Washington Hotline – August 28, 2012


IRS Tips for Charitable Taxpayers

The IRS has published a series of six tips that are designed to help charitable taxpayers. Both the Department of the Treasury and the IRS hope to enable donors to support various charities. The six recommendations will help donors to be certain that their gifts are deductible.

1. Tax Exempt Status.
A charity must be qualified under the IRS guidelines for a gift to be deductible. At www.irs.gov there is an “Exempt Organization Select Check” that allows donors to be certain the charity is qualified to receive deductible gifts.

2. Itemizing.
Your charitable gifts are deductible only if you itemize deductions on IRS Form 1040, Schedule A.

3. Fair Market Value.
Gifts of cash are deductible at face value. Gifts of appreciated stock, land and many other types of property are often deductible at fair market value. There are special rules for cars, boats, clothing and household items. If the charity gives value in return, such as goods, services, admission to a charity banquet or sporting event, that amount will reduce the value of your charitable deduction.

4. Good Records.
You need to maintain records of all donations. All cash gifts must be documented even if they are quite small. You should keep cancelled checks, bank or credit card statements, payroll deductions or a statement from the charity with its name, contribution, date and amount for your gifts.

5. Larger Gifts.
If your gift is $250 and above, you must receive a receipt or written acknowledgement from the charity. The acknowledgement should state the amount of the gift and may include a description and fair market value for property gifts. It must state whether the charity provided goods or services for your gift. Non-cash gifts over $500 require you to file IRS Form 8283, Non-Cash Charitable Contributions, with your Form 1040. If the non-cash property is over $5,000 and is not a public stock, bond or mutual fund, you usually must obtain a property appraisal from a qualified appraiser who holds himself or herself out to the public for that purpose. In some cases, the appraisal must be attached to the return with a signed Form 8283.

6. Timing.
If you make a pledge, the gift will be deductible only when it actually is made. For example, a donor may make a pledge in November and then make the gift the following March. The gift is deductible in the year it is made. End-of-year donations by check or credit card are generally deductible in the year that they are made or placed in the U.S. mail.

Editor’s Note: In nearly all cases, your charitable gifts will qualify for a substantial reduction in your taxes. For specific information, go to www.irs.gov and search for IRS Publication 526, Charitable Contributions. Valuation rules are available in IRS Publication 561, Determining the Value of Donated Property.

Switzerland Co-operates with U.S. Authorities

The Department of Justice has been negotiating with 11 Swiss Banks to obtain information on bank accounts of U.S. citizens. Some individuals from the U.S. have placed substantial funds in Swiss bank accounts in order to avoid paying income tax. The IRS, Treasury and Department of Justice have been pursuing these individuals.

The employees of several banks hired Geneva Attorney Douglas Hornung to oppose release of further information. Under Swiss law, banks are essentially prohibited from cooperating with foreign investigations unless there is an exception granted by the Swiss government. The Swiss Federal Council has granted an exception to the 11 banks to cooperate with the U.S. Department of Justice.

Swiss newspapers have criticized the 11 banks for entering into negotiations with the Department of Justice. There are no class action lawsuits in Switzerland, so the potential penalties recoverable by Swiss bank employees against those organizations are fairly modest. However, Swiss Bank UBS paid a $780 million fine in 2009 as part of a settlement for holding assets of U.S. citizens. The settlement payments by the other 11 banks could be in excess of $1 billion.

An advocacy group named SwissRespect plans to bring lawsuits in Geneva and Switzerland to oppose release of data. However, the negotiations continue between the Swiss banks and the U.S. Department of Justice.

Editor’s Note: With a “tax gap” estimated to be $385 billion, the IRS is continuing to pursue different strategies to collect tax that is owed but unpaid. The effort to pursue Americans who are hiding assets overseas has been quite productive. Tens of millions of dollars in fines have been paid and each month several convicted U.S. citizens face potential imprisonment. The hiding of assets overseas by affluent Americans is likely to decline significantly with the success of this effort by the IRS. Rather than spending time in jail, many of these affluent individuals could have enjoyed great personal satisfaction and saved larger tax amounts through “tried and true” charitable methods. Hopefully, their sophisticated advisors are now turning from overseas accounts to a diligent study of charitable lead and remainder trusts.

Applicable Federal Rate of 1.0% for September — Rev. Rul. 2012-24; 2012-36 IRB 1 (17 August 2012)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2012. The AFR under Section 7520 for the month of September will be 1.0%. The rates for August of 1.0% or July of 1.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.