THE TAX ATTIC with Jerry Coon — December 9, 2010

Ensure end-of-year deductions will be allowable

 

Jerry Coon

As we approach the end of this year, December 31 is the magic date. In order to include most items on this year’s tax return, payment must occur on or before December 31. The definition of “payment,” however, takes on a special meaning on December 31. The general definition today is that when a check is written, the item is paid. If I write a check on December 31, 2010, and can prove that I mailed it on December 31, 2010, in most instances—but not always—that item is going to be counted as being paid in 2010.

We can look to April 15 for some guidance in this matter. If taxpayers have a balance due on their tax return, that amount is due and payable no later than April 15. The taxpayers can write a check on April 15, mail it on April 15, and it will be considered as paid on April 15 even though the check doesn’t arrive at the Internal Revenue Service until a few days later.

However, the burden of proving the check was in the mail on April 15 lies squarely on the backs of the taxpayers. Since the check won’t arrive at the IRS until sometime after April 15, the IRS might question if it indeed was mailed on April 15. Anything short of certified mail with proof of mailing and proof of delivery could be questioned. Private carriers such as UPS and FedEx also provide proof of mailing and proof of delivery. A copy of an envelope with a stamp or even a meter showing April 15 can still be questioned because the stamp or meter normally doesn’t have a post office cancellation showing the envelope was mailed on April 15.

Taking these same rules back to December 31 tells us that we must be able to prove the check was written and mailed on December 31 and not in January. Anything short of this proof could put the deduction in danger. In other words, if a check is written on December 31, 2010, but not mailed until January 2011, that deduction is questionable. To be safe, just write the check before December 31 so it gets to its destination before December 31.

There are at least other four other alternatives to writing a check that will, in most instances, ensure the deduction will be allowable.

First, pay the item in cash and get a receipt. As Dave Ramsay says, “Cash is king.” That deduction will never be questioned as long as the receipt is correct. I am seeing more people paying in cash, so perhaps Ramsey’s philosophy is being followed by more people. The disadvantage, of course, is that you have to have a face-to-face meeting with the other party in order to effect a cash transaction. This is not always possible.

The second alternative is paying with a bank money order or cashier’s check. The taxpayer turns over cash or the equivalent to a bank or financial institution and they issue a negotiable instrument that is the same as cash. Please be aware that the same problems as outlined above apply if the money order is being mailed. If the money order doesn’t reach its destination until May 2011, claiming it on the 2010 tax return might be a bit of a stretch.

The third alternative is to use a debit card. It’s as good as cash and the same rules apply. Just make sure to save the receipt.

The fourth alternative is to charge the item on a credit card. In the financial world, a charge made on December 31 is the same as paying cash on December 31. The taxpayer is legally committed to the charge made and that’s good enough for the IRS. Remember to obtain the receipt.

At this point in time, the debit and credit card alternatives offer the best manner of paying a bill on December 31 and still, without a shadow of a doubt, being able to claim the deduction.

We see this most often in the charitable contribution area. Taxpayers can watch the entire Red Wings annual New Years Eve game that usually gets over by 11 p.m., go to an organization’s website, make a contribution, and have plenty of time to still have a glass of champagne at midnight.

Actually, the later in the year that a contribution is made or a deduction is taken, the higher the return on the investment. If a contribution is made on January 1, 2010, the taxpayer will wait until February 2011 to file his return and get the tax benefit from the contribution. At least 13 months have elapsed since the contribution was made before the benefit is received. However, if the contribution is made on December 31, 2010, there is only a one-month wait until the benefit is received. I like getting the benefit after one month versus 13 months. Perhaps this is another reason that charitable gifts increase dramatically in December. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com.

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