Get jump start on next year

In the final column of the season, James K. Wilhelm answers questions on charitable items, income tax from contract work, claiming the loss of a vehicle

April 18, 2005

Joseph, Perry Hall: We gave a fair amount to AMVETS last year in the way of clothing, VHS tapes, books, etc. No one item was that expensive, but there was a lot. Since it was over $500 we need to fill out an additional form. They want to know what we paid for each item. How are we supposed to remember all that? Is there a way around just taking a wild guess?

Wilhelm: Joseph, I assume you have a written acknowledgement from AMVETS that includes a good faith estimate of the value of your donated goods. That is the first thing you would need to provide upon examination of your tax return. I will also assume that the total value of the donated goods is less than $5,000.

In addition to this written acknowledgement, you should be able to provide a thorough list of the items donated, how you acquired each item and the cost of the item. As you indicated, it is nearly impossible to know exactly what you paid for each item. However, practically speaking, you can estimate how much you paid for a VHS tape or for an article of clothing. As long as your estimate is reasonable and well documented, you should be fine. Be sure you fill out Part I of Form 8283, Noncash Charitable Contributions, in its entirety, to avoid any unnecessary tax notices.

The important thing to remember is that the IRS expects the fair market value of used clothing and household goods to be significantly less than the amount you paid for them. Otherwise, you wouldn't be giving them away. Special rules apply if you donate appreciated property, meaning it is worth more than you paid for it.

Donald Hooker, Baltimore: In 2004 I did some consulting as an individual independent contractor for a corporation and was paid for my work. The corporation has not issued me a 1099-MISC, after my repeated requests. Is the corporation obligated to issue a 1099-MISC to me? And if so, how do I report the income if the corporation does not send me a 1099-MISC? My income from this engagement was more than $5,000.

Wilhelm: Donald, in this case, the corporation should have issued you a 1099-MISC with the amount you were paid in Box 7 ("Non-employee Compensation") of this form. In general, companies are required to issue a 1099-MISC for any non-employee compensation of $600 or greater paid to an independent contractor who is not a corporation. However, whether or not you receive a 1099, you should report your consulting income. As for the reporting requirements, you should report this compensation as "Gross Receipts" on Line 1 of the Form 1040, Schedule C Profit or Loss From a Business. You should also keep track of any business expenses you incurred while performing the consulting services because they would also be reported on Schedule C and would reduce the amount of income subject to tax. Examples would include automobile, telephone, office supplies and office space expenses, etc. It is also important to remember that income you received is also subject to self-employment tax calculated on Form 1040 Schedule SE Self-Employment Tax.

A parting thought: If your net income from this engagement is over $5,000, consider making a contribution to a retirement plan such as an IRA or simplified employee pension plan ("SEP") to shelter some of this consulting income from tax. Since IRA and other retirement plan rules can be complicated, we'd recommend you speak to a CPA prior to implementing this strategy.

C.R. Wamser, Bethlehem: Late last year, our 1990 Geo Metro needed multiple repairs. The mechanic stated it was not worth repairing, and did not think it was salvageable to donate to a charity. He later contacted us and said that an individual, who lived near his shop, was in dire need of any type of car and would we consider donating the Metro. We did. Can this donation -- or loss -- be claimed?

Wilhelm: C.R., charitable donations are only deductible if they are made to, or for the benefit of, a qualified organization. Qualified organizations generally include organizations that are operated for religious, charitable, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals. An individual would not qualify as one of these qualified organizations, so the donation cannot be claimed on your individual return. In addition, a loss cannot be claimed on the disposal of personal assets. The donation of the car could be considered a gift, however, that would not affect your individual tax return.