Form 1040 instructions for 2008 detail several new items
IRS has released the general instructions for Form 1040 for 2008 on its web site. They detail the many new rules that apply for 2008 and 2009 as a result of the flood of recent tax legislation.

What’s new for 2008. The 2008 Form 1040 instructions detail these new items for 2008.

• Economic stimulus payment. Any economic stimulus payment the taxpayer received in 2008 is not taxable for federal income tax purposes but reduces his recovery rebate credit.
• Recovery rebate credit. This credit is figured like last year’s economic stimulus payment, except that the amounts are based on tax year 2008 instead of tax year 2007. The maximum credit is $600 ($1,200 if married filing jointly) plus $300 for each qualifying child. A taxpayer may be able to take this credit only if he did not get an economic stimulus payment, or his economic stimulus payment was less than $600 ($1,200 if married filing jointly for 2007) plus $300 for each qualifying child he had for 2008. The credit is entered on line 70 and there is a worksheet (at page 61 of the instructions) for figuring the credit.

RIA observation: Many individuals may have received a zero or reduced economic stimulus payment because of the phaseout rules. Under those rules, the amount of an economic stimulus payment (both the basic and the child’s amount) was reduced by 5% of a taxpayer’s adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). Since the time when IRS first started sending out economic stimulus payments, economic conditions have worsened. As a result, many individuals who lost all or a portion of their economic stimulus payment because of the phaseout rules may be in a position due, for example, to a layoff or cutback in hours or salary, to claim a recovery rebate credit on the 2008 return they file in 2009. Like the stimulus payment, the recovery rebate credit is subject to the same phaseout rules.

• Withdrawal of economic stimulus payment from certain accounts. If a taxpayer’s economic stimulus payment was directly deposited to a tax-favored account and he withdraws the payment by the due date of his return (including extensions), the amount withdrawn will not be taxed and no additional tax or penalty will apply. For stimulus payments deposited into a Coverdell education savings account (CESA), the withdrawal can be made by the later of the above date or June 1, 2009. Additional information may be found at the instructions for lines 15a and 15b, 21, and 59.
• Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $46,200 ($69,950 if married filing jointly or a qualifying widow(er); $34,975 if married filing separately).
• IRA deduction expanded. An individual and his spouse, if filing jointly, each may be able to deduct up to $5,000 ($6,000 if age 50 or older at the end of the year). The individual may be able to take an IRA deduction if he was covered by a retirement plan and his 2008 modified adjusted gross income (AGI) is less than $63,000 ($105,000 if married filing jointly or qualifying widow(er)). If his spouse was covered by a retirement plan, but the individual was not, he may be able to take an IRA deduction if his 2008 modified AGI is less than $169,000. Details and exceptions may be found at the instructions for line 32 that begin on page 30.
• Standard deduction increased by real estate taxes and net disaster losses. A taxpayer’s standard deduction is increased by certain state or local real estate taxes he paid, and a net disaster loss attributable to a federally declared disaster, as explained in the instructions for line 39c on page 34.
• First-time homebuyer credit. If a taxpayer buys a main home after April 8, 2008, and before July 1, 2009, and did not own a main home during the prior 3 years, he may be able to take this credit, as detailed in the instructions for line 69 on page 61.
• Rollovers to Roth IRAs. A taxpayer can roll over distributions from an eligible retirement plan to a Roth IRA. The rollover is not tax-free, as detailed in the instructions for lines 16a and 16b.
• Standard mileage rates. The 2008 rate for business use of one’s vehicle is 50 1/2 cents a mile (58 1/2 cents a mile after June 30, 2008). The 2008 rate for use of one’s vehicle to get medical care or to move is 19 cents a mile (27 cents a mile after June 30, 2008).
• Earned income credit (EIC). A taxpayer may be able to take the EIC if (1) a child lived with the taxpayer and the taxpayer earned less than $38,646 ($41,646 if married filing jointly), or (2) a child did not live with the taxpayer and the taxpayer earned less than $12,880 ($15,880 if married filing jointly). The maximum AGI one can have and still get the credit also has increased. A taxpayer may be able to take the credit if his AGI is less than the amount in the above discussion that applies to the taxpayer. The maximum investment income he can have and still get the credit has increased to $2,950. More information can be found in the instructions for lines 64a and 64b that begin on page 46.
• Mailing the return. A taxpayer may be mailing his return to a different address this year because IRS has changed the filing location for several areas. Taxpayers who received an envelope with their tax package should use it. Otherwise, they should obtain the filing location from the back cover.
• Personal exemption and itemized deduction phaseouts reduced. Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The amount by which these deductions are reduced in 2008 is only 1/2 of the amount of the reduction that otherwise would have applied in 2007.
• Tax rate on qualified dividends and net capital gain reduced. The 5% tax rate on qualified dividends and net capital gain that applied for 2007 is reduced to zero for 2008.
• Tax on child’s investment income. Form 8615 is required to figure the tax for a child with investment income of more than $1,800 if the child:

(1) was under age 18 at the end of 2008;
(2) was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support; or
(3) was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child’s support.

RIA observation: The election to report a child’s investment income on a parent’s return and the special rules
for when a child must file Form 6251 also now apply to the children listed above.

• Tax relief for Kansas disaster area. Temporary tax relief was enacted as a result of May 4, 2007, storms and tornadoes affecting the Kansas disaster area. The tax benefits provided by this relief include suspended limits for certain personal casualty losses and special rules for withdrawals and loans from IRAs and other qualified retirement plans. For more details on these and other tax benefits related to the Kansas disaster area, see Pub. 4492-A.
• Tax relief for Midwestern disaster areas. Temporary tax relief was enacted as a result of severe storms, tornadoes, or flooding affecting Midwestern disaster areas after May 19, 2008, and before Aug. 1, 2008. The tax benefits provided by this relief include:
• … Suspended limits for certain personal casualty losses and cash contributions.
• … An additional exemption amount if the taxpayer provided housing for a person displaced by the Midwestern storms, tornadoes, or flooding.
• … An election to use the taxpayer’s 2007 earned income to figure his 2008 EIC and additional child tax credit.
• … An increased charitable standard mileage rate for using the taxpayers’ vehicle for volunteer work related to the Midwestern storms, tornadoes, or flooding.
• … Special rules for time and support tests for people who were temporarily relocated because of the Midwestern storms, tornadoes, or flooding.
• … Special rules for withdrawals and loans from IRAs and other qualified retirement plans. Details on these and other tax benefits related to the Midwestern disaster areas will be explained in IRS Publication 4492-B .
• Credit for nonbusiness energy property expired. The credit for nonbusiness energy property has expired and does not apply for 2008. Form 5695 is now used only to claim the residential energy efficient property credit.

What’s New for 2009. The 2008 Form 1040 instructions detail these new items for 2009.

• Earned income credit (EIC). A taxpayer may be able to take the EIC if: (1) a child lived with the taxpayer and the taxpayer earned less than $40,295 ($43,415 if married filing jointly), or (2) a child did not live with the taxpayer and the taxpayer earned less than $13,440 ($16,560 if married filing jointly). The maximum AGI one can have and still get the credit also has increased. One may be able to take the credit if his AGI is less than the above amount that applies to him. The maximum investment income the taxpayer can have and still get the credit has increased to $3,100.
• IRA deduction expanded. A taxpayer may be able to take an IRA deduction if he was covered by a retirement plan and his 2009 modified AGI is less than $65,000 ($109,000 if married filing jointly or qualifying widow(er)). If the taxpayer’s spouse was covered by a retirement plan, but the taxpayer was not, he may be able to take an IRA deduction if his 2009 modified AGI is less than $176,000.
• Elective salary deferrals. The maximum amount the taxpayer can defer under all plans is generally limited to $16,500 ($11,500 if the taxpayer only has SIMPLE plans; $19,500 for Code Sec. 403(b) plans if the taxpayer qualifies for the 15-year rule). The catch-up contribution limit for individuals age 50 or older at the end of the year is increased to $5,500 (except for Code Sec. 401(k)(11) plans and SIMPLE plans, for which this limit remains unchanged).
• Divorced or separated parents. A noncustodial parent claiming an exemption for a child can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement was executed after 2008. The noncustodial parent will have to attach Form 8332 or a similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption.
• Limit on exclusion of gain on sale of main home. Generally, gain from the sale of the taxpayer’s main home is no longer excludable from income if it is allocable to periods after 2008 where neither the taxpayer nor his spouse (or former spouse) used the property as a main home. See IRS Publication 553 for more details.
• Credit for plug-in electric drive motor vehicles. A taxpayer may be able to take a credit if he places a plug-in electric drive motor vehicle in service in 2009.
• Qualifying child definition revised. The following changes to the definition of a qualifying child apply to years after 2008.
• … The taxpayer’s qualifying child must be younger than the taxpayer.
• … A child cannot be the taxpayer’s qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.
• … If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person’s AGI is higher than the highest AGI of any parent of the child.
• … The taxpayer’s child is a qualifying child for purposes of the child tax credit only if he can and does claim an exemption for him or her.
• Credit for nonbusiness energy property. A taxpayer may be able to take this credit for qualifying energy savings items for his home placed in service in 2009.
• Personal casualty and theft loss limit. Generally, a personal casualty or theft loss must exceed $500 to be allowed for 2009. This is in addition to the 10% of AGI limit that generally applies to the net loss.
• Alternative minimum tax (AMT) exemption amount decreased. Absent a law change, the AMT exemption amount will drop to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).
• Allowance of certain personal credits against the AMT. Absent a law change, the following personal credits will no longer offset the AMT: credit for child and dependent care expenses; credit for the elderly or the disabled; education credits; mortgage interest credit; residential energy credits; and District of Columbia first-time homebuyer credit.

Source: Federal Taxes Weekly Alert (preview) 11/20/2008, Volume 54, No. 47

Substantiating and reporting charitable contributions
Practice Alert
Author: Preston J. Quesenberry, associate with the Washington, DC law firm of Caplin & Drysdale, Chartered.
In 2007, the Treasury Inspector General for Tax Administration released two reports suggesting that hundreds of thousands of taxpayers are incorrectly reporting billions of dollars in deductions for noncash charitable donations. Taxpayers and tax preparers should review the substantiation and reporting requirements for charitable contributions, especially since the Pension Protection Act of 2006 (PPA) recently added even more requirements. Schedule M on the new Form 990, which will allow IRS to identify those charities receiving noncash donations, gives taxpayers and tax preparers added incentive to make sure they get the substantiation and reporting of their charitable deductions right. Unfortunately, these requirements have become unduly complex over the years as both Congress and Treasury have sought to prevent actual and perceived improper deductions. This Practice Alert, which is excerpted from a more extensive article in the March/April 2008 issue of Taxation of Exempts , discusses the requirements for substantiating and reporting charitable contributions.

The dollar thresholds. The discussion below follows the standard practice of organizing the substantiation and reporting requirements by the dollar thresholds at which different rules take effect. Unless otherwise stated, the dollar thresholds represent the amount of the deduction that the donor claims for the charitable contribution, which will not always equal the actual value of the contribution. If, for example, a donor receives goods or services in exchange for the contribution, and is forced to reduce his or her deduction accordingly, the threshold is usually determined by the deduction amount, not the gross value of the contribution. For this purpose, “deduction amount” means the deduction before applying any income limitations under Code Sec. 170(b) (i.e., limitations of charitable deductions to 50%, 30%, or 20% of the donor’s “contribution base,” usually adjusted gross income).

Unless otherwise stated, the substantiation and reporting requirements apply to the contributions of individuals, corporations, and partnerships. They apply to partnerships at the entity level, even though inadequate substantiation can result in the denial of the deduction at the individual partner level.

Requirements applicable to all charitable deductions. To take a charitable deduction for any contributions of cash, checks, or other monetary gifts made after Aug. 17, 2006, Code Sec. 170(f)(17) requires that a donor retain either (1) a bank record or (2) a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. For these purposes, a bank record can include a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount. This provision therefore puts an end to the ability of taxpayers to claim a charitable deduction for undocumented cash contributions, even if each contribution is of a relatively small amount.

Donors making contributions through payroll deductions can satisfy the “written communication” portion of Code Sec. 170(f)(17) with (1) a pay stub, Form W-2, or other document furnished by the employer stating the amount withheld for payment to a charity; and (2) a pledge card or other document prepared by (or at the direction of) the donee organization showing the name of the donee organization. (Notice 2006-110, 2006-51 IRB 1127)

Similarly, donors of noncash property must retain a “receipt” (which can include a letter or other written communication) from the donee. It must show the name of the donee, the date and location of the contribution, and a reasonably detailed description (but not necessarily the value) of the property contributed. ( Reg. § 1.170A-13(b)(1) ) When obtaining a receipt would be “impractical,” however, (e.g., if the donor deposits property at a charity’s unattended drop site), the donor can support a deduction by keeping “reliable written records” that contain the following information:

• The name and address of the donee.
• The date and location of the contribution.
• A reasonably detailed description (but not necessarily the value) of the property contributed.
• The fair market value of the property at the time the contribution was made.
• The method used to determine the fair market value (and, if the valuation was determined by appraisal, a copy of the appraiser’s signed report).
• The terms of any agreement or understanding entered into by the donor relating to the use, sale, or other disposition of the contributed property. (Reg. § 1.170A-13(b)(2)(ii))

Requirements applicable to charitable deductions of $250 or more. The most significant provision that takes effect with gifts of this size is Code Sec. 170(f)(8). It requires donors taking a deduction of $250 or more for any one contribution (either cash or noncash) to obtain a “contemporaneous written acknowledgment” from the donee. This acknowledgment must state (1) the amount of cash and/or provide a description (but not the value) of any noncash property contributed and (2) whether the donee organization provided any goods or services in consideration (in whole or in part) for any cash or other property contributed.

If goods and services were provided as consideration, the acknowledgment also must provide a good faith estimate of the value of such goods or services (or, if such goods or services consisted solely of “intangible religious benefits,” a statement to that effect). (Code Sec. 170(f)(8)(B)) To be “contemporaneous,” a written acknowledgment must be obtained on or before the earlier of (1) the date the donor files the return for the tax year in which he or she makes the contribution or (2) the due date (including extensions) for filing that return. (Code Sec. 170(f)(8)(C))

In determining whether they have crossed the $250 threshold, donors need only look at the amount of a single contribution to a specific donee. Accordingly, separate contributions of less than $250 to the same donee do not require a contemporaneous written acknowledgment, even if they total $250 or more during the same tax year. (Reg. § 1.170A-13(f)(1))

Requirements applicable to noncash charitable deductions of more than $500. Donors of cash of more than $500 face no substantiation and reporting requirements other than those discussed above. Other donors face a more complicated situation. The most notable requirement that takes effect for noncash contributions above the $500 threshold is filing an Form 8283, which any donor, other than certain C corporations, must do when claiming a charitable deduction for a noncash gift of over $500. C corporations, other t
han personal service and closely held corporations, must file Form 8283 only if the amount claimed as a deduction is more than $5,000.

Another requirement is to maintain the “reliable written records” discussed above. These donors’ records must also include information regarding (1) how the donor acquired the property (e.g., by purchase, gift, bequest, inheritance, or exchange); (2) the approximate date on which the donor received the property (or substantially completed its production, manufacture, or creation); and (3) the adjusted basis of the contributed property (with the exception of publicly traded securities) immediately before the contribution. (Reg. § 1.170A-13(b)(3))

Additional requirements apply to gifts of particular kinds of noncash contributions in excess of $500—specifically, (1) qualified vehicles, (2) qualified conservation contributions under Code Sec. 170(h) , and (3) clothing and household items.

Requirements applicable to noncash charitable deductions of $5,000 or more. Crossing the $5,000 threshold triggers the most onerous substantiation rule for donors of noncash property: the requirement to obtain a “qualified appraisal” of the contributed property. (Code Sec. 170(f)(11)(C))

Qualified appraisal. All donors claiming a charitable deduction of more than $5,000 for an item (or similar items) of noncash property (other than publicly traded securities and certain other excepted items) must obtain a qualified appraisal and keep it in their records “for as long as it may be relevant in the administration of the internal revenue laws.” (Reg. § 1.170A-13(c)(3)(iv)(C)) They also must complete the appraisal summary on section B of Form 8283, which must be signed and dated by both the qualified appraiser and the donee. (Reg. § 1.170A-13(c)(4)(i)(B), (C))

As defined in the Code and regs, a qualified appraisal is a written appraisal document that:

• Is made not earlier than 60 days before the property is contributed.
• Is received by the donor before the due date (including extensions) of the return on which the deduction is claimed.
• Includes certain specified information.
• Does not involve an appraisal fee based on a percentage of the appraised value of the property (with one narrow exception for certain fees to nonprofit appraiser associations) or the value of the property allowed as a charitable deduction under Code Sec. 170.
• Is conducted in accordance with “generally accepted appraisal standards” (e.g., the Uniform Standards of Professional Appraisal Practice), as well as any applicable regs or other guidance provided by Treasury.
• Is conducted, prepared, signed, and dated by a “qualified appraiser.” (Code Sec. 170(f)(11)(E) ; Reg. § 1.170A-13(c)(3))

A key component of a “qualified appraisal,” then, is that it be conducted by a “qualified appraiser.” Under new provisions in the PPA, a qualified appraiser is an individual who:

• Has an appraisal designation from a recognized professional appraiser organization or has met minimum education and experience requirements to be set by regulation.
• Is regularly paid to perform appraisals.
• Can demonstrate verifiable education and experience valuing the type of property appraised.
• Has not been barred from practice before IRS during the three years preceding the date of the appraisal.
• Meets any additional requirements prescribed by the Treasury in regs or other guidance. (Code Sec. 170(f)(11)(E))

Requirements applicable to deductions of $20,000 or more for contributions of art. Donors who take a total deduction of $20,000 or more for contributions of works of art must attach a complete copy of their signed appraisal to the return on which they claim the deduction. For individual objects valued at $20,000 or more, a photograph of “sufficient qualify and size” must be provided to IRS upon request. (Ann. 90-25, 1990-8 IRB 25; Instructions to Form 8283)

Rev Proc 96-15, 1996-1 CB 627, contains a procedure open to those who contribute works of art valued at $50,000 or more. Such donors may, before filing the return claiming the charitable deduction, request a Statement of Value from the IRS to substantiate the value of the gift for income tax purposes. This does not save the donor the trouble of getting an appraisal, as the donor has to submit a completed appraisal to IRS to get the Statement of Value.

Requesting a Statement also presents a potential downside risk. If the donor does not withdraw the request before receiving an answer and obtains a Statement of Value that is lower than his or her appraisal, the donor nevertheless must attach the Statement to his or her income tax return reporting the charitable deduction (though the donor can also enclose additional information supporting his or her appraised value). On the other hand, if the Statement accords with the donor’s own appraisal, he or she is entitled to rely on it, assuming the Statement was based on “accurate statements of the material facts.”

Requirements applicable to deductions of more than $500,000. Donors claiming a deduction of more than $500,000 for an item (or group of similar items) donated to one or more donees must attach their qualified appraisal to their returns. (Code Sec. 170(f)(11)(D))

Source: Federal Taxes Weekly Alert (preview) 10/30/2008, Volume 54, No. 44