One of the negative aspects of buying a new car is the annoyance involved with getting rid of your old car. Many individuals find the trade-in allowance offered by dealers (if any) to be well below the car's true value. But the alternative of selling the car on your own involves the expense of advertising as well as the commitment of time needed to meet with potential buyers, accompany them on test drives, negotiate a fair price, etc.

For these reasons, you may want to consider a different option for your old car: donating it to charity. Under this approach, you will be entitled to a charitable deduction equal to the fair market value of the car. The value is usually set according to the "Blue Book" listings for used cars published by the National Automobile Dealers Association. In some cases, this value will exceed the amount you could actually get on a sale. If the car is in terrible condition, however, and is worth much less than its "Blue book" value, you must use its true market value, not its "Blue Book" value.

The donation approach saves you the trouble involved with trying to sell the car. Many charities even offer the added convenience of picking up the car at your home and saving you the trip, proving your right to the deduction. If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction. First, you need a written acknowledgement from the charitable organization stating that you made the donation, describing the car, and noting that the charity provided no services in exchange for it.

Second, if the value is over $500, Form 8283 must be attached to your tax return showing when and how you acquired the car and its original cost. If the value is over $5,000, special rules requiring an appraisal apply.

 Donating works of art to charity

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Several different tax rules may come into play in connection with getting a deduction for a donation to a charity of a work of art.

First of all, a charitable contribution of a work of art is subject to reduction if the charity's use of the work of art is unrelated to the purpose or function that is the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity.

Example (1). You bought a painting five years ago for $10,000 and it's now worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital's use of the painting is unrelated to its charitable function and you would have had a $10,000 long-term capital gain had you sold it.

Example (2). Now assume you donate the painting to an art museum. Here, your deduction is $20,000.

One or more substantiation rules may come into play when you donate a work of art. First, if you claim a deduction of $250 or more, you must get and keep an acknowledgement of the contribution from the donee organization. getting a deduction for a donation to a charity of a work of art. If you claim a deduction in excess of $500, you generally must maintain written records that include information about the donee; a description of the donated property; the fair market value at the time of contribution, the method of determining it and a copy of the signed appraisal, if any; a description of how and when you acquired the property; and the cost or other basis of the property. You also must complete section A of Form 8283 and attach it to your tax return.

Where the claimed value of the property exceeds $5,000, you must have a qualified appraisal of the property, i.e., an appraisal done by a qualified appraisal not earlier than 60 days before the contribution date and that meets numerous other requirements. You include information about these donations on section B of Form 8283, which you file with your tax return. If total deduction for art is $20,000 or more, you must attach a complete copy of the signed appraisal

In addition, your deduction may be limited to 20%, 30% or 50% of your contribution base or an even lesser amount. This base, which usually is your adjusted gross income, varies depending on the type of organization involved and whether or not the deduction of the work of art had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.

If you would like to discuss of any these rules, please call.

If you are planning to make a relatively substantial contribution to a charity, college, etc., you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.

This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is "gain" property, the donor does not have to recognize the gain on the donated property. These rules allow for the "doubling up," so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

Example: Tim and Tina are twins, each of whom attended Yalvard University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago. Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock. Tina donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case. Caution: While this plan works for Tina in the above example, it will not work if the stock has not been held for more than a year. It would be treated as "ordinary income property" for these purposes and the charitable deduction would be limited to the stock's $2,000 cost.

If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).

Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns. If you'd like to discuss this method of charitable giving more fully, including the limitations and potential problem areas, please contact us at Tax Tech Support.

Did you know that you can contribute business inventory, equipment, furniture, real estate, etc. to charities and get a tax deduction in excess of the amount you paid for the property?

The amount of your deduction for inventory contributions is the lower of (a) one-half the difference between your cost of the inventory and its fair market value or (b) twice your cost. For other qualifying property, the deduction may be somewhat lower. In order to qualify for this tax break, you must contribute the property to a particular type of charity, the charity must use it in a particular way, and the charity must provide you with certain written documentation. In certain cases, other requirements must be met as well.

There's no dollar limit on how much property you can get a deduction for under these rules, other than the overall corporate limit on charitable contributions (under which any charitable contributions in excess of 10% of taxable income must be carried forward to future tax years).

How to make tax-deductible contributions in a foreign country for charitable purposes, in light of the rules requiring that a donee organization be formed in the U.S.

Under the domestic organization requirement, to qualify as a donee organization eligible to receive tax-deductible contributions from an individual, the recipient charitable organization must be created under the laws of the United States (or those of any state, the District of Columbia, or any possession of the United States), except as otherwise delineated in an international tax treaty. However, contributions may be used in a foreign country for charitable purposes.

The inquiry about the deductibility of a contribution doesn't stop with the determination that an amount has been paid to a qualified donee organization. If the amount is earmarked for use by a non-U.S. organization, then, to determine whether the domestic organization requirement has been met, it's necessary to look beyond the fact that the immediate recipient is a qualified donee. Thus, specifically, if you make your contributions to a domestic organization which in turn makes grants to foreign charitable groups, they will be deductible if they are subject to the domestic organization's control and aren't earmarked in any way for use abroad.

For example, if the domestic organization is required (perhaps by a specific provision in its charter) to turn particular contributions it receives over to a foreign organization, then IRS would consider the ultimate foreign recipient to be the real donee and the contribution would not be deductible. Otherwise, the "organized in U.S." rule would be nullified.

Over the years, many foreign charitable groups have created, or established ties with, a U.S. charity in a relationship approved by IRS as meeting the above requirements though the domestic organization turns over contributions to a particular foreign organization. Such an organization specifically targets its support for a charitable organization located in a foreign country, and is often called a "friends of" organization, the term often included as part of its legal name to reveal the close affinity. Generally, they exercise the requisite "discretion and control," and the domestic organization need not conduct a variety of charitable activities abroad. In other words, it can serve as a grant-making organization.

Another option you might consider is arranging with an appropriate U.S. charity to accept your contribution and then, perhaps because it desires to further the foreign organization's work, turn over part or all of the amount to the foreign organization. Of course, you must ascertain that IRS requirements have been met.

Be aware that when a domestic organization solicits grants for foreign groups, it must:

• review and approve the grants as being in furtherance of its own purposes; and

• maintain full control of the donated funds and discretion as to their use.

Incidentally, if you are using an intermediary organization that is classified as a private foundation, the determination that the foreign organization is a qualified organization must be based on the grantee's affidavit or on counsel's opinion. IRS has provided a form for the grantee's affidavit.

Although no tax deduction is allowed for the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services (subject to the deduction limit that generally applies to charitable contributions). Away-from-home travel expenses while performing services for a charity aren't deductible, however, if there's a significant element of personal pleasure associated with the travel. And if your services for a charity involve lobbying activities, no deduction is permitted.

If you use your car while performing services for a charitable organization you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs. Alternatively, you may deduct a flat 14 cents per mile for charitable use of your car. In either event, you may also deduct parking fees and tolls.

You will want to keep track of your expenses, the services you were performing and when you performed them, and the organization for which you performed the services. You should retain receipts, canceled checks, and other reliable written records relating to the services and expenses.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution by a written acknowledgment from the charitable organization. The acknowledgment generally must include the amount of cash and a description of any property contributed. This would present a problem for out-of-pocket expenses incurred in the course of providing charitable services, because the charitable organization wouldn't know how much those expenses were. However, you can satisfy this requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the organization that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return (and a description and good-faith estimate of the value of those goods or services). You must get this statement by the time you file your tax return for the year of the contribution (or by the return date if you file a late return).

IRS requires donors and donee organizations to supply certain information to prove a taxpayer's right to deduct charitable contributions. In addition to certain substantiation requirements, if you donate an item (or a group of similar items) of property worth more than $5,000, you must get an appraisal. To comply, you must get a "qualified appraisal," attach an "appraisal summary" to the first tax return on which the deduction is claimed, include other information with the return, and maintain certain records.

Also, the qualified appraisal must be received by the donor before the tax return due date. While a court has allowed taxpayers some latitude in meeting the "qualified appraisal," we think you should aim for exact compliance.

The qualified appraisal isn't submitted to IRS. In contrast, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor's tax return.

Failure to comply with the appraisal requirements. Although there is no specific penalty in the statute for failure to get a qualified appraisal or to attach an appraisal summary to the taxpayer's return, a charitable deduction is allowed only if the contribution is verified according to IRS regs. Thus, a charitable deduction may not be allowed for such unappraised property if the appraisal requirements aren't satisfied.

Property for which qualified appraisal is required. A qualified appraisal is not required for publicly-traded securities. Also, only a partially completed appraisal summary need be attached to the tax return for contributions of:

• Nonpublicly-traded stock for which the claimed deduction is greater than $5,000 and does not exceed $10,000; and

• Publicly-traded securities which aren't "readily available."

Inventory and scientific equipment. A special rule applies for deductions claimed for certain "related use" contributions of inventory or scientific equipment by a corporation. In determining whether the $5,000 threshold has been exceeded, only the excess over cost is considered.

Application of rules where two or more gifts are made. If you make gifts of two or more properties during a tax year, even to multiple donees, the claimed values of all similar property (that is, of the same generic category or type, such as stamps, paintings, books, publicly-traded stock, land, jewelry, furniture, or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.

A "qualified appraisal" is a complex and detailed document that among other things is prepared and signed by a qualified appraiser.

An "appraisal summary" is a summary of a qualified appraisal that, among other things is made on Form 8283, and attached to the donor's return.

In summary, you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. If you have any further questions, or to discuss any aspect of your contribution planning, please give us a call.

As you may know, a cancelled check isn't enough. Instead, you need a written receipt from the charity. And, you must have the receipt in hand by the time you file your return or you won't be able to claim the deduction.

Gifts of property are subject to the same rule as cash contributions. If you give property for which you claim a deduction of $250 or more, you'll need a written receipt from the charity. The receipt must describe the property, but needn't place a value on it.

Can you get around this requirement by always giving less than $250? The answer is a qualified yes. The qualification arises because IRS is supposed to issue "anti-abuse" rules aimed at preventing taxpayers from avoiding the requirement by, for example, writing several checks on one day. Since these rules haven't been published yet, it's impossible to know exactly what they'll say. The best course is to get a receipt.

You may also make another type of charitable contribution — called a "quid pro quo" contribution — in return for which you can receive goods or services, such as a dinner or theater tickets, from the charity. You can deduct the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But you don't have to take insubstantial goods and services (like a coffee cup) into account for this purpose.

If you make a quid pro quo contribution of more than $75, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of the goods or services you received. Be sure to keep these statements.

Also, when you make a donation of $250 or more, the receipt that the charity gives you must describe any goods or services received in return and must estimate their value. If no goods or services were given, the receipt must say so.

There's an exception to this rule where what you received from the charity was an "intangible religious benefit," such as attending a religious service. This type of benefit has no commercial value, so it doesn't have to be subtracted from the amount of the charitable deduction. As a result, your receipt need only state that the benefits received consisted entirely of intangible religious benefits.