Limitation on Charitable Contributions

When an individual makes a contribution to charity his tax deduction is limited to 50% of his adjusted gross income. The percentage could go down depending on the type of property contributed and the type of charity that receives the donation. Charities that have a 30% limitation include fraternal orders, war veteran organizations, cemetery companies, and certain private non-operating foundations. The deduction is also limited to 30% of adjusted gross income, when an individual contributes property that would have produced long term capital gains to a qualifying 50% charity. However, the donor can save the 50% limitation by electing to only take the amount of the basis in his property as a charitable deduction on his tax return.

In applying these rules to contributions of appreciated assets, you should keep in mind that there are also rules reducing the amount of the charitable contribution on certain specific capital gain property. This category includes tangible personal property that is unrelated to the charitable organization’s exempt function, and capital gains property other than publicly traded stock donated to certain private foundations. For these assets taxpayers are required to reduce the amount of a charitable contribution by the amount of the long term capital gains that the sale of the property would have generated.

Example: A bankruptcy lawyer donates her jewelry to her alma mater, which the college sells to help pay faculty salaries. Since the jewelry was not used in providing education, her tax deduction for the jewelry will be reduced by the capital gain she would have received, if she had instead sold the property and donated the proceeds to the school.

Additional Medicare Taxes For High Income Earners

Beginning with the year 2013 an additional medicare tax of .9% apples to the salaries of high earners. The tax applies to annual wages over $200,000.00 for individuals; $250,000.00 for joint returns and $125,000.00 for married individuals filing separate returns. The law imposes this tax on the employee not the employer. An employer is required to withhold the additional tax for employees that he pays more than $200,000.00 a year, but this withholding obligation will not cover many situations, where the employee has tax liability.

Example: Judy works as a plastic surgeon for a local hospital and in 2014 earns $175,000.00 a year. Her husband Jim works as an estate planning lawyer for a large law firm for a salary in 2014 of $150,000.00 a year. Since neither one of them earns more than $200,000.00 a year their employers will not withhold the additional .9% medicare tax. However, since their combined salaries exceed the thresh hold by $75,000.00 they will owe an additional medicare tax of $675.00 which they will have to submit, when they file their annual 1040 tax return.

Self employed individuals are also liable for the .9 % additional medicare tax on their earned income which exceeds the limits.

Tax Deduction For Domestic Production Activities

One of the tax breaks that Congress has enacted to encourage manufacturing and other production in the United States is the deduction for domestic production activities. Under this law a taxpayer can take an extra income tax deduction equal to 9% of its domestic production income.

A taxpayer calculates his domestic production income by taking gross receipts from qualified activities and subtracting costs of goods sold and direct and indirect expenses allocated to the qualified activities. Qualified activities include lease, rental sale or license of property manufactured, produced grown or extracted in the United States. It covers qualified film production and production of electricity natural gas or potable water. It also covers construction of real property or architectural or engineering services connected with the construction of real property. Most service businesses, such as a bankruptcy lawyer, would not be eligible to claim the deduction.

Since part of the purpose of encouraging domestic production is also to encourage domestic employment the deduction for domestic activities production is also limited to 50% of W-2 wages paid by the taxpayer. Thus the deduction is the smaller of 9% of domestic production income or 50% of W-2 wages.

Listed Property For Income Taxes

The Internal Revenue Code classifies certain depreciable property as “listed property.” Listed property consists of items that Congress felt required special rules, because they are the type of property that could generate legitimate business expenses, but which is frequently really used more for personal than business reasons. The term includes passenger automobiles; other forms of transportation likely to be put to personal use such as boats or airplanes; entertainment recreational and amusement property; and computers and peripheral equipment.

The first restriction on listed property is that the taxpayer can only claim accelerated depreciation on the equipment, if it is used more than 50% for business. Thus if a bankruptcy lawyer puts 10% of the mileage on her car driving to court, but the rest of her use of the vehicle is personal, she cannot use the accelerated rate of depreciation that is normally available on automobiles. Instead she can only use the straight line method of depreciation for the 10% of the car she is allowed to depreciate, and she must use a longer depreciable life.

The other restriction on listed property consists of stricter record keeping requirements in order to qualify for the tax deductions. On listed property taxpayers are required to record when and where the property was used for business and the business purpose involved in each use.

Premium Health Insurance Tax Credit

As any bankruptcy attorney can tell you health problems can lead to financial disaster, and one of the reasons for this has been that many Americans could not obtain the adequate health insurance. A major goal of Obamacare is to increase the number of people with health insurance, and beginning with the 2014 tax year certain individuals with a limited income can obtain a tax credit to help with the payment of their health insurance premiums.

To obtain the credit these individuals must buy health insurance through the Marketplace, be ineligible for insurance through an employer or government plan, file a joint tax return if married, and not be claimed as a dependent on another person’s tax return.

To meet the income eligibility for the program your household income must be between 100% and 400% of the federal poverty line. The federal poverty line is based on family size and is adjusted each year. For 2013 the poverty amount for the 48 contiguous states and the District of Columbia was $11,490.00, which would leave an individual with annual income up to $45,960.00 eligible for the credit. For a family of four the poverty level was $23,550.00 leaving a family of four with income up to $94,200.00 eligible for the credit.

When To Enter A Premarital Agreement



The lead story in the Chicago Tribune Business Section this Sunday was about the divorce of the wealthiest man in Illinois, and the court fight over the validity of his premarital agreement. According to Mr. Griffin’s agreement his wife should end up with about fifty million dollars. after the divorce. Mrs. Griffin however is challenging the agreement and hoping to take away a much larger share of her husband’s five and a half billion dollar net worth.

While I am not to worried about either one of them ending up in the poor house if they lose the argument, their controversy illustrates a common area of concern with a premarital agreement. The contract was signed one day before their 2003 wedding, and when these agreements are entered into this close to the marriage date they are subject to challenge based on the inability to carefully consider what the parties are signing with this time pressure. I do know lawyers in fact, who for this reason will refuse to represent parties in a premarital agreement unless they are going to sign the agreement at least thirty days before exchanging vows.

One might be surprised that this could happen to a couple, who had very talented lawyers working on the agreement, and who presumably fully advised their clients on the consequences of their acts. However, there are two facts of human nature, that no doubt were involved. First of all no one wants to reschedule their wedding at the last minute, and a suggestion to do from your family lawyer is unlikely to be well received.. Second when negotiation is involved contracts frequently take longer to finalize than the parties anticipated.

In conclusion I should probably just say that like obtaining a reservation for your reception hall, writing your premarital agreement is something you should try to allow plenty of time for when one is planning to tie the knot.

Tax Deductions For Depreciated Apartment Buildings

As a bankruptcy attorney I have seen plenty of individuals, who have lost money on rental real estate investments in the last few years. This can prove quite a letdown after people buy a house or an apartment building with the hope of building a nest egg for their future. Fortunately though compared to people, who have lost money on their principal residences, the tax law is more generous with people who invest in rental property.

A building owned for rental purposes is covered by Section 1231 of the Internal Revenue Code. Section 1231 assets include most property which is held for more than one year and used in a trade or business or for the production of income. Such an asset receives special tax treatment when it is sold.

When a Section 1231 asset is sold, any gain is treated as capital gain, which means the tax rate on the gain will be considerably lower than the tax rate on ordinary income. For most property which is entitled to capital gains treatment there is a potential downside in that, if the property sells for a loss it will be treated as a capital loss, and capital losses create a number of hurdles for claiming the benefit on your tax return. For example you can only deduct a net capital loss of $3,000.00 or less against ordinary income on any year’s tax return.

When a Section 1231 asset is sold at a loss though the taxpayer may treat it as a loss deductible against ordinary income. This can produce a considerable break for someone, who has made an unlucky real estate investment in the last few years .

The Section may not produce as much of a benefit though for a large landowner who has bought and sold a number of rental properties. This is because, when you have net 1231 gains in any tax year, you will have to reduce the amount that can be treated as capital gain income by the amount of Section 1231 losses which you incurred in the prior five tax years.

Tax Deductions For Charitable Contributions Of Appreciated Property

Taxpayers can take a deduction for a contribution to a charity, and when the contributions are of property the deduction is generally equal to the fair market value of property. This has lead many people to believe there are advantages to contributing appreciated property to charities.

Example: If an estate planning lawyer bought stock for $1,000 five years ago that is now worth $10,000, it might be wise for her to donate the stock to her church rather than sell it. She could then claim a $10,000 deduction for contributions and avoid paying capital gains taxes on the $9,000 the stock has increased in value.

However, the charitable deduction in this case would be limited to 30% of the donor’s adjusted gross income for the year computed without regard to the charitable contribution or the net operating loss deductions. This is less than what she would be entitled to under the general rule, which allows charitable deductions to be up to 50% of this base amount.

The donor could also lose the deduction on the appreciated portion of capital gain property, if it is tangible personal property that is not used in the church’s exempt purpose, or if it is applicable tangible personal property that is sold rather than used in the organization’s exempt purpose. There is also a limitation for long term capital gains property contributed to certain nonoperating foundations. A special rule applies to qualified intellectual property which computes the charitable deduction based on the income the donor received from the intellectual property.