IRS Requirements for Documentation for Charitable Donations

Recently, the U.S. Tax Court denied a taxpayer’s claimed deductions for over $27,000 of charitable contributions because the taxpayer had failed to properly document them.


Individual taxpayers and business owners claiming deductions must be able to substantiate them according to specific rules established by the IRS. Watch out for these common pitfalls.


Donations. Cash contributions of less than $250 require a bank record or written receipt indicating the name of the organization and the date and amount of the contribution. For noncash donations, you need a receipt and a record showing the donee’s name and a description of the gift. If the value of any gift equals $250 or more, you also need a contemporaneous written acknowledgment, a statement of whether the charity provided any goods or services in exchange for the gift, and, if so, a description and a good faith estimate of the value. Additional rules apply to contributions of noncash property of more than $500.


Hobbies. Deductions for hobby expenses are strictly limited. If you wish to claim the full extent of any expenses, you must be prepared to show that your activity qualifies as a business. The IRS will presume it’s a business if you can show a profit in three of the past five years. If that isn’t the case, then you should be prepared to produce evidence to satisfy a number of more subjective tests to avoid application of the tax law’s “hobby loss” restrictions.


Divorce. Alimony payments are tax deductible, but payments for child support are not. Taxpayers should retain their final divorce decree and any agreements for child support and/or separate maintenance in case the IRS questions claimed deductions. Also, retain any agreements regarding who will claim exemptions for dependent children. For capital gains purposes, save cost records for both jointly owned and settlement property.


Business expenses for travel, meals, and entertainment, and transportation. Generally, you must retain documentation to establish the amount, time, place, and business purpose for each expenditure. Specific expense categories may have additional requirements.


Business use of an automobile. Maintain records for the cost of the car and any improvements; the date you started using it for business; the mileage, destination, and business purpose for each trip; and the total mileage for the year. When you use the actual expense method rather than the IRS standard mileage rate, you also need records of your operating costs, such as gas, oil, repairs, maintenance, and insurance.


Home office. Be prepared to produce records that substantiate your claimed expenses and show regular and exclusive business use of that part of the home.


To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.


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Alimony and the IRS – What You Need to Know

If you and your spouse are ending your marriage, you’ll have many decisions to make. You will have to divide your belongings in a fair and equitable way. If you have children, you’ll have to work out custody arrangements. You may even have to decide who keeps the cat or the dog.

Another important decision you’ll face is whether alimony payments will be part of your divorce decree. This decision can have significant tax consequences for both of you. The IRS rules regarding alimony payments are complex. Before your divorce agreement becomes final, both you and your spouse should understand the tax implications of your arrangement.

The Rules

Alimony payments are tax deductible by the person who pays them and are considered taxable income to the recipient. However, to be tax deductible, alimony payments must meet certain requirements. For one thing, payments can’t be voluntary — they must be required by your divorce or separation agreement. Payments must also be in cash. You can’t, for example, do yard work or buy your ex a new TV and have that count as alimony, although you can agree to cover a specific expense such as the rent or mortgage.

You and your former spouse must be living apart for payments to qualify as alimony. And payments must stop if the recipient dies. If payments are to continue, none of the payments — even those made while the recipient is living — are deductible. However, if alimony payments stop because your ex-remarries, their deductibility is not affected.

Child Support Is Different

Unlike alimony payments, payments made for child support are not tax deductible by the person paying them, nor are they considered taxable income to the person who receives them. If alimony payments will decrease once a child reaches a certain age, the differential is treated as nondeductible child support.

Your tax situation and that of your spouse may affect your decision to designate payments as tax-deductible alimony or nondeductible child support. Our tax advisors can offer you the guidance you need, so give us a call today.

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Planning for Divorce

If you are getting a divorce, taxes are probably not highest on your list of concerns. Still, you should consider a number of tax-related issues.


Property Settlements

Dividing property in connection with a divorce generally has no immediate consequences for either spouse. However, if the spouse who receives property in the divorce settlement later sells it, there may be a gain to report for tax purposes. So, potential taxes should be a consideration in deciding which spouse will receive which property. If you like to figure out feasible ways to settle divorce and related property disputes at the earliest, then speak to one of top lawyers with full acknowledge of texas divorce laws.

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Note that a spouse who receives property in a divorce figure any gain on a subsequent sale of the property using the transferring spouse’s basis (e.g., cost), not the property’s value when it was received.


Example. Michelle receives 10 acres of unimproved land in her divorce settlement. Her ex-husband bought the land for $25,000. It’s now worth $100,000. If Michelle sells the land for $100,000, she will have to report a taxable gain of $75,000 (the difference between the $100,000 selling price and the $25,000 cost basis).


Personal Residence

If a divorcing couple sells their home while they are still married, they are entitled to exclude up to $500,000 of gain from their taxable income if otherwise eligible for the exclusion. If the ownership of the home is simply transferred to one spouse as part of the divorce settlement, there is no taxable gain or loss at the time of transfer. However, should that spouse later sell the house while he or she is unmarried, only a $250,000 exclusion would be available.

Consult Paterson & Dowding family lawyer Perth to get help in deciding on the property rights prior to a divorce.

Retirement Benefits

A divorce settlement often determines how retirement plan benefits will be divided. However, an employer may distribute retirement plan benefits to a former spouse only after receiving a court-issued document that meets the requirements for a qualified domestic relations order (QDRO). The benefits are taxable to the former spouse who receives them pursuant to a QDRO.


Dependency Exemption

While the spouse who has legal custody of a child is generally entitled to claim the dependency exemption, this tax advantage is negotiable and can change from year to year. The custodial spouse can waive his or her right to the exemption, allowing the noncustodial spouse to claim it.


Tax Credits

Claiming a child as a dependent may impact other tax benefits. For example, if a child is attending college, the spouse who claims the student as a dependent is generally entitled to claim either the American Opportunity Tax Credit or the Lifetime Learning tax credit for tuition paid, assuming eligibility requirements are met. The law also allows a child tax credit of up to $1,000 annually for each qualifying dependent child under age 17.


Alimony vs. Child Support

Payments that qualify as alimony under the tax law are deductible by the paying spouse and are considered taxable income to the recipient spouse. Child support payments, on the other hand, are not deductible by the paying spouse and are not included in the recipient spouse’s income. The IRS characterizes payments that are linked to an event or date relating to a child — such as high school graduation or a 21st birthday — as child support rather than alimony. You can contact divorce attorney in Pensacola for any concerns related to the custody of your child.

These are just some of the tax planning issues that could be important in a divorce situation. Give us a call, as always, we’re available for planning assistance.


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To settle disputes within a family contact Fresno family lawyers for complete legal support.

Are You Getting Divorced? Here’s what You Need to Know About Your Taxes

Divorce opens up a whole new territory of legal, personal, and financial issues. Here are some things to be aware of on the tax front.


Alimony and Child Support


Alimony payments are tax deductible; child support payments are not. On the other hand, amounts received as alimony have to be included in income for tax purposes, while child support can be received tax free.


Dependency Exemption


Typically, the parent who has legal custody of a child has the right to claim the dependency exemption. However, parents can agree otherwise. A custodial parent uses IRS Form 8332 to release the exemption.


Tax Credits


Generally, the parent who claims the child as a dependent also gets the benefit of child-related tax credits, such as the child tax credit and the credit for higher education expenses.


Retirement Plan Benefits


Retirement plan benefits received from the retirement plan of a former spouse under a court-issued document called a “qualified domestic relations order” are taxable to the recipient.


Personal Residence


Gain from the sale of a principal residence is not taxable if certain requirements are met. The tax-free ceiling is $500,000 of gain for a married couple and half that amount for a single person.


To learn more about tax rules and regulations and divorce, give us a call today. Our knowledgeable and trained staff is here to help.


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Tax Issues when You get Divorced

When a couple divorces or separates, there are many issues that need to be sorted out. One issue many forget to discuss is taxes. Here is a look at some of the tax issues divorcing couples may encounter.

File Jointly or Separately?

For tax purposes, a person’s marital status is determined on the last day of the tax year, so individuals who separate (but don’t divorce) during the year typically will need to make a choice between filing jointly or separately.

Filing separately may result in the loss of valuable tax credits and deductions. For example, the American Opportunity Tax Credit (for higher education costs) is not available to a married taxpayer who files a separate return. Typically, filing jointly will result in the lowest overall tax.

One reason to consider filing separately is for protection from the other spouse’s future tax liabilities. Generally, spouses who sign joint returns have joint and several liability — meaning that they are each fully liable for unpaid tax liabilities arising out of the return. Moreover, the IRS has the right to pursue the party who is best able to pay the full amount quickly, leaving issues of fairness to be worked out between the two filers. (The “innocent spouse” rules and/or the “separate liability” election may provide protection in some circumstances.)

Alimony Versus Child Support

Alimony represents taxable income to the recipient and a tax deduction for the person paying it. Child support, on the other hand, is not taxed to the recipient, and the person paying the child support gets no deduction for the payments. Because the tax consequences are so significant, a number of technical rules govern what constitutes alimony.

Generally, alimony must be paid in cash (or by check) pursuant to a divorce or separation agreement and terminate upon the death of the recipient. Some people — in the divorce decree or settlement agreement — try to “front-load” their alimony payments by designating payments in the early years as alimony rather than as child support. The IRS has specific rules limiting front-loading.

Property Transfers

Spouses should take care when dividing up assets. The general rule is that no gain or loss is recognized for property transfers if they occur either within one year of the end of the marriage or within six years of the end of the marriage and pursuant to a divorce or separation instrument. However, such transfers may create tax issues down the road, because when the property is sold, the owner may have to pay capital gains tax on the difference between the sale price and the basis (generally, the original cost). As a result, it’s important to consider potential future taxes when negotiating a property settlement.

Child-related Tax Breaks

Only one parent may claim the dependency exemption for a child. Generally, the dependency exemption will go to the parent with physical custody, although numerous subsidiary rules may apply. The rules for claiming the child tax credit generally track those for the dependency exemption. And the general rule for the child and dependent care credit is that the credit will go to the parent with physical custody.

Connect with our team today for all the latest and most current tax rules and regulations.

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Don’t Forget Your Taxes when You Split Your Assets in a Divorce

Divorcing couples should pay close attention to tax issues, even if spouses are in complete agreement about how to divide their assets. Failing to take taxes into account may leave one spouse with a smaller net share than anticipated. To make all this process simpler just like how people can now file to a social security office in Omaha by online application in the same manner people can now even apply for asset separation due to any form of separation online.


Call It Taxable — or Not?


The way in which payments made by one spouse to the other are designated can have significant tax consequences. Alimony is generally deductible by the payor and taxable to the recipient. Child support is not tax deductible by the payor and does not represent taxable income to the recipient.


Dependent Children


Couples with dependent children also need to consider which spouse will be entitled to claim dependency exemptions for the children. This also can be important for determining eligibility for certain tax credits, such as the child tax credit.


After-tax Values


Dividing assets such as investments means looking beyond their current market values. Since selling an asset in the future may create a tax liability, couples should determine the “adjusted tax basis” (essentially, the cost) of each asset before they reach a settlement. The value of assets that seem equal may no longer be equal after taxes are taken into account.


Dividing Retirement Benefits with a QDRO


A qualified domestic relations order (QDRO) is a court order that spells out the property rights of a spouse or dependent during a divorce with respect to qualified retirement plan assets (such as the assets in a 401(k) account). A QDRO is required in order to transfer all or a portion of the benefits in a qualified retirement plan from one spouse to the other without losing the plan’s tax advantages. Mistakes can be costly.


Beyond Taxes


Divorcing couples who want to name new beneficiaries for their life insurance policies, retirement accounts, and other accounts whose assets pass through beneficiary designations should be sure to do so promptly. Otherwise, an ex-spouse beneficiary could receive policy death benefits or assets left in accounts should the account holder die unexpectedly.


All of these issues can be complex for divorcing couples. Professional advice is essential so give us a call today for more information.


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What You Need to Know About Taxes when You Divorce

Tax planning is an important step in finalizing a divorce agreement. Here are some issues divorcing couples may want to consider.

What’s in a Name?

Alimony and child support both involve one spouse making payments to the other, but that’s where the similarity ends. Alimony payments are tax deductible to the payer and taxable to the recipient. Child support is not deductible and can be received tax free.

Dependent — or Not?

Generally, the custodial parent claims the dependency exemption, although couples can make other arrangements. Parents with more than one child may decide to split the exemptions between them. Parents might also decide to alternate claiming the exemption.

Who Gets the Credit?

The parent who claims the child as a dependent type is entitled to claim tax credits such as the child tax credit and the credit for higher education expenses. However, a custodial parent paying work-related child care expenses can claim the child care tax credit even if the other parent claims the dependency exemption.


Assets To Transfer?

No taxes are owed on the transfer of assets between spouses. However, when dividing assets, it’s important to consider how taxes, such as capital gains, may come into play in the future.

How About Retirement Benefits?

Where retirement plan benefits have been made payable to a former spouse under a court-issued qualified domestic relations order (QDRO), subsequent distributions will be taxable to the former spouse.

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For more information about divorce and taxes, give our tax professionals a call today and read this article.


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