Charitable deductions: Dot the i’s and cross the t’s
Don’t underestimate the importance of the substantiation requirements for deductions of charitable gifts. In a recent U.S. Tax Court case, a taxpayer lost nearly $500,000 in deductions because she failed to obtain a satisfactory contemporaneous written acknowledgement (CWA) of her gift. The taxpayer donated 120 items from her collection of Native American artifacts and jewelry to a local museum. On the day the donation was made, the taxpayer and the museum executed a “deed of gift” describing the donated items and the terms of the gift.
Donations greater than $250 require a CWA that includes the amount of cash and a description of any property other than 1) the cash contributed, 2) whether the recipient provided goods or services in consideration for any such property, and 3) a description and good faith estimate of the value of any goods or services. In this case, because the deed didn’t specify whether the museum provided the taxpayer with any goods or services, the deductions were denied.
When turning down an inheritance makes sense
Turning down “free money” may seem counterintuitive, but in some cases, it makes sense to reject (or “disclaim”) an inheritance. It could reduce your family’s overall tax liability to pass to someone else property that generates taxable income or would trigger gift or estate tax. For example, let’s say that you inherit an IRA from one of your parents and that your child is the contingent beneficiary. Given your high tax bracket, distributions from the IRA will generate significant income taxes. If you were to disclaim the inheritance, however, it would pass to your child who, presumably, is in a lower tax bracket.
Is student loan forgiveness taxable?
If you or a family member was fortunate enough to have a student loan forgiven, will the amount forgiven be taxable? Generally speaking, forgiven debt constitutes taxable income. However, forgiven student debt is currently exempt from federal tax through 2025. In addition, most states exempt student debt relief from their income tax, but there are some exceptions.
According to a recent analysis by the Tax Foundation, forgiven student debt may be taxable in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin. However, state rules on this issue are in flux, so check on recent developments in your state.