Taxes, Withholdings and Deductions

First, I should remind everyone that now is the best time to redo your withholdings on your W4. The best place to do this is the IRS Withholding Calculator. By recalculating your withholdings annually, you will help ensure that you are not giving the government an interest free loan AND that you will not owe money at the end of the year. If you are getting married or having a child this year, it counts for the entire year...so calculate it as such.

That said, there are some new rules in the IRS this year which have caused us a bit of a headache. Defined in IRS publication 526 for 2007, there are new rules about deductions and in particular what documentation must be needed. For cash contributions of any amount, you must have one of the following regardless of the amount you contribute:

   1. A bank record that shows the name of the qualified
    organization, the date of the contribution, and the
    amount of the contribution. Bank records may include:
         1. A canceled check,
         2. A bank or credit union statement, or
         3. A credit card statement.
   2. A receipt (or a letter or other written 
    communication) from the qualified organization 
    showing the name of the organization, the date of the
    contribution, and the amount of the contribution.
   3. The payroll deduction records described next.

Since our bank doesn't make available to us our cancelled checks, we are stuck in limbo hoping the charities give us a receipt or we will have to figure out the check numbers and request them of the bank.

But the new rules don't stop there, they take special exception to any single contribution over $250. If you have five $50 contributions, that wouldn't count. But, a single $250 contribution has special rules. The rules are that the charity that you gave this $250 or more donation to must acknowledge that contribution and the acknowledgment must meet these tests:

   1. It must be written.
   2. It must include:
         1. The amount of cash you contributed,
         2. Whether the qualified organization gave you 
          any goods or services as a result of your 
          contribution (other than certain token items 
          and membership benefits),
         3. A description and good faith estimate of the
          value of any goods or services described in (b) 
          (other than intangible religious benefits), and
         4. A statement that the only benefit you received 
          was an intangible religious benefit, if that was 
          the case. The acknowledgment does not need to 
          describe or estimate the value of an intangible 
          religious benefit. An intangible religious benefit 
          is a benefit that generally is not sold in 
          commercial transactions outside a donative (gift)
          context. An example is admission to a religious 
          ceremony.
   3. You must get it on or before the earlier of:
         1. The date you file your return for the year you
          make the contribution, or
         2. The due date, including extensions, for filing
          the return.

Overall, this makes it tougher on those of us who are contribute to various charities. In a given year, thanks to many queries for support, Heather and I may give to 15-20 charities. Now, we have to try to track down receipts, canceled checks, and acknowledgments for all of these contributions. Some contributions may be as low as $5-10. So, at some points I guess the government wins because people may not go through the hassle for deducting those small contributions.