Donations of clothing and household items to charity

What should you do if you donate over $5,000 worth of clothing and household items to Goodwill? First of all you should list all of the individual items donated and get a receipt from the charity. You should also take pictures of the donations. Obtaining the value of the donated items is the tricky part. Usually such items are worth at most only 20% of the retail cost. Many charities have online guidelines for what clothing and household items are worth in good condition. To avoid complications with an IRS audit you should consider getting an appraisal before you donate the items.

Charitable Donations and 501(c)(3)

The Internal Revenue Code section 501(c) covers tax exempt non-profit organizations. There are 29 different types but only one of them allows you to deduct contributions on your tax return which is 501(c)(3). This subsection covers organizations operated exclusively for "religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition ( no part towards athletic facilities or equipment), or for the prevention of cruelty to children or animals.  No part of the net earnings can be for the benefit of any private shareholder or individual." The IRS has to approve an organization requesting 501(c)(3) status. The IRS issues a publication every year listing all of the 501(c)(3) organizations which can be searched online by federal ID #. Most foreign organizations do not qualify. However certain Canadian, Mexican, and Israeli charities qualify by tax treaty.

Publicly Traded Partnerships(PTPs)

These are partnerships that are  traded on a securities market. Passive losses from a PTP can only be used against passive income from the same PTP so they don't fall under the sames rules for deducting passive losses on form 8582. However when you sell your  partnership interest you can then deduct suspended passive losses if you have basis. Investing in PTPs usually results in a very complicated K-1 that may increase your tax preparation fees.

Business vs. Hobby

The IRS requires that a business has a profit motive in order for you to deduct reasonable, ordinary , and necessary business expenses from it. How do you prove a profit motive? If you show a profit in 3 out of 5 years on a schedule C business, that will work. If you don't, the IRS will wonder why you are working without making any money. The IRS might think you are trying to write off personal expenses against your other W-2 income. There are also 9 factors which the IRS looks at to determine a profit motive such as the time and effort in the activity, the manner the activity is carried on, and whether there are elements of personal pleasure or recreation. It is a facts and circumstances test. If the IRS determines that your activity is not a business but a hobby, then you have to report the income on line 21 of form 1040 and the expenses are not deductible.

Travel Per Diem Rates for Lodging

A per diem rate for lodging can only be used by employers for employee reimbursements in certain situations. The Federal government sets these rates by location which are accepted by the IRS which are currently either $216 or $134. However, if you are self employed filing a schedule C or F you have to use actual lodging receipts for your tax deduction. 

Defined Benefit Retirement Plans

This is termed a qualified plan by the IRS and allows business owners to contribute over $300,000 a year in certain cases where you combine a 401k profit sharing and cash balance plan. The ages of the employees are a big factor in determining the contribution along with years of service which has to be done by an actuary and can't be discriminatory between employees. A defined benefit plan determines how much each participant gets in retirement. These sort of plans are best when there are few employees and the owner is much older than the other employees. The administration cost of defined benefit plans are about $1,500 a year now vs. $10,000 ten years ago. I believe actuaries are benefiting from better computers. One disadvantage is that you have to contribute every year even if you are having a bad year so the business should be profitable for at least three years in a row to consider such a plan.

Section 529 Plans

Section 529 plans are even better now under the new tax law than they were before, and they were pretty good before. As of 1/1/2018 you can now take out tax free  $10,000 a year per beneficiary to cover tuition expenses for private elementary and secondary schools. Under the old rules you could just take out withdrawals for qualified college expenses. Georgia also gives you a $4,000 tax deduction per child for contributions to the State of Georgia 529 plan. Contributions are not deductible on the federal return but the plan grows tax free and qualified withdrawals are not taxed. The named beneficiary of the 529 plan does not have any legal rights to the funds so you retain control. If you withdraw funds for reasons other than education you are subject to taxes on the earnings plus a 10% penalty. You also have the right to change the beneficiary to another qualifying family member. 529 plans do not have any income, age, or annual contribution limits except for a lifetime contribution limit of $235,000 to $520,000 which varies by state plan. You can also treat a large contribution  as a gift over a 5 year period to fall under the annual gift tax exclusion of $15,000.