These brief tips explain why it’s important to obtain a contemporaneous written acknowledgment when substantiating a charitable deduction; detail a court case involving the mortgage interest deduction; and cover why a cash balance plan may be the answer for business owners who have fallen behind on retirement plan contributions.

Charitable deductions: Review written acknowledgments carefully

To substantiate a charitable deduction, you must obtain a “contemporaneous written acknowledgment” from the charity that states, among other things, the amount of cash (or a description of property other than cash) contributed and whether you received any goods or services in exchange for your gift.

Ensuring that the acknowledgment contains the required information is critical. In a recent U.S. Tax Court case, the donor of a historic preservation easement lost a $64.5 million charitable deduction because the acknowledgment letter from the charitable trust that received the easement failed to state whether the trust provided the donor with any goods or services in consideration for the easement. Although the charity later included the required information in an amended Form 990 filed with the IRS, the court found that this didn’t satisfy the tax code’s requirements.

Mortgage interest deduction is good news for unmarried co-owners

Recently, the IRS acquiesced in a decision by the Ninth U.S. Circuit Court of Appeals ruling that the tax code’s mortgage interest deduction limits apply on a per-individual basis rather than a per-property basis. Taxpayers are permitted to deduct interest on up to $1 million in home-acquisition debt and up to $100,000 of home-equity debt.

In a case involving unmarried co-owners of a residence, the U.S. Tax Court ruled that the deduction limits applied to their combined indebtedness. The Ninth Circuit disagreed, holding that the limits apply on a per-taxpayer basis. In other words, while individuals and joint filers can deduct interest on up to $1.1 million in indebtedness, unmarried co-owners can deduct interest on up to $2.2 million in indebtedness.

By acquiescing in the decision, the IRS has acknowledged that it will follow the Ninth Circuit’s ruling nationwide.

Accelerate retirement savings with a cash balance plan

Business owners who have fallen behind on their retirement contributions should consider establishing a cash balance plan. These plans combine features of both defined contribution plans (such as 401(k) plans) and defined benefit plans (such as pension plans).

Cash balance plans are defined benefit plans, but they allocate annual credits to hypothetical accounts, giving them the “look and feel” of a 401(k) plan and making it easier for employees to get a handle on their future benefit payouts. However, as defined benefit plans, cash balance plans are subject to limits on payouts to employees in retirement rather than contribution limits.

Contributions may be as high as necessary to fund an employee’s retirement benefits. The closer an employee is to retirement, the larger the contribution must be to generate the promised benefit. This enables the business to make substantially higher contributions (as much as three to four times the defined contribution limit) on behalf of older owner-employees, who have fewer years until retirement.  

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