Reed Tinsley, CPA

Health Care Reform 2014 - Now Is The Time

Just over three years ago, Congress enacted legislation that overhauls the U.S. health care system and affects nearly all taxpayers, many employers, and many elements of the health care industry. The legislation contains a host of tax changes, many of which are both complex and novel. Some already have gone into effect, some go into effect this year, and still others will be in place in 2014 and 2018.

Thomson Reuters is offering a complimentary publication that helps you get a fix on the rules newly effective this year, as well as those looming on the horizon, by presenting a timeline of 2013-2018 tax changes in the health care legislation, and a concise summary of each new tax provision.

http://yourcheckpoint.thomsonreuters.com/healthcarereform/

What you need to know about the new 3.8% net investment income tax

In December 2012, the IRS issued proposed regulations (REG-130507-11) for the net investment income tax under Sec. 1411 that went into effect on Jan. 1, 2013. At the same time, the IRS released a list of frequently asked questions concerning the net investment income tax.

The new levy was created to help pay for health care reforms that were enacted in 2010. The rate is 3.8% of the lower of net investment income or the amount of modified adjusted gross income (MAGI) over specific thresholds. The key consideration, however, is what constitutes net investment income and which taxpayers are affected. Moreover, practitioners need to know what information they must obtain from clients to correctly compute the additional tax, and they need to be aware of common issues that may arise in computing the net investment income tax.

Only individuals with MAGI above the thresholds and certain estates and trusts are subject to the net investment income tax. Nonresident aliens and entities other than natural persons are not subject to the tax. The thresholds for individuals are: married filing jointly and qualifying surviving spouse, $250,000; married filing separately, $125,000; single and head of household, $200,000. The thresholds are not indexed for inflation. For most taxpayers, MAGI is the same as adjusted gross income (AGI). Excluded income and certain deductions under Sec. 911 of citizens or U.S. residents residing abroad are the only modifications to AGI for the net investment income tax calculation.

Estates and trusts with undistributed net investment income and AGI above the dollar amount at which the highest tax bracket for an estate or trust begins for that tax year are also subject to the net investment income tax. (For 2013, $11,950.) Exempt trusts include grantor trusts under Secs. 671–679, REITs and common trust funds, tax-exempt trusts under Secs. 501 and 664, and charitable trusts under Sec. 170(c)(2)(B).

Three defined categories of income are subject to the net investment income tax (Sec. 1411(c)):
Category I: Gross income from interest, dividends, rents, royalties, and nonqualified annuities, other than such income derived in the ordinary course of a trade or business not described in Category II.
Category II: Other gross income from businesses that trade financial instruments or commodities, and businesses that are passive activities within the meaning of Sec. 469.
Category III: Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property, other than property held in a trade or business that is not described in Category II. Gains and losses from dispositions of trade or business property used in passive activities are included in calculating the net investment income tax.

To arrive at net investment income, investment income from these categories is reduced by investment expenses such as early-withdrawal penalties, interest expense, adviser fees, directly related rental and royalty expenses, and state and local taxes allocable to items included in investment income. Wages, self-employment income, unemployment compensation, business income from nonpassive sources, Social Security benefits, tax-exempt interest, and qualified pension, annuity, and individual retirement account distributions are excluded when calculating the net investment income tax.

Some real estate industry representatives and others have spread alarm, incorrectly, that the net investment income tax applies to all proceeds from sales of personal residences. As described in Category III, only the taxable portion of any gain from the sale of property, including a primary personal residence, is potentially subject to net investment income tax. Any gain excluded under the principal residence provisions under Sec. 121 is not considered net investment income. Since up to $250,000 of gain for single individuals and $500,000 for taxpayers filing jointly generally is exempt (if the ownership, use, and other requirements are met), many or most taxpayers are unaffected by the net investment income tax on the sale of their principal residences. However, gain attributable to depreciation adjustments (which cannot be excluded from income under Sec. 121(d)(6)) is included in net investment income. Gains from sales of second homes are subject to the tax. And, of course, the taxpayer must have MAGI exceeding the applicable threshold for the net investment income tax to apply.

Special Issues

Passive activities: With the inclusion of passive activity income in net investment income, it is even more critical that taxpayers properly identify their activities as passive or nonpassive and group them appropriately. Since the enactment of the net investment income tax, the IRS recognizes that previous groupings may no longer be appropriate. Therefore, in the first tax year beginning after Dec. 31, 2013, individual, estate, or trust taxpayers subject to the net investment income tax will be allowed a one-time “fresh start” for regrouping (Prop. Regs. Sec. 1.469-11(b)(3)(iv)). An individual, estate, or trust to which Sec. 1411 applies in a tax year beginning in 2013 may regroup activities in that tax year. Regroupings must comply with the rules in Rev. Proc. 2010-13 and Regs. Sec. 1.469-4. Practitioners should take this valuable opportunity to review all activity groupings and revise them, as appropriate.

S corporations and partnerships: Gain from disposition of an interest in a passthrough entity (a partnership or S corporation) where the interest is not a passive activity with respect to the taxpayer would seem to be included in Category III as net investment income. However, Sec. 1411(c)(4) provides that the amount of gain or loss included in net investment income from the disposition of an interest in a nonpassive passthrough entity is limited to the amount of gain or loss that would result if the entity sold all of its assets at fair market value (FMV) for cash immediately before the disposition of the interest (deemed-sale method). Gains from the sale of assets used in a nonpassive qualified trade or business are not included in net investment income. Under the proposed regulations, each asset must be separately valued, including goodwill, and a determination must be made whether the asset is used in a qualified trade or business. The individual shareholder’s or partner’s basis in the interest may have been adjusted outside the entity. The proposed regulations provide instructions for allocating adjusted basis among the gains and losses for purposes of adjusting net investment income.

Fortunately, the proposed regulations do not specify that the reporting entity must provide FMV and detailed asset use information to former partners or S corporation shareholders with their Schedule K-1, Shareholder’s [or Partner’s] Share of Income, Deductions, Credits, etc. However, sellers must attach a statement to their tax return for the year of disposition that includes specific information and the calculation of the adjustments to net investment income computed under this exception.

As a practical matter, since FMV and asset details are not usually readily available to shareholders and partners, obtaining these values and making the calculation will require assistance from the entity’s accountants. This will require asking preparers of Forms 1065, U.S. Return of Partnership Income, and 1120S, U.S. Income Tax Return for an S Corporation, for information that will be time-consuming to provide and, in the worst case, could lead to litigation. Sellers should consider including the information required to compute adjustments to net investment income as part of the sale agreement to avoid any future conflict with the IRS and to expedite the calculation of net investment income. In another twist, the deemed-sale exception does not apply to dispositions of S corporation stock if Sec. 338(h)(10) is elected.

Foreign entities: Prop. Regs. Sec. 1.1411-4(g) provides special rules for the treatment of distributions from controlled foreign corporations and passive foreign investment companies.

Kiddie tax: If parents elect to include a child’s interest, dividends, and capital gains on the parents’ Form 1040, U.S. Individual Income Tax Return, the child’s income, less the excluded amount on Form 8814, Parents’ Election to Report Child’s Interest and Dividends, is included in the net investment income tax calculation. Alternatively, if the child files his or her own return and computes the tax based on the parents’ effective rate, it appears that the child’s MAGI determines whether the net investment income tax is owed; but no official guidance is available.

While the net investment income tax was effective Jan. 1, 2013, the effective date of the proposed regulations is generally Jan. 1, 2014; however, taxpayers may rely on the proposed regulations for compliance purposes until the effective date of the final regulations. The IRS announced it expects to finalize the regulations under Sec. 1411 in 2013. Many more issues will likely arise in accurately calculating the net investment income tax. Preparers should be alert to new regulations as they are proposed and finalized.

Qualified Medical Officce Real Property Expenditures Are Again Eligible for Section 179 Deductions

Historically, real property costs have been ineligible for the Section 179 deduction privilege. However, the Small Business Jobs Act of 2010 dramatically changed the deal by allowing Section 179 deductions for up to $250,000 of qualified real property costs for tax years beginning in 2010 and 2011. Somewhat surprisingly, the fiscal cliff legislation restored the $250,000 real property deduction privilege for tax years beginning in 2012 and 2013. [See IRC Sec. 179(f).] Here are the details.

 Eligible Costs.  Qualified real property costs include:

• Qualified leasehold improvement property costs, as defined by IRC Sec. 168(e)(6) . The definition covers only nonresidential building interior costs, and certain interior costs are excluded (such as the cost of elevators, escalators, enlargements, structural components benefiting common areas, and any interior structural framework of the building). The improvements must be placed in service more than three years after the date the building was first placed in service.

• Qualified retail improvement property costs, as defined by IRC Sec. 168(e)(8) . The definition covers only nonresidential building interior costs for a building that is open to the general public and used in a retail business of selling tangible personal property to the general public. Certain interior costs are excluded (such as the cost of elevators, escalators, enlargements, structural components benefiting common areas, and any interior structural framework of the building). The improvements must be placed in service more than three years after the date the building was first placed in service.

 Coordination with Overall $500,000 Allowance.  Qualified real property costs that are expensed under this provision reduce the overall $500,000 maximum Section 179 allowance. In other words, the $250,000 allowance for qualified real property costs is a subset of the overall $500,000 allowance rather than an addition to the overall allowance.

Details on the Additional Medicare Tax

When does Additional Medicare Tax start?

Additional Medicare Tax applies to wages and compensation above a threshold amount received after December 31, 2012 and to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.

What is the rate of Additional Medicare Tax?

The rate is 0.9 percent.

When are individuals liable for Additional Medicare Tax?

An individual is liable for Additional Medicare Tax if the individual's wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• Single: $200,000
• Head of household (with qualifying person): $200,000
• Qualifying widow(er) with dependent child: $200,000

What wages are subject to Additional Medicare Tax?

All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual's filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer's Tax Guide.

Will Additional Medicare Tax be withheld from an individual's wages?

An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual's filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Allowance Certificate.

IRS Releases FAQ on Medical Device Excise Tax

Q1. What is the medical device excise tax?

A1. Section 4191 of the Internal Revenue Code imposes an excise tax on the sale of certain medical devices by the manufacturer or importer of the device.

Q2. When does the tax go into effect?

A2. The tax applies to sales of taxable medical devices after December 31, 2012.

Q3. How much is the tax?

A3. The tax is 2.3 percent of the sale price of the taxable medical device. See Chapter 5 of IRS Publication 510, Excise Taxes, and Notice 2012-77 for additional information on the determination of sale price.

Q4. Who is responsible for reporting and paying the medical device excise tax?

A4. Generally, the manufacturer or importer of a taxable medical device is responsible for filing Form 720, Quarterly Federal Excise Tax Return, and paying the tax to the IRS.

Q5. Will individual consumers be subject to any reporting or recordkeeping requirements?

A5. Generally, no action is required by individual consumers. Because the tax is imposed upon the sale of a taxable medical device by the manufacturer or importer, the manufacturer or importer is responsible for reporting and paying the tax.

Q6. Who is the manufacturer for purposes of the medical device excise tax?

A6. Generally, with regard to the medical device excise tax, the manufacturer is the person who produces a taxable medical device from scrap, salvage or junk material, or from new or raw material, by processing, manipulating or changing the form of a device or by combining or assembling two or more devices.

Q7. Who is the importer for purposes of the medical device excise tax?

A7. Generally, with regard to the medical device excise tax, the importer of a taxable medical device is the person who brings the device into the United States from a source outside the United States, or withdraws the device from a customs-bonded warehouse for sale or use in the United States.

Q8. What is the tax treatment of convenience kits?

A8. Notice 2012-77 provides interim guidance on the tax treatment of convenience kits. Under the interim guidance, a taxable medical device that goes into a domestically-produced convenience kit will be subject to tax upon its sale by the manufacturer or importer, but the sale of the convenience kit by the kit producer will not be subject to tax. Special rules apply to imported kits.

For purposes of the notice, a convenience kit is a set of two or more devices within the meaning of § 201(h) of the Federal Food, Drug, and Cosmetic Act that is enclosed in a single package, such as a bag, tray, or box, for the convenience of a health care professional or the end user.

Q9. What form will be used to report the medical device excise tax?

A9. The medical device excise tax is a manufacturers excise tax. Like other manufacturers excise taxes, the medical device excise tax is reported on Form 720. See Chapters 11 and 12 of IRS Publication 510 for additional information on filing, deposits, and payments.

Q10. When is the Form 720 due?

A10. Form 720 is filed quarterly. The first return to report the medical device excise tax will be due on April 30, 2013, for the quarterly period including January, February, and March 2013. Quarterly return due dates are as follows:

      For the months:                         Due by:
      ________________________________________________

      Jan., Feb., Mar.                        April 30
      Apr., May, Jun.                         July 31
      Jul., Aug., Sep.                        Oct. 31
      Oct., Nov., Dec.                        Jan. 31

Q11. Are tax deposits required for the medical device excise tax?

A11. Yes. Semi-monthly deposits will generally be required if tax liability exceeds $2,500 for the quarter. The first deposit of the medical device excise tax, covering the first 15 days of January 2013, will be due on January 29, 2013. Notice 2012-77 provides transition relief from deposit penalties during the first three calendar quarters of 2013. For details on deposit requirements, see the Instructions to Form 720 and Chapter 12 of IRS Publication 510.

Q12. Should an entity that is disregarded for income tax purposes file Form 720 in the disregarded entity's name or the owner's name?

A12. An entity that is disregarded as an entity separate from its owner for income tax purposes is treated as a separate entity for excise tax purposes. Therefore, the entity, and not the disregarded entity's owner, is responsible for filing Form 720 and paying of the tax.

Q13. Has the IRS issued guidance on the medical device excise tax?

A13. Yes. The IRS and the Treasury Department issued final regulations on December 5, 2012. The IRS and the Treasury Department issued Notice 2012-77 on December 5, 2012, to provide interim guidance on certain issues related to the medical device excise tax.

Q14. What is a taxable medical device?

A14. In general, a taxable medical device is a device that is listed as a device with the Food and Drug Administration under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 CFR part 807, unless the device falls within an exemption from the tax, such as the retail exemption.

Q15. Are there any exemptions to the medical device excise tax?

A15. Yes. There are specific statutory exemptions for eyeglasses, contact lenses, and hearing aids. There is also an exemption for other devices that are of a type that are generally purchased by the general public at retail for individual use (the retail exemption).

Q16. How does a manufacturer determine if a particular type of device qualifies for the retail exemption?

A16. The regulations provide a facts and circumstances approach to determine whether a type of device meets the retail exemption. The regulations enumerate several factors that are relevant, but there may be relevant factors in addition to those enumerated in the regulations. The determination is based on the overall balance of factors relevant to a particular type of device. No one factor is determinative. See § 48.4191-2(b)(2) of the regulations for more information about the retail exemption. The regulations also provide a safe harbor for certain devices that will be considered to be of a type that falls within the retail exemption. See Q&A 18.

Q17. Do the regulations illustrate how the retail exemption facts and circumstances test should be applied?

A17. Yes. The regulations include examples that apply the facts and circumstances test to several types of medical devices. Based on the totality of the circumstances presented in the examples, the examples conclude that non-sterile absorbent tipped applicators, adhesive bandages, snake bite suction kits, denture adhesives, mechanical and powered wheelchairs, portable oxygen concentrators, and therapeutic AC powered adjustable home use beds are devices that fall within the retail exemption. Based on the totality of the circumstances presented in the examples, the examples also conclude that mobile x-ray systems, nonabsorbable silk sutures, and nuclear magnetic resonance imaging systems are not devices that fall within the retail exemption.

Q18. Is there a retail exemption safe harbor?

A18. Yes. The regulations identify certain categories of devices that qualify for the retail exemption so that manufacturers and importers do not have to apply the facts and circumstances test. Those categories are set forth in a safe harbor provision in § 48.4191-2(b)(2)(iii) of the regulations.

Q19. Are there any circumstances under which a taxable medical device can be sold tax-free?

A19. Yes. A manufacturer or importer of a taxable medical device may, in certain circumstances, sell a taxable medical device tax-free for use by the purchaser for further manufacture (or for resale by the purchaser to a second purchaser for further manufacture), or for export (or for resale for export). To make a tax-free sale for further manufacture or export, both parties to the sale must be registered with the IRS. Form 637, Application for Registration for Certain Excise Tax Activities, is used for the registration process. For more information on the Form 637 registration process, see the 637 Registration Program at IRS.gov.

Q20. I'm not familiar with manufacturers excise taxes. Where can I learn more?

A20. For more information about manufacturers excise taxes in general, see Chapter 5 of IRS Publication 510.

 

Substantiating Charitable Contributions

One of the most popular tax deductions for individuals is the one allowed for donations to charitable organizations—from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, over the last several decades, this deduction has also been among the most abused. Thus, perhaps it is not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.

What we’re left with is a confusing array of rules that you have to comply with in order to claim a deduction. A recent court case illustrates how easy it is to run afoul of the documentation requirements. In the case, the taxpayers donated around $22,000 to their church during the tax year. Although the donations were made by check and the taxpayer provided canceled checks to document the gift, the IRS disallowed the deduction because the taxpayers failed to obtain a timely receipt from their church to support the donations. Such receipt (or receipts) must be received by the time you file your return for the year of the donation (or, if earlier, by when the return is due). In addition, it must include all of the following:

1. The name and address of the charity.
2. The date of the contribution.
3. The amount of cash and/or a description (but not an estimate of value) of any property contributed.
4. A list of any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically state that the donor received no goods or services from the charity.

In the case at hand, the taxpayers had a receipt from their church, but it did not contain the required statement regarding whether goods or services were provided. They tried to correct this omission by getting a new receipt from their church after the IRS challenged the deduction. By then, of course, it was too late.

A few tax tips for physicians (and anybody else)

Consider Accelerating Income to 2012

It is often recommended that physician practices defer taxable income to the following year or postponing some deductible expenses (Unless youare a C corporation). But this approach is only useful if you expect to pay a lower tax rate next year, and with the Bush tax cuts scheduled to expire at year end, many businesses and individuals may find themselves paying higher rates in 2013. If this is the case, then it may be more beneficial to accelerate some taxable income into this year so that it can be taxed at the lower rate.

Take Advantage of the 0% Rate on Investment Income

The tax rate on qualified dividends and long-term capital gains is currently zero percent for those who fall within the 10 and 15 percent tax brackets. This generous tax rate could be history by the end of the year, and now may be time to take advantage of it. If your income is too high to qualify for this rate (available to married couples making less than $70,700 or single filers making less than $35,350), then consider giving some appreciated stock or mutual fund shares to loved ones who fall within the lower brackets. Just remember, giving securities to anyone under age 24 could result in them being taxed at their parents’ rates.

Time Investment Gains and Losses and Consider Being Bold about It

Consider selling appreciated securities this year while the maximum tax rate on long-term capital gains from 2012 sales is only 15 percent. This favorable rate applies to appreciated securities held for at least a year and a day before selling. Biting the bullet and selling some loser securities—those currently worth less than you paid for them—before year end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year.

Current Medical Loss Ratio (MLR) Rebates Have Varied Tax Consequences

The first round of medical loss ratio (MLR) rebates payable under the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) have now been either recently received or are "in the mail." The first MLR rebates under the PPACA were required to be disbursed to health insurance policyholders by insurance companies on or before August 1, 2012.

In April 2012, the IRS posted frequently asked questions (FAQs) addressing the federal tax consequences of MLR rebates. These FAQs form the framework and extent of IRS guidance to date. The basic rule of thumb throughout the various scenarios addressed by the FAQs is fairly straightforward: if a tax benefit was previously gained on the premiums now being refunded, the rebate is taxable; otherwise, the premiums are usually tax free to the recipient.

The guidance confirmed that where employees make premium contributions with pre-tax dollars through a cafeteria plan, any MLR rebates that the employer passes through to those employees will be subject to federal income and employment taxes, and related employer wage withholding obligations, in the year that they are paid, Fenton told CCH. "This is true regardless of whether the rebates are distributed in the form of cash or future credits against premiums (for example, credits produce more taxable wages)."

Individually-purchased policies. An individual who purchased and paid premiums for health insurance for himself or herself in 2011, without receiving any reimbursement or subsidy for the premiums, will not be taxed on any rebate received in 2012, provided the individual did not receive a tax benefit from deducting the 2011 premiums on 2011 Form 1040, Schedule A or, if self-employed, on line 29 of 2011 Form 1040. The same result applies whether the rebate is received in cash or as a reduction in the amount of premiums due for 2012.

Group policies—after-tax premium payments by employee. As is the case for individually-purchased policies, employees who in 2011 paid their share of the premiums on group policies with after-tax wages (income already taxed and subject to employment taxes) generally will not recognize income on 2012 MLR rebates. For employees who participated in the plan during 2011 and 2012 paying after-tax premiums, the rebates—whether paid in cash or as a reduction in 2012 premiums—will be income tax free to them, except to the extent they benefited from deducting the premium on 2011 Form 1040.

One twist for group plans applies, however, that is dependent upon whether, under DOL rules, the employer shares the rebate from the insurance company with current employees regardless of whether they participated in the 2011 plan. If the employer pays out the rebate based on the employee’s after-tax share of 2012 premiums irrespective of whether the individual was an employee in 2011, the employee receives the rebate as a tax-free purchase price adjustment to 2012 premiums paid. This tax-free treatment applies both to 2012 employees who were employees in 2011 and those who were not and, therefore, irrespective of whether any 2011 premiums were deducted on Form 1040, Schedule A.

Group policies—pre-tax premium payments by employee. MLR rebates are generally taxable if distributed to 2012 participants who pay premiums on a pre-tax basis under the employer’s cafeteria plan. If a 2011-2012 employee who paid in pre-tax premiums receives a rebate check, it is considered a return of wages that have not yet been taxed or subject to employment tax. If that employee receives the rebate in the form of a 2012 premium reduction, the employee’s payment of premiums through a salary reduction contribution in 2012 is decreased by that amount and therefore taxable salary is increased by that amount.

If an employer pays out rebates in 2012 irrespective of whether an employee under the cafeteria plan had worked for the employer in 2011, the MLR rebate is likewise considered addition income and subject to employment taxes. If paid in cash, it is considered additional wage income. If paid as a premium reduction, it is considered a reduction in the pre-tax amount due by the employee under the cafeteria plan and, therefore, increases wage income.

Information reporting requirements

Cash rebates to individual policy holders generally are subject to Form 1099-MISC information reporting by the insurance company only if two conditions are met: (1) the total rebate payments made to that policyholder for the year total $600 or more; and (2) the insurance company "knows that the rebate payments constitutes taxable income to the individual policyholder or can determine how much of the payments constitute taxable income."

Rebates paid to a group policyholder as a premium reduction likewise are not subject to Form 1099-MISC information reporting under the same criteria as for cash rebates, above (the premium reduction is for $600 and the insurance company knows it will be taxable income to the group policyholder) and the group policyholder is not an exempt recipient for Form 1099 purposes. An exempt recipient includes corporations, tax exempt organizations, and federal/state governments.

Rebate payments passed along by employers to employees under a cafeteria plan, either as cash or premium reductions, will normally be reflected on each employee’s Form W-2 as increased wage income, subject to income tax withholding and employment taxes.

Tax Calendar for Small Businesses and Self-Employed

The IRS has created a great calendar to keep up with due dates and also to provide tax advice. The calendars come in online form, desktop form, and paper form.  To download, follow this link:

http://www.irs.gov/businesses/small/article/0,,id=176080,00.html

 

Substantiating Charitable Contributions

One of the most popular tax deductions for individuals is the one allowed for donations to charitable organizations—from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, over the last several decades, this deduction has also been among the most abused. Thus, perhaps it is not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.

What we’re left with is a confusing array of rules that you have to comply with in order to claim a deduction. A recent court case illustrates how easy it is to run afoul of the documentation requirements.

In the case, the taxpayers donated around $22,000 to their church during the tax year. Although the donations were made by check and the taxpayer provided canceled checks to document the gift, the IRS disallowed the deduction because the taxpayers failed to obtain a timely receipt from their church to support the donations. Such receipt (or receipts) must be received by the time you file your return for the year of the donation (or, if earlier, by when the return is due). In addition, it must include all of the following:

1. The name and address of the charity.
2. The date of the contribution.
3. The amount of cash and/or a description (but not an estimate of value) of any property contributed.
4. A list of any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically state that the donor received no goods or services from the charity.

In the case at hand, the taxpayers had a receipt from their church, but it did not contain the required statement regarding whether goods or services were provided. They tried to correct this omission by getting a new receipt from their church after the IRS challenged the deduction. By then, of course, it was too late.