Taking Some Tax Pain Out of the Season of Giving

Also, the deductibility of tuition and a call for tax-tracking software advice.
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'Tis the season of giving. It's that feel-good time of year that makes us feel very philanthropic.

Leave it to Uncle Sam to make your act of kindness a pain in the butt tax-wise. But we'll try to simplify those

Grinch

-like rules so you really do end up feeling good about your donations.

In addition, we'll discuss the deductibility of tuition costs.

But first: We need some help from traders.

In February, we

wrote about trade-tracking software, highlighting

Quicken

,

Money

,

Captools

and

LiveWire

, to name a few. But reader

Greg Stranger

wants to know if these packages are still the best available.

What do you think? Let us

know, and after some research of our own, we'll share your suggestions.

If you have any tax questions or comments, send them to the above address and please include your full name.

The Gift-Giving Grinch

What is the maximum material charitable donation you can get a tax deduction for? -- Phil Feldman

Phil,

Everyone tells you to donate to charity to get your tax bill down -- but they neglect to tell you that Uncle Sam can be a Grinch and takes the feeling of goodwill out of your act of kindness.

If your charitable contributions for the year add up to less than 20% of your adjusted gross income (line 34 on your

Form 1040), ignore everything below. All of your charitable contributions will be deductible.

It's only once you get really generous that you run into complications.

Fortunately, Clarence Kehoe, partner and director of employee benefits at

Anchin Block & Anchin

, a New York accounting firm, helped us make some sense out of these seemingly nonsensical rules.

You must ask yourself two questions to determine the deductible amount of your contribution:

What organization are you donating to?

If you are giving to most common charities -- churches, synagogues, hospitals, cancer associations, etc. -- the deductibility of your contribution is limited to 50% of your adjusted gross income. These charities are sometimes called the "50% charities" in IRSpeak.

If you give to veterans organizations, fraternal societies or not-for-profit cemeteries, your contribution is limited to 30% of your AGI.

Finally, if you're donating to family funded private foundations, your contribution is limited to 20% of your AGI.

What are you contributing?

If you're donating cash, clothes, cars, securities held for the short term -- anything other than assets that would generate long-term capital gains -- your contribution limit is determined by the organization you're donating to. See the percentages listed above.

If you are donating an asset like a winning stock you've held for more than a year -- something that would generate a long-term capital gain if you sold it -- things get hairy, Kehoe warns.

Determining the limitation on this contribution is a two-step process. First, determine the percentage of adjusted gross income that normally applies to the organization you're donating to, then drop it down one notch.

So, if you're giving long-term capital-gain property to a church (a 50%-limitation charity), your limitation bumps down to 30%. But if that property is going to the veterans association (a 30%-limitation charity), the limitation drops to 20%. (The limitation can't fall below 20%.)

Who made up these crazy rules?

If you can't deduct part of your contribution because of these limitations, any excess can be carried forward for up to five years.

There is a worksheet in the

Internal Revenue Service's

Publication 526

-- Charitable Contributions

to help you figure this all out.

Once you determine your charitable deduction, you must report it on lines 15 to 17 of

Schedule A

-- Itemized Deductions

.

One other note: If your adjusted gross income is more than $126,600, your itemized deductions are limited to 3% of the difference between your AGI and $126,600.

A few more things to remember:

If you give a gift worth more than $250, you have to get a written receipt. And you need this documentation by the time you file your tax return, Kehoe stresses. "That means if you're filing your return on April 15, the organization must have sent you documentation back by then or the IRS has the right to disallow the deduction."

Any time you give away noncash property worth more than $500, you must file

Form 8283

-- Noncash Charitable Contributions

. More importantly, noncash items valued at $5,000 or more must be appraised by the time you file your tax return.

Deducting Your MBA

What's the story with the tax deductibility of business-school tuition? -- Chand Sooran

Chand,

This question comes up a lot, so here is my final answer on the subject: It depends.

First, I'm assuming you're not being reimbursed for any of these costs. If you are, most likely you can't deduct a thing.

In general, you must be "established in a trade or business before any expenses are deductible," according to the

Research Institute of America

.

So if you were a full-time student last year and did not have a full-time job, you can't take a deduction for any education expenses. If you went straight to grad school from college (even if you took on a summer job) you would not be able to deduct your costs.

On the flipside, tuition and related expenses generally are deductible if the purpose is to maintain or improve a skill required by your job or to meet certain requirements such as certificates or credentials, Kehoe says.

Here are a few scenarios:

You got a bachelor's degree in accounting and you work in the tax department of an accounting firm. You decide to go back to school at night and get your master's in taxation. Those costs are deductible because they are to maintain or improve a skill required at your job.

Along the same lines, if you're a certified public accountant, you have to take continuing education courses each year. They are required to keep your certificate so they're deductible, Kehoe notes.

But if the education is going to change your job position, you can't deduct it. If you're a broker and you're going back to school to get your MBA because you want to be a chief financial officer someday, you can't deduct those costs.

TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.