Deducting Charitable Contributions: Eight Essentials
IRS Tax Tip 2012-57

Donations made to qualified organizations may help reduce the amount of tax you pay. 

The IRS has eight essential tips to help ensure your contributions pay off on your tax return.

1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received. 
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. 
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

Standard Deduction vs. Itemizing: Seven Facts to Help You Choose 

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.

2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:
        Single     $5,800
        Married Filing Jointly   $11,600
        Head of Household   $8,500
        Married Filing Separately  $5,800
        Qualifying Widow(er)  $11,600

3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.

4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.

5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

by Evie Alvarez

Executive Summary
This deduction is available to employees and business owners who have a space in their home that is regularly and exclusively used for business. Most expenses will be allotted according the percentage of the home which is used for business. Sole-proprietors and single-member LLCs, will report this as an expense on Schedule C. Employees will report this on Schedule A as an Unreimbursed Employee Expense. For employees, the amount of the deduction is the excess of 2% of gross income.

Eligibility Tests
Regularly and exclusively. Regularly and exclusively. You got that? Great!

Now, what does that mean? Any space in your home for which you are claiming business use of home must be regularly and exclusively used for business.

Let’s work through a few examples together and you can tell me whether it is REGULARLY and EXCLUSIVELY used for business.

- The kitchen table? Not likely. You probably have to push your piles of papers aside in order to fit your plate of pizza on the wood.
- A room set aside as an office? Possibly. If it looks like an office, then it should qualify. If it has a large bed that your mother-in-law sleeps on when she visits (every other weekend), it may be crossing the line when it comes to exclusivity. However, you may still be able to use the area of the room that is exclusively used for business.
- The coffee table in your living room where you sit and type on your laptop? Probably not. Again, that darned exclusivity test!
- The desk in your bedroom which you use to work from home twice a week? Sorry, but no. That’s not regular, so this doesn’t qualify as your principal place of business.

Now, of course, this wouldn’t be the Internal Revenue Code if there weren’t a few exceptions to the rule.

For the exclusivity test, there are exceptions if you use part of your home for storing inventory or product samples, or if you use part of your home as a daycare facility. These exceptions are somewhat beyond the scope of this blog, however.

Claiming the Deduction
Information you’ll need to know in order to claim the deduction:
- Area (square footage) of your home
- Area (square footage) of the space you use regularly and exclusively for business
- Length of time used for business (full- or partial-year)
- Direct Expenses: Those expenses which are only for the business part of the home. Examples include: painting or repairing the business room.
- Indirect Expenses: The expenses for keeping up and running the entire home. Examples include: insurance, utilities, general repairs, etc.

Direct expenses are fully deductible while the deductibility of indirect expenses is figured using the percentage of the home used for business.

Example

Area of office room: 50 square feet
Area of home: 2000 square feet
Percentage used for business: 3%
Cost of painting office: $100
Cost of utilities: $3,000

Deductible amount: $100 + 3% of  $3,000 = $190

There is also an opportunity to take depreciation on your home, if you own your home. Land is never depreciable. Depreciation is a topic for another day, so I’ll just let you know that you can take depreciation on your home if you have qualified business use.

Now, whether you’re an employee or a business owner, the guidelines for claiming Business Use of Home is the same. The difference is where that information then goes onto your return.

Sole-Proprietor or Single-Member LLC

You’ll need to fill out form 8829, which will then flow through your Schedule C as an expense. This amount will either lower your profit or increase your loss, which will then affect your gross income to be taxed. Awesome! Lowered profit = lower taxes.

Employee

This will come through your 1040 Schedule A, Unreimbursed Employee Expenses. Of course, as the name implies, if your employer reimburses you for these expenses, you will not be able to claim them on your tax return. The Schedule A is where you document your itemized deductions. Now, here’s the catch which lowers the overall effect of this deduction on your return. Only the excess of 2% of your gross income is actually deducted to determine your taxable income. (I’m assuming that your overall, itemized deductions are greater than the standard deduction. If the standard deduction is greater, the unreimbursed employee expenses won’t help you.)

So, taking our example from above into consideration, if I had gross income of $9,000, I’d only be able to deduct $10, since 2% of $9,000 is $180 and my overall expense is $190.  If I’m in the 15% tax bracket and only taking into consideration this deduction, my overall tax would change from $1,350 (15% of  $9,000) to $1,348.50 (15% of $8,990). Yep, that’s a whopping buck and a half. But, since we round to the whole dollar…only $1.

You may ask why I chose to use gross income of $9,000. That’s rather low. I totally recognize that and realize the limitations of my example. So, why $9,000? If I chose $10,000, you’d get absolutely no deduction WHATSOEVER. 2% of $10,000 is $200. Only the amount over $200 is deductible and our total was $190.

Now, of course, your circumstances will be different, but this does show you how this generous deduction really flows through to very little effect upon the amount of taxes you actually owe if you are an employee. If you own your own business, the net effect will be greater since you don’t have to worry about it being the excess of 2%.

I hope all of this confusing rambling has helped you come to appreciate the complexities of the tax code! Hopefully, it has also helped to give you some understanding of how your tax is determined so that you can make the most of the deductions available to you.