The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. Before 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. However, now, a single transaction exceeding $600 can trigger a 1099-K The Service emphasized that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Taxpayers can access Form 1099-K, its instructions and a set of answers to frequently asked questions on the IRS web site.

In addition, the Service reminded taxpayers that they must pay income tax either through withholding or estimated tax payments. Taxpayers should use estimated tax payments to pay other taxes such as self-employment tax and the alternative minimum tax. IRS Publication 17, Your Federal Income Tax (for Individuals), provides general rules to help taxpayers pay the income taxes they owe. Additional helpful information is available in Chapter 5, Business Income, of Publication 334, Tax Guide for Small Business; Publication 525, Taxable and Nontaxable Income, and on the IRS website at Understanding Your Form 1099-K.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Before 2022, reporting was required only when a third-party settlement organization (TPSO) made more than 200 payments to a payee that totaled more than $20,000 for the year. However, beginning in 2022, a TPSO must report a payee’s payments once they total $600, regardless of their number.

The IRS recently updated its Form 1099-K Frequently Asked Questions (FAQs) to help taxpayers understand who files the form, who receives it, and what it means. The updated FAQs are divided into five sections.

1. General

The General section of the FAQs explains that the IRS will also use Forms 1099-K for systemic computer matching to tax returns to identify potential unreported income. The agency will also use the information to develop taxpayer education and outreach efforts, as well as new approaches to audits and collection.

2. Definition

The second section of the FAQs defines several relevant terms, including:

• Payment cards (credit cards, debit cards, gift cards, etc.)
• Merchant category code
• Third-party settlement organization (TPSO)
• Merchant acquiring entity
• Participating payee
• Gross amount of reportable transactions.

3. Individuals

The third section of the FAQs explains who will receive a Form 1099-K and who will not. An individual who receives a form should use the information to compute gross sales and receipts, and correctly calculate gross income.

An individual who has questions about the form, believes it was issued in error, or believes it includes incorrect information should generally contact the form’s issuer. The individual may also contact the payment settlement entity (PSE) whose name and phone number appear on the form.

4. Reporting

The reporting section of the FAQs explains due dates for filing Form 1099-K with the IRS and providing a copy to the payee. This section also reiterates that the form must report the gross amount of the payee’s reportable transactions, with no adjustments for fees, refunds, and other adjustments.

5. Filing Form 1099-K

Finally, the last section of the FAQs explains which party is responsible for filing which forms. For example, a merchant acquiring entity is responsible for filing some Forms 1099-K, while a third-party settlement organization is responsible for filing others.

Reportable payments include payments to a government unit or a foreign payee. However, they do not include payments that are reportable under Code provisions other than Code Sec. 6050W.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Draft partnership instructions for the 2022 Schedules K-2 and K-3 (Form 1065) and partner’s instructions for the 2022 Schedule K-3 were released October 25. The instructions add a “domestic filing exception” for a partnership that meets all four of the following requirements for its 2022 tax year:

• The partnership has:
  • no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity, or
  • foreign activity that is limited to passive category foreign income generating no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
• All of the partners are U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic grantor trusts with only U.S.-citizen or resident-alien grantors and beneficiaries, or domestic non-grantor trusts with only U.S.-citizen resident-alien beneficiaries;
• The partners receive a notification from the partnership electronically or by mail, dated no later than two months before the due date of the partnership’s return, that the partners will not receive Schedules K-3 unless they request them; and
• The partnership does not receive a request from any partner for Schedule K-3 at least one month before the due date of the return (that is, a calendar-year partnership does not receive any requests by February 15, 2023).

A partnership that receives a timely request from a partner for a Schedule K-3 does not qualify for the domestic filing exception and must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting partner. However, the partnership only needs to complete the parts of Schedules K-2 and K-3 that are relevant to that partner.

If a partnership receives a request from a partner for a Schedule K-3 after the one-month date but no requests by that due date, the partnership only needs to provide Schedule K-3 to the requesting partner by the date on which the partnership files its return or one month after it receives the request, whichever is later.

The draft instructions note that if a partnership fails the domestic filing exception test, it may still qualify for an exception to the filing requirement if all of its partners are eligible for the exemption from filing Form 1116.

A regularly updated IRS FAQ sheet on Schedules K-2 and K-3 states that "comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022."

The draft instructions also add guidance on when a domestic partnership with only domestic activity needs to file Schedules K-2 and K-3, on reporting capital gains and losses and foreign tax redeterminations, and on reporting income inclusions required by 2022 regulations that apply aggregate treatment to domestic partnerships in some situations.

Draft instructions for S corporations’ 2022 Schedules K-2 and K-3 have not been issued yet.

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA).

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA). Notice 2017-10 identified as listed transactions for purposes of Reg. §1.6011-4(b)(2) all syndicated conservation easement transactions, including all substantially similar transaction, entered into on or after January 1, 2010. The IRS had conducted examinations of the taxpayers’ Forms 1065, U.S. Return of Partnership Income, and disallowed the claimed deductions for noncash charitable contributions. In addition, each notice of final partnership administrative adjustment asserted a gross valuation misstatement penalty, a substantial valuation misstatement penalty, a negligence penalty, a substantial understatement penalty and an additional reportable transaction penalty.

The Tax Court held that Notice 2017-10 was a legislative rule because it created new substantive reporting obligations for taxpayers and material advisors, the violation of which prompted exposure to financial penalties and sanctions. Because the notice was a legislative rule, it should have gone through the notice-and-comment rulemaking under the APA. Moreover, Congress did not expressly authorize the IRS to identify a syndicated conservation easement transaction as a listed transaction without following the APA’s notice-and-comment procedures. In these consolidated cases, Notice 2017-10 was not issued until the tax year at issue. Accordingly, the court did not apply Notice 2017-10 retrospectively and disagreed that prior notice and comment made at the time of promulgation of Reg. §1.6011-4 satisfied the IRS’s ongoing obligation to comply with the APA when issuing Notice 2017-10. The Tax Court also concluded that the Congress had made it clear that each substantive rule of general applicability, including any amendment or revision, must comply with the APA. Consequently, the taxpayers’ cross-motions for summary judgment was granted in part, and Notice 2017-10 was set aside. Finally, Code Sec. 6662A penalties were not imposed with respect to reportable transactions.

Four concurring and two dissenting opinions were filed. The dissenting opinions focused on the express reference to Code Sec. 6011 in Code Sec. 6707A when it was enacted, and that the IRS had already identified 30 listed transactions by 2004 when Code Sec. 6707A was enacted without adherence to the APA's notice-and-comment requirements. In addition, when Code Sec. 4965 was enacted in 2006, the conference report defined a listed transaction as a tax avoidance transaction "identified by notice, regulation, or other form of published guidance as a listed transaction."

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

In a fact sheet issued October 26, 2022, the Treasury Department highlighted four key areas the tax policy built on the Inflation Reduction Act will drive clean energy:

• the IRA will provide targeted incentives to drive investment and create opportunity in communities across the country;
• the IRA will encourage clean energy project developers to meet strong labor standards, so that the benefits of building a clean energy economy are felt by workers making it happen;
• the IRA will lower the costs of energy-saving property improvements and rooftop solar installation, saving working families and small businesses money on their monthly utility bills and empowering families and businesses to shield themselves from volatile fossil energy prices; and
• The IRA allows state, local, and Tribal governments, as well as non-profit organizations and other tax-exempt entities, such as rural electric co-operatives, to receive certain tax credits as payments, expanding the range of actors that will have a direct incentive to invest in their communities.

According to the fact sheet, the law will "provide bonuses for investing in low-income communities, as well as in communities that have historically depended on the energy sector for jobs and economic activity."

To help incentivize this, the IRA modifies and extends the clean energy Investment Tax Credit "to provide a 30 percent credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects that meet prevailing wage standards and employ a sufficient portion of qualified apprentices from registered apprenticeship programs."

It also modifies and extends the Renewable Energy Production Tax Credit "to provide a credit of 2.5 cents per kilowatt-hour in 2021 dollars (adjusted for inflation annually) of electricity generated from qualified renewable energy sources."

Other tax credits extended and/or expanded include the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Energy Efficient Commercial Buildings Deduction.

These incentives were discussed as part of an October 26, 2022, virtual roundtable hosted by Treasury Secretary Janet Yellen, during which she "emphasized that the Inflation Reduction Act provides long-term clarity and certainty for the clean energy sector, and underscored Treasury’s commitment to work expeditiously to provide guidance so that investments can move forward and our climate and economy can realize the benefits of the law as quickly as possible."

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

In fiscal year 2022, IRS-CI expanded partnerships with foreign counterparts to help combat tax and financial crimes on a global level. IRS-CI special agents delivered trainings in countries like Argentina, Germany, Colombia, and Palau on topics ranging from cybercrime to human trafficking. IRS-CI Mexico City, after changes to Mexico law that enabled the extradition of tax fugitives, launched an initiative to identify fugitives who had absconded to Mexico and nearby countries. This initiative resulted in the location of 79 criminal fugitives and the apprehension of eight during the first year. The report also includes additional case examples for each U.S. field office, an overview of IRS-CI’s international footprint, details about the specialized services provided by IRS-CI and investigative statistics, broken down by discipline, for fiscal year 2022.

Report Details

The Internal Revenue Service’s Criminal Investigations division earned convictions in 90.6 percent of its cases in fiscal year 2022, according to the division’s annual report.

CI Chief Jim Lee called the conviction rate "the statistic I continue to be most proud of" in the division’s annual report released November 4, 2022. "We are thorough and good at what we do. As I tell crowds around the country, if a CI special agent has you in their crosshairs, there is a good chance you are going to jail."

The report notes that of the 1,837 cases referred for prosecution, 1,564 cases resulted in convictions. CI identified $32.6 billion in financial crimes, $5.7 billion of which were classified as tax fraud.

"While navigating our way through the backend of a global pandemic, we seized record amounts of data and cryptocurrency, led some of the largest tax cases on record and spearheaded first-of-its-kind national and international initiatives aimed at developing and strengthening partnerships in the public and private sectors," Lee said in the report.

In terms of tax crimes, the report highlights four key areas that the division focused on

• General tax fraud;
• Refund Fraud Program;
• Abusive tax schemes; and
• Employment tax fraud.

The Refund Fraud Program has three parts – the Questionable Refund Program, the Stolen Identity Refund Fraud investigations, and the Return Preparer Program for both individuals and businesses. Each of these programs looks out for criminals who file fraudulent tax returns to steal government funds.

"This type of theft erodes voluntary compliance and taxpayer confidence in the integrity of the tax system," the report states. "It also results in the loss of vital funds needed to support government programs, many of which impact the most vulnerable Americans."

Areas the division focus on related to non-tax crimes include money laundering, public corruption, corporate fraud, general fraud, and the Bank Secrecy Act Program, which focuses on fraud using foreign bank accounts.

CI also focuses on cybercrimes and in 2022, it was a part of the largest single financial seizure in government history with "the arrest of Ilya Lichtenstein and his wife, Heather Morgan, for an alleged conspiracy to launder cryptocurrency that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange," the report states. "Approximately 119,754 bitcoin (BTC) was stolen from the exchange and was valued at approximately $4.5 billion at the time of the arrest. The CI Cyber Crime Unit, with the assistance of other U.S. authorities traced the stolen funds."

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions for:

• Form 8908, Energy Efficient Home Credit, and
• Form 8911, Alternative Fuel Vehicle Refueling Property Credit

Energy Efficient Home Credit

The Inflation Reduction Act extends the Code Sec. 45L energy efficient home credit to cover qualified new energy efficient homes sold or leased after 2021 and before 2033. The Act also increases and modifies the credit for homes sold after 2022.

The draft Form 8908 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The IRS intends that contractors use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, contractors should use the appropriate prior revision of the form.

Alternative Fuel Vehicle Refueling Property Credit

The Inflation Reduction Act extends the Code Sec. 30C alternative fuel vehicle refueling property credit to cover refueling property placed in service after 2021 and before 2033. The Act also modifies the credit for certain refueling property placed in service after 2022.

The draft Form 8911 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The draft form divides Lines 4 and 5 to break out amounts subject to the lower credit rate for refueling property placed in service after 2022 that does not meet new prevailing wage and apprenticeship requirements.

The IRS intends that taxpayers use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, the taxpayers should use the appropriate prior revision of the form.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

"The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance," IRS Commissioner Charles Rettig said in a statement, adding that the recent funding in the Inflation Reduction Act "will help the IRS in many ways, increasing taxpayer education, significantly improving services to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers."

IRS published a report on the new estimate on October 28, 2022.

According to the report, the estimated net compliance rate is 87 percent, defined as tax paid voluntarily and timely plus enforced and other late payments divided by the total true tax. The voluntary compliance rate, which is the amount of tax paid voluntarily and timely divided by the total true tax is estimated to be 85.0 percent.

The tax gap includes three components, including:

• nonfiling (tax not paid on time by those who do not file on time) - $39 billion;
• underreporting (tax understated on timely filed returns) - $398 billion; and
• underpayment (tax that was reported on time, but not paid on time) - $59 billion.

The report estimates that $68 billion of the tax gap will eventually be paid.

The IRS also reported that the tax gap for years 2017-2019 is projected to increase to $540 billion.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

"My time as Commissioner has given me an even deeper appreciation of what our workforce is capable of achieving," Rettig wrote in his message posted November 11, 2022, on the IRS website. "I have been constantly amazed at the accomplishments of IRS employees during what has been a challenging and historic time for our nation. Time and again I have seen them deliver for taxpayers under tight timeframes and difficult circumstances – responding in a manner that demonstrates the importance of every American to the IRS and the IRS to every American."

He noted a number of accomplishments of the workforce, including disbursing COVID relief payments of more than $830 billion while the agency was still working to conduct its normal business operations, which included delivering more than $1.5 trillion in refund payments and making more than 200 million advanced payments of the Child Tax Credit totaling $93 billion.

"It's also important to realize that, during this pandemic period, our employees faced the same health and safety concerns for themselves and their families as everyone else," he added. "Nonetheless, they went the extra mile in doing their jobs, and they also made a difference in their communities."

But he also praised the employees of the agency for stepping up even when there was no disaster requiring immediate actions.

"IRS employees don’t wait for a disaster to pitch in," he wrote. "They routinely give back – by collecting food for the hungry, volunteering to help low-income people, older Americans or underserved people prepare their tax returns, and in so many other ways. IRS employees make a difference, they care, and they take pride in serving taxpayers, tax professionals, and our country, on and off the job."

Rettig also identified a number of accomplishments he was proud of during his time, particularly getting publications out in more languages to help the agency reach a wider audience and make its activities more accessible to Americans, as well as making the Form 1040 available in Spanish for the first time during the 2021 tax filing season.

He also highlighted the work of Criminal Investigations during his time.

"There are many examples, but one I’d like to highlight involves agents from CI’s Cyber Crimes Unit," he wrote. "These agents played a key role in the largest cryptocurrency seizure ever recorded for the federal government, valued at more than $3.6 billion. This involved an alleged conspiracy to launder cryptocurrency stolen from a virtual currency exchange called Bitfinex. This was also the largest single financial seizure recorded by the federal government."

The Next Steps

In addition to highlighting the accomplishments of the agency, he also pointed to the direction he leaving the agency headed, including modernizing the IRS’ information technology infrastructure, both hardware and software.

"An important part of our modernization strategy involves expanding our digital services, to give everyone a seamless experience when they interact with the IRS online," he wrote. "A great example is the IRS Online Account. We are continually working to expand the transactions that individuals can conduct through this account. Last year, for example, we launched a new feature allowing people to authorize their tax practitioner to represent them before the IRS with a Power of Attorney, and to view their tax accounts with a Tax Information Authorization."

He continued: "At the same time, we realize that there is still much for us to improve on to help taxpayers and the tax system. Our employees know we need to do more. The IRS continues to focus on reducing paper correspondence inventory and processing paper tax returns from 2021 as well as work on our response to an unprecedented level of phone demand – situations that have been compounded by the pandemic and related issues. Actions we’ve taken to address the inventory include surge teams, mandatory overtime, innovating to expedite case closures and suspending various notices. We are continuing to work hard on this area, and the efforts of our hard-working employees are enabling significant progress."

Other challenges he noted include the thwarting of identity thieves and improving work in underserved communities, areas that will benefit from the funding received from the Inflation Reduction Act. And he has faith the leadership and the workforce is up to meeting the challenges ahead.

"Although the IRS is a large government institution, it’s an institution run by people –people who care," he wrote. "The IRS has made great strides over the last four years, but as always, IRS employees want to do more, and I know they will continue moving forward in every area, in service to our great nation."

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Scope
The CAA clarifies the scope of the partnership audit rules. The new rules are not narrower than the TEFRA partnership audit rules; they are intended to have a scope sufficient to address partnership-related items. The CAA eliminated references to adjustments to partnership income, gain, loss, deduction, or credit, and replaced them with partnership-related items. "Partnership-related items" are any item or amount that is relevant to determining the income tax liability of any partner, according to the Joint Committee on Taxation (JCT). Among other things, partnership-related items include an imputed underpayment, or an item or amount relating to any transaction with, basis in, or liability of the partnership.

According to the JCT, the partnership audit rules do not apply to withholding taxes except as specifically provided. However, any partnership income tax adjustment will be considered when determining and assessing withholding taxes when the partnership adjustment is relevant to that determination. Further, the technical corrections clarify that an imputed partnership underpayment is determined by appropriately netting partnership adjustments for that year, and then applying the highest rate of tax for the reviewed year.

Pull-In; Push-Out
Also included in the CAA is a "pull-in" procedure, which allows for modifying an imputed underpayment without requiring individual partners to file an amended tax return. The "pull-in" procedure, if elected, would replace the "push-out" election. A push-out shifts liability to individual partners. The "pull-in" procedure contemplates that partner payments and information could be collected centrally by the IRS. However, the procedure permits the partnership representative or a third-party accounting or law firm to collect the data and remit it to the IRS.

Penalties
The partnership adjustment tracking report required in a push out is a return for purposes of failure to file, frivolous submission, and return preparer penalties. Also, the failure to furnish statements in a push-out is subject to the failure to file or pay tax penalties. However, neither an administrative adjustment request nor a partnership adjustment tracking report are returns for purposes of the partner amended return modification procedures.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

Above-the-line deductions are more desirable than itemized deductions because:

• they are more available (for example, they are not phased out or subject to a floor like many itemized deductions);
• they can be claimed even if the taxpayer does not itemize deductions; and
• they lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.

The above-the-line deductions include:

• Trade or business expenses
• Net operating loss deduction
• Loss from sales and exchanges
• Depreciation and depletion
• Deductions tied to rents and royalties
• Teacher's classroom expenses
• Jury pay turned over to employer
• Overnight travel expenses of Reserve or National Guard
• Supplemental unemployment compensation repayments
• Business expenses of qualifying performing artists
• Contributions to individual retirement accounts
• Student loan interest deduction
• Tuition and fees deduction
• Health savings account deduction
• Moving expenses
• ½ of self-employment tax
• Health insurance costs of the self-employed
• Contributions to SIMPLE or SEP plans
• Penalty for early withdrawal of funds from a savings account
• Alimony payments
• Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
• Domestic production activities deduction

The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.

The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.

The surtax applies to individuals, estates, and trusts. The surtax applies if the taxpayer has NII and his or her "modified" adjusted gross income exceeds certain statutory thresholds: $250,000 for married taxpayers and surviving spouses; $125,000 for married filing separately; and $200,000 for individuals and other taxpayers. The tax is broad and can raise tax bills by hundreds, if not thousands, of dollars.

Complex provisions

The regulations are extensive and complex. They address a number of issues that were not answered in the statute, such as the interaction of Code Sec. 1411 (the surtax provisions) and Code Sec. 469 (passive activity loss rules). Significant areas addressed in the proposed regulations include:

• Identification of those individuals subject to the surtax,
• Surtax's application to estates and trusts,
• Definition of NII,
• Disposition of interests in partnerships and S corporations,
• Allocable deductions from NII,
• Treatment of qualified plan distributions, and
• Treatment of earnings by controlled foreign corporations and passive foreign investment companies.

Some issues, however, are not yet addressed, such as the application of the Code Sec. 469 material participation rules to trusts and estates. Further guidance from the IRS is expected.

Borrowed definitions and principles

Net investment income that is subject to the new 3.8 percent tax generally includes interest and dividend income as well as capital gains from investments.  But Code Sec. 1411 doesn't stop there, seeking to tax "passive activities" and contrasting those activities with a "trade or business" in often complex ways.

Because Code Sec. 1411 does not define many important terms, the regulations use definitions from several other Tax Code provisions. For example, the definition of a trade or business is determined under Code Sec. 162, regarding trade or business expenses. This definition is essential to Code Sec. 1411, since the application of each of the three categories of net investment income depends on determining whether the income is from a trade or business. The regulations also borrow the definition of a disposition, which applies to category (iii) income, from other provisions, such as Code Section 731 (partnership distributions) and Code Sec. 1001 (dispositions of property).

New elections available

The regulations provide certain elections that may be beneficial to many taxpayers. Taxpayers that engage in multiple activities under Code Sec. are allowed to make another election to regroup their activities. Taxpayers married to a nonresident alien can elect to treat their spouse as a U.S. resident, which allow more income to escape the 3.8 percent surtax.  

Net investment income generally includes interest and dividend income as well as capital gains from investments. To prevent avoidance of the tax, the regulations include substitute payments of interest and dividends in the definition. The IRS also warned in the preamble to the proposed regulations that it will scrutinize activities designed to circumvent the surtax and will challenge questionable transactions using applicable statutes and judicial doctrines. The IRS further warned that taxpayers should figure their exposure to the 3.8 percent tax quickly since liability for this additional tax must be included in quarterly estimated tax computations and payments starting with first quarter 2013.

Please feel free to contact this office for a personalized review of how the 3.8 percent tax may impact you, and what compliance and planning steps should be considered as a consequence.

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

The answer to that question depends on who inherits the IRA. Surviving spouses are subject to different rules than other beneficiaries. And if there are multiple beneficiaries (for example if the owner left the IRA assets to several children), the rules can be complicated. But here are the basics:

Spouses

Upon the IRA owner's death, his (or her) surviving spouse may elect to treat the IRA account as his or her own. That means that the surviving spouse could name a beneficiary for the assets, continue to contribute to the IRA, and would also avoid having to take distributions. This might be a good option for surviving spouses who are not yet near retirement age and who wish to avoid the extra 10-percent tax on early distributions from an IRA.

A surviving spouse may also rollover the IRA funds into another plan, such as a qualified employer plan, qualified employee annuity plan (section 403(a) plan), or other deferred compensation plan and take distributions as a beneficiary. Distributions would be determined by the required minimum distribution (RMD) rules based on the surviving spouse's life expectancy.

In the alternative, a spouse could disclaim up to 100 percent of the IRA assets. Some surviving spouses might choose this latter option so that their children could inherit the IRA assets and/or to avoid extra taxable income.

Finally, the surviving spouse could take all of the IRA assets out in one lump-sum. However, lump-sum withdrawals (even from a Roth IRA) can subject a spouse to federal taxes if he or she does not carefully check and meet the requirements.

Non-spousal inherited IRAs

Different rules apply to an individual beneficiary, who is not a surviving spouse. First of all, the beneficiary may not elect to treat the IRA has his or her own. That means the beneficiary cannot continue to make contributions.

The beneficiary may, however, elect to take out the assets in a lump-sum cash distribution. However, this may subject the beneficiary to federal taxes that could take away a significant portion of the assets. Conversely, beneficiaries may also disclaim all or part of the assets in the IRA for up to nine months after the IRA owner's death.

The beneficiary may also take distributions from the account based on the beneficiary's age. If the beneficiary is older than the IRA owner, then the beneficiary may take distributions based on the IRA owner's age.

If there are multiple beneficiaries, the distribution amounts are based on the oldest beneficiary's age. Or, in the alternative, multiple beneficiaries can split the inherited IRA into separate accounts, and the RMD rules will apply separately to each separate account.

The rules applying to inherited IRAs can be straightforward or can get complicated quickly, as you can see. If you have just inherited an IRA and need guidance on what to do next, let us know. Likewise, if you are an IRA owner looking to secure your savings for your loved ones in the future, you can save them time and trouble by designating your beneficiary or beneficiaries now. Please contact our office with any questions.

If you have or are planning to move - whether it's a change of personal residence or a change of business address - you want the IRS to know about your change of address. The IRS has recently updated its procedures for taxpayers to follow when notifying the IRS of a change of address. The IRS uses a taxpayer's "address of record" for mailing certain notices and documents that the agency is required to send to a taxpayer's last known address.

The IRS's process for updating changes of address is important for both individual and business taxpayers because a notice or document sent to your (or your business') "last known address" is legally effective and binding, even if you never receive it because you have moved. This presumption of delivery includes such important correspondence as notices of deficiency, liens and levies.

Have you moved since April 15?

If you have already filed your federal income tax return (or any other respective business tax return, such as Form 1065, U.S. Return of Partnership Income), and have since moved from the address that you provided on your return, you need to inform the IRS. This is because the IRS automatically uses the address on your return as its "address of record." Thus, when a taxpayer files a tax return, such as a Form 1040, U.S. Individual Income Tax Return, the address on your return is automatically updated by the IRS after the return has been properly processed (tax returns are considered properly processed after a 45-day period that begins on the day after the return is received by the IRS.)

Therefore, if you move to a new address after filing your return, you need to ensure the IRS has your new address. This can generally be done in one of several ways. First, when a taxpayer provides the U.S. Postal Service (USPS) with a new address, the IRS automatically updates the taxpayer's address of record with the address maintained in the USPS's National Change of Address database. So, when you change your address with the USPS to have your mail forwarded to your new address, the IRS may also update you address of record based on the new address you provide the USPS. However, take caution. You should nonetheless notify the IRS directly of your change of address to ensure the IRS has your correct address. This can be done by filing Form 8822, Change of Address, with the IRS.

However, you can also provide the IRS with your change of address by giving the agency "clear and concise notification" of the change. This can be done electronically, written, or orally, and is discussed below. We recommend such followup notification just in case the IRS fails to follow one of its updating procedures.

Types of returns automatically updated when filed

The IRS's updated procedure (Revenue Procedure 2010-16) not only lists the types of returns on which address provided thereon are automatically updated into its "address of record" database, it also makes clear that certain forms are not considered returns and therefore not automatically updated if a new address is listed. Specifically, a new address listed on (1) Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or (2) Power of Attorney and Declaration of Representative, are not used by the IRS to automatically update a taxpayer's address. The IRS does not consider these to be returns. Therefore, if you file these forms providing a new address, you will need to use another method for informing the IRS of the address change, such as filing Form 8822.

The types of returns from which addresses are automatically updated by the IRS include, but are not limited t

-- Individual income tax returns (e.g., Forms 1040, 1040A, Form 1040X, 1040-SS, 1040EZ, 1040NR, 1040NR-EZ); -- Gift, estate, and generation-skipping transfer tax returns (e.g. Forms 706 series, 709 series); and -- Returns filed under an employer identification number (e.g., Forms 720, 730, 940, 941 series, 943, 945, 940, 990 series, 1041, 1042, 1065 series, and 1120 series.

Comment. Because the IRS maintains address records for gift, estate, and generation-skipping transfer (GST) tax returns that are separate from records maintained for individual income tax returns, an individual's notification of a change of address should identify whether any gift, estate, or GST transfer tax returns are affected.

Documents and notices

The IRS uses the last known address for mailing a number of important documents and notices, as well as any refund you may be owed. Therefore, it is imperative for taxpayers to ensure that the IRS has your proper change of address information. Such notices and documents include, among others, deficiency notices, notices of intent to levy, notices and demand for tax, employment status determinations, notices of third party summonses, notices regarding interest abatements, and notices of final determinations regarding spousal support.

Clear and concise notification

Taxpayers that want to change their address of record can do so by providing the IRS with a "clear and concise notification" that is in accord with the agency's procedures. As previously mentioned, clear and concise notification may be made in writing, electronically, or orally. You must in any case, must provide the your full name, new address, old address, and Social Security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN) when providing the "clear and concise notification" procedures.

Written. The filing of Form 8822, Change of Address, is one way to meet the "clear and concise notification" requirement, for example. You can also provide the IRS with a written statement signed by you, informing the IRS you wish to change your address of record. You must include information such as your full name, new and old address, SSN, ITIN, or EIN as well. If you file a return with your spouse, you should both provide this information as well.

Electronic. You can also satisfy the "clear and concise" requirement by electronically notifying the IRS. You must use a secure application located on the IRS's website, www.irs.gov. A "secure application" is one that requires the taxpayer to verify the taxpayer's identity before accessing the application. However, other forms of electronic notice, such as emailing an IRS email address, do not constitute clear and concise notification.

Verbal. You can also provide the IRS with a change of address orally, by providing a statement - whether in person or directly via telephone -- to an IRS employee. Again, it is a good idea to follow up your telephone call with another call to verify that your address has in fact been inputted properly.

If you have any questions about change of address procedures, please call our office.

If you have completed your tax return and you owe more money than you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

Pay Uncle Sam as much as you can

First and foremost, if you cannot pay the full amount of taxes due, you should nevertheless file your return by the April 15 deadline. Moreover, you should send in as much money as you can with your return. The IRS assesses failure-to-file penalties so you should file your return despite being unable to pay the full amount with the return. As such, it's to your benefit to file your return by its due date and pay off any outstanding balance as soon as you can in order to minimize interest and penalties.

Payment options

If you are not able to pay the full amount of tax you owe, you have options. While you can obtain an automatic six-month extension of time to file, the IRS will still assess interest on the outstanding unpaid tax liability. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return, by the due date for filing your calendar year return (typically April 15) or fiscal year return. However, an extension of time to file is not an extension of the time to pay your taxes. Penalties and interest continue to accrue during the extension.

Second, consider paying some or all of your tax liability by credit card or obtaining a cash advance on your credit card. The interest rate your credit card or bank charges (plus applicable fees) may be lower than the total amount of interest and penalties imposed by the IRS under the Tax Code.

You may also be eligible to take advantage of the IRS's monthly installment agreement option. This option allows eligible taxpayers to pay off their tax bill over a period of time - in monthly installments - to the IRS. However, if you have entered into an installment agreement during the preceding 5 years you cannot use this option. Additionally, even while you are making payments through an installment agreement, penalties and interest continue on the unpaid portion of that debt. To request an installment plan, you can use Form 9465, Request For Installment Agreement. Or, you can use the Online Payment Agreement (OPA) application.

There are many options for paying off your tax debt. Our office can discuss the payment options that will work best in your specific circumstances. Please don't hesitate to call our office with questions.

Many taxpayers are looking for additional sources of cash during these tough economic times. For many individuals, their Individual Retirement Account (IRA) is one source of cash. You can withdraw ("borrow") money from your IRA, tax and penalty free, for up to 60 days. However, the ability to take a short-term "loan" from your IRA should only be taken in dire financial situations in light of the serious tax consequences that can result from an improper withdrawal or untimely rollover of the funds back into an IRA.

The funds must be returned, or rolled back into, an IRA within 60 days from the day after the date of the withdrawal, or income and penalty taxes are imposed on the amount withdrawn and not returned. These tax consequences can be serious. Therefore, it is imperative that you return the withdrawn funds back into an IRA within 60 days.

Tax and interest imposed

If the funds are not returned within 60 days, the withdrawal will not only be treated as a taxable distribution for individuals who are under the age of 59 1/2, but you will also face an additional 10 percent penalty tax, as well as possible state income tax.

Example

You withdraw $10,000 from your IRA on March 2. The 60-day period begins on March 3. To avoid income taxes as a result of early withdrawal treatment and an additional 10 percent penalty tax, the amounts must be returned to an IRA on May 2. Although May 2 falls on a Saturday, there is no extension as a result of weekends (or holidays).

Income tax reporting

If you decide to take the short-term, 60 day "loan" from an IRA you must report the entire amount of the withdrawal. The withdrawal is reported on line 15a of your Form 1040 for the tax year in which you took the withdrawal. If you have returned the withdrawn funds within the 60 day period, you will enter "zero" as the taxable amount of line 15b of Form 1040.

One-year rule

You can only take a "60 day loan" from a specific IRA account and return the funds to that IRA or a different account once during a one-year period. If you make a withdrawal from the same IRA more than once during a one-year period, the second withdrawal is treated by the IRS as a taxable IRA distribution, again generally subject to income taxes and a 10-percent early withdrawal penalty tax.

Moreover, if you redeposit funds back into a particular IRA account and withdraw money from that same account within the one-year period, again the withdrawn funds are again treated as a premature withdrawal subject to income taxes and the 10-percent penalty tax.

For those struggling in these economic times and looking for additional sources of cash, there are other options in addition to a 60-day loan from your IRA. Our office can discuss your options and the potential tax consequences of each. 

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

The fact that the debtor is a family member or other related interest does not preclude you from taking a bad debt deduction, provided that the debt was bona fide and that worthlessness has been established. A direct or indirect transfer of money between family members may create a bona fide debt eligible for the bad debt deduction. However, these transactions are closely scrutinized to determine whether the transfer is a bona fide debt or a gift.

Bona-fide debt and other requirements for deductibility

You may only take a bad debt deduction for bona-fide debts. A bona-fide debt is a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. You must also have the present intention to seek repayment of the debt. Additionally, for a bad debt you must also show that you had the intent to make a loan, and not a gift, at the time the money was transferred. Thus, there must be a true creditor-debtor relationship.

Moreover, nonbusiness bad debts are only deductible in the year they become totally worthless (partially worthless nonbusiness bad debts are not deductible).

To deduct a bad debt, you must also have a basis in it, which means that you must have already included the amount in your income or loaned out your cash (for example, if your spouse has not paid court-ordered child support, you can not claim a bad debt deduction for the amount owed as this amount was not previously included in your gross income).

Reporting bad debts

You can deduct nonbusiness bad debts as short-term capital losses on Schedule D of your Form 1040. On Schedule D, Part I, Line 1, enter the debtor's name and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). If you are reporting multiple bad debts, use a separate line for each bad debt. For each bad debt, attach a statement to your return containing the following:

•  A description of the debt, including the amount and date it became due;
• The name of the debtor, and any business or family relationship between you and the debtor:
• The efforts you made to collect the debt; and
• An explanation of why you decided the debt was worthless (for example, you can show the debtor has declared bankruptcy or is insolvent, or that collection efforts such as through legal action will not likely result in the debt being paid).

If you did not deduct a bad debt on your original income tax return for the year it became worthless, you can file a refund claim or a claim for a credit due to the bad debt. You must use Form 1040X to amend your return for the year the debt became worthless. It must be filed with 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.

Note. If you deduct a bad debt and in a later year collect all or part of the money owed, you may have to include this amount in your gross income. However, you can exclude from your gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year you deducted the debt.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.