basics:

  1. The Triggering Event must be clearly defined in the FLIP-CRUT document  Treas. Reg. §1.664-3(a)(1)(i)(c)
  2. The Triggering Event may be a specific DATE that is defined in the FLIP-CRUT document OR it MAY be upon the specific occurrence of an EVENT, however:
  3. If the Triggering Event is defined as an Event, then the occurrence of that Event must not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person Treas. Reg. §1.664-3(a)(1)(i)(c)(1)

Examples of Triggering Events that WOULD NOT Work

  1. Upon the decision of the Donor (or Trustee) to sell the portfolio of highly appreciated publicly traded securities; 
  2. Whenever the Trustee feels like it;
  3. Upon the advice of the Donor’s financial advisor, CPA or other fiduciary

Examples of Triggering Events that WOULD Work:

  1. On the first day of June in the 3rd year after the FLIP-CRT is established;
  2. Upon the marriage, divorce, death, or birth of a child of the Donor;
  3. Upon the sale of unmarketable assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents

Further Treasury Department Guidance as to Acceptable Triggering Events

In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations give seven (7) examples of what an acceptable triggering event might look like.  These “safe harbors” should not be considered exclusive in nature.

They are:

  1. Upon the sale of the donor’s former personal residence;
  2. The sale of securities for which there is no available securities exemption permitting a public sale;
  3. When the income recipient reaches a certain age;
  4. When the donor gets married;
  5. When the donor divorces;
  6. When the income recipient’s first child is born; and
  7. When the income recipient’s father dies.

When considering setting up a FLIP-CRUT, it is critical to have the advice of qualified legal and tax counsel.

We invite you to contact a Family Philanthropy Attorney at Ainer & Fraker.

We provide tax and charitable giving services to high net worth clients throughout the Bay Area, and welcome the opportunity to speak with you about your legal needs.

 

 

Choosing a Guardian #5 – Consult Legal Counsel Immediately!

Choosing a Guardian for Your Minor Children

Step 5 – seek professional legal help immediately!

Recent studies show that up to 66% of Americans die without a valid will or trust.

However, roughly 100% of Americans mean to get around to it someday.

In choosing a Guardian, as with all Estate Planning, procrastination is by far your greatest enemy.  Everyone thinks they will live well into their children’s adulthood. However, statistics prove that this is not always true.

If 66% of parents die without completing their Will or Trust, then this means that the vast majority of Guardianship proceedings take place without any input from the deceased parents.

Without having your Guardianship decisions in a legally valid format, the Judge will appoint a Guardian for your children without considering any of your wishes or beliefs.

We realize that choosing a Guardian for your Children is one of the most difficult decisions you will have to make.  However, you do not have to make them alone.

If you would like ideas on how to nominate the best Guardian for your Children, we invite you to consult with a Guardianship Attorney at Ainer & Fraker.  We have helped hundreds of families choose the right Guardian for their children.

We know we can help your family as well.