We are closing in on the end of the year. Most individual tax returns are set in stone as of December 31 because we are what is termed as “cash basis” taxpayers. In other words, when we receive a dollar of income by the stroke of midnight on December 31, it has to be determined if it is taxable income or not. Likewise, if we spend a dollar by midnight on December 31, we have to decide if it counts as a deduction or not. Most employees receive income through a paycheck. If a paycheck is dated on or before December 31, that income will be included on the employees’ W2 and it will be taxable for this year. Even if the employee worked several days in December and had that pay coming, if the paycheck dated December 31 doesn’t include that pay, the income is not taxable until the next year. If a taxpayer is selling an asset such as a piece of property, the sale must be dated on or before December 31. If a taxpayer is taking a distribution from a retirement plan such as an IRA or 401k, the distribution must be dated on or before December 31. In these instances, the taxpayer doesn’t have to have the money in his or her checking account for the sale or the distribution to count, but the money has to be committed to the taxpayer. Similarly, if a taxpayer buys a piece of property such as a residential rental, the purchase date of December 31 controls the purchase even if the taxpayer only puts a minimal amount of money down. If the taxpayer buys a business vehicle, as long as the purchase papers are signed on or before December 31, it’s a purchase even if 90% of the vehicle is financed.
Let’s discuss charitable contributions for a moment. They have a special rule or two that the receiving entity must comply with to document the taxpayer’s contribution. For taxpayers considering whether or not to make a charitable contribution, a check can be written and mailed on December 31 but a problem could develop because the charity isn’t able to cash the check until the New Year. In fact, the charity, in their paper work, might very well document the contribution as made in the New Year because they didn’t have control of the funds as of December 31. Most churches will give members a date deadline that a contribution must be received by the church office in order to count it in the year end reports. This is particularly important if the contribution is $250 or more. In that case, the rules are quite stringent. In order to deduct the $250 contribution, the church has to provide to the taxpayer written acknowledgement of the receipt of the funds and stating that no goods or services were provided by the charity in exchange for the funds. The written acknowledgement must be written and received by the taxpayer before the taxpayer files his tax return. The courts have backed up IRS’ right to enforce this particular law. For taxpayers who make contributions of $250 or more, make sure the written acknowledgement is written before the return is filed. Next week, we can discuss the new tax law I would presume as passed by Congress. Now, I would Iike to wish each of you a very Merry Christmas. It’s been a great but quick year so I also wish each of you a Happy New Year. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
Contact Jerry at www.actiontaxservice.com