IRAs and charitable contributions Staff

Each Wednesday through April 21,'s tax experts will answer your questions this tax-filing season.

Our experts are Jim Dupree of the Maryland office of the Internal Revenue Service in Baltimore and, this week, Nicole M. Harrell, head of her own accounting firm in Baltimore.

To be included next week, please use the form at the right side of this page to submit your questions.

For tax year 2002, I overfinanced my Roth IRA. I withdrew the overfunded amount, $1,800, in February 2002, claiming it as a distribution on my 2002 return (without a 1099). This year, I received a 1099 for the distribution. Do I claim the same $1,800 on my 2003 return or just ignore the 1099? Cal, Sykesville

Dupree: Cal, I don't see why the contribution itself would be considered an excess contribution in either year, since you pulled it out before filing your return for that year -- and assuming you also pulled out any earnings attributable to it. Those earnings would be taxable.

Here is why, from IRS Publication 590, "Individual Retirement Arrangements." You might want to check with the administrator of your Roth account to ask why this was reported the way it was:

"Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made."

Harrell: You should not ignore the Form 1099 you received in 2003 for the distribution from your Roth IRA.

This information has not only been sent to you but also is reported to the Internal Revenue Service. The agency will not immediately understand the situation and expect to see the distribution on your 2003 tax return. If you did include the distribution on your 2002 tax return don't show it again but instead send a letter to the IRS explaining that you received the 1099 for the wrong year and that you have included the overpayment in 2002.

With the letter, be sure to include other information showing the distribution actually occurring in 2002 (investment statement and a copy of your 2002 Form 1040, for example). You also should contact the company managing your IRA account and request a corrected 1099 that shows the distribution occurring in 2002.

I understand that charitable donations to both the Salvation Army and United Way are limited to "50 percent of [adjusted gross income]." What does that mean? How much am I able to deduct on my taxes? Michael, Fulton

Dupree: Michael, if your total contributions for the year are 20 percent or less of your adjusted gross income, you don't have to worry about anything. Your adjusted gross income is the figure on Form 1040, line 34.

In general, the amount of your deduction is limited to 50 percent of your adjusted gross income, but may even be limited to 30 percent or 20 percent, depending on the type of property you give and the type of organization you give it to.

The 50 percent limit applies to the total of all charitable contributions you make during the year. This means that your deduction for charitable contributions cannot be more than 50 percent of your adjusted gross income for the year. The 50 percent limit is the only limit that applies to gifts to "50 percent Limit Organizations."

These organizations are what most people think of as charities, and the organization itself can tell you if it is a "50 percent" organization. But there is one exception. A 30 percent limit applies to these gifts to 50 percent organizations if they are gifts of capital gain or property for which you figure your deduction using fair-market value without reduction for appreciation.

A 30 percent limit applies to these gifts:

  • Gifts to all qualified organizations other than 50 percent-limit organizations. This includes gifts to veterans' organizations, fraternal societies, nonprofit cemeteries and certain private nonoperating foundations.
  • Gifts for the use of any organization. The 20 percent limit applies to all gifts of capital gain property to or for the use of qualified organizations (other than gifts of capital gain property to 50 percent-limit organizations). However, if these gifts are of capital-gain property, they are subject to the 20 percent limit, rather than the 30 percent limit. Otherwise, the good news is that you can carry over your contributions that you cannot deduct in the current year because they exceed your adjusted gross income. You can deduct the excess in each of the next 5 years until it is used up, but not beyond that time. However, your total contributions deduction for the year to which you carry your contributions cannot exceed 50 percent of your adjusted gross income for that year. The 50 percent, 30 percent and 20 percent limits on contributions and the carryover provisions are explained, in detail, in Publication 526, "Charitable Contributions." Harrell: The Internal Revenue Service limits the total charitable contributions that you may take in a year to a percentage of your adjusted gross income -- "AGI" -- line 35 on your Form 1040. Three limits are placed on deductible contributions. The 50 percent limit is placed on contributions to churches, educational, health care and child welfare type organizations. The 30 percent limit is placed on contributions to organizations such as the veterans' groups, fraternal societies and capital gain property given to 50 percent limit organizations. The 20 percent limit is placed on capital gain property given to organizations that are not considered 50 percent limit organizations. Capital gain properties (i.e., investments, real estate, artwork) are considered assets that would realize a gain if you sold them instead of donating them. Here is an example of how to calculate your maximum deduction: Let's say your AGI is $50,000 for 2003 and your contributions were given to 50 percent limit organizations. Your total charitable deductions cannot exceed $25,000 for the year. If your actual contributions exceed your limit, you will be able to carry over the remaining contributions as part of your itemized deductions for the next five years; however, you still will be subject to the charitable deduction limits each year. Remember to keep accurate records to prove your contributions. This can include acknowledgments from the organization or church, year-end pay stub, or canceled checks -- but only for contributions under $250. Refer to IRS Publication 78 to determine whether an organization is considered a qualified charitable organization by the IRS and what contribution limits have been placed on them.
    I inherited a property in 1996 that was unlivable, doing nothing to it until last April. I completed construction of the property and then rented it. I installed water heaters and completed the construction in 2003 but was unable to receive rent until February 2004. Before starting construction, I obtained a home-equity loan on the property to pay for the installation of the water system and the paying off of back property taxes, as well as other construction expenses. Can I deduct all the expenses I incurred in 2003 as rental expenses? Bill, Manchester Dupree: Unfortunately, it appears the answer is no, unless you mean depreciation deductions. Any deductions only would be taken in the year in which the property was available for rent and, according to you, that was in 2004. Any equipment -- water heaters, for instance -- would be depreciated over five years. All construction expenses would be added together and considered a major renovation and, in turn, added to the basis (fair-market value at the date of death in 1996) of the house, also for depreciation. Any home-equity interest is usually deductible as well as real estate taxes in the year paid, if you itemize your deductions. You should obtain a copy of Publication 946, "How to Depreciate Property, and Publication 527, "Residential Rental Property," if the house is residential rental property. Harrell: Expenses that you incurred in making the property rentable can be deducted by using Schedule E -- "Supplemental Income and Loss" -- but not all of the expenses are able to be deducted in the year you paid for them. You can deduct expenses in the same year if they do not add significant value to the property or extend its life, for instance. Changing a lock, fixing a leak or painting are examples of repairs that are deductible in the same year. Expenses that add significant value to the property must be capitalized, meaning an annual deduction (i.e., depreciation expense) on your tax return will be taken over several years. Installing a water heater or building an addition or other structure to the home are examples of improvements that will be deducted using established IRS standards over a certain number of years until you fully recover the cost incurred. For example, the cost of a new refrigerator will be depreciated over five years, and the fair-market value of the inherited property, which is now your cost basis, will be depreciated over 27.5 years. Other deductible expenses include all types of taxes, interest on the home-equity loan, licenses, permits, commissions, utilities, insurance, travel expenses -- and fees paid for legal or accounting advice and advertisements. The net income or loss calculated on Page One of Schedule E is reported on line 17 of your Form 1040. Refer to Publication 527 to see what is considered rental income and expenses, the method used to calculate the deduction for the improvement costs and the period of years to recover costs.
    Copyright © 2018, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad