SMART TIPS BEFORE DONATING THAT
OLD CLUNKER TO CHARITY

IRS Publication 4303 ("A Donor's Guide to Car Donations") says that would be donors of automobiles (1) should check out the charity, (2) check the value of the vehicle being donated, and (3) check their responsibilities as a donor, as follows:

• If the donor wants to claim a deduction for the donation of a car, he should make certain the charity is a qualified organization. Otherwise, the donation is not tax deductible.
• The deduction is limited to the fair market value of the car, i.e., the price that a willing buyer would pay and a willing seller would accept for the car, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts. According to IRS, some fund raisers claim that donors can, in all cases, deduct the full value of their vehicle as found in a used car guide, such as "Blue Book" value. A used car guide may be a good starting point to value a car, but IRS says that fair market value may be substantially less than blue book.
  GLK's observation: Blue Book value is normally based on a vehicle in reasonably good operating order and without significant damage to the body. If a vehicle needs extensive repairs, its value may be substantially less than Blue Book value.
• If the total deduction for a donated car is $250 or more, the donor must obtain a contemporaneous written acknowledgment from the charity.

The charity can provide a paper copy of the acknowledge-ment or an e-mail acknowledgment.

If the deduction is more than $500, the donor must complete Section A of Form 8283 and attach it to his return. If the deduction is more than $5,000, the donor must get a written appraisal from a qualified appraiser and also complete Section B of Form 8283, which also requires the signature of an authorized official of the charity.

'SAME SEX' MARRIED COUPLES CAN NOT FILE JOINT RETURNS

In response to a letter written to the IRS on 4/13/04 by Eugene Delgaudio, President of Public Advocate (a Falls Church, Virginia, nonprofit organization backing traditional marriage), the IRS replied stating that "same sex" couples are prohibited by Federal Law (including Federal Tax laws) from filing joint tax returns because they limit married status to a "legal union between a man and a woman as husband and wife."

"Spouse" is defined as "a person of the opposite sex who is a husband or wife." In addition, the reply letter goes on to say that: "The law is clear on this issue, and we point out the federal definition of marriage when explaining "filing status" in IRS Publications 17, "Your Federal Income Tax," and 501, "Exemptions, Standard Deduction, and Filing Information."

In both publications, we introduce the subject of martial status with this paragraph: "In general, your filing status on whether you are considered unmarried or married.

A marriage means only a legal union between a man and a woman as husband and wife.

Holding on Longer Can Lower Your Taxes.

If you hold appreciated securities in taxable accounts, owning them at least one year and a day is necessary to qualify for the preferential long-term capital gains tax rates. In contrast, short-term gains are taxed at your regular rate, which can be as high as 35%. Make sure you consider this important distinction when evaluating your investment portfolio. Whenever possible, try to meet the more-than-one-year ownership rule for appreciated securities held in your taxable accounts. (Of course, while the tax consequences are important, they should not be the only consideration for making a buy or sell decision.)

Generally, when you sell stock or mutual fund shares, the shares you purchased first are considered sold first, which is good news if you are trying to qualify for the long-term capital gain rate. However, there may be situations where you are better off selling shares that have been held a year or less rather than those held longer. Selling recently purchased shares at little or no gain (because you purchased them at a higher price) may be better than selling shares held for more than one year if that sale would produce a significant gain. Whenever you want to sell shares other than those you purchased first, you must properly notify your broker as to the specific shares you want sold.

Sell Losers with Tax Savings in Mind. It is also important to consider the best time to trigger capital losses by selling losers held in your taxable investment accounts. Capital losses are used to offset any capital gains for the year. Specifically, short-term losses first offset short-term gains; then long-term gains. Long-term losses first offset long-term gains; then short-term gains. If total losses exceed total gains, the excess can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.

Bottom Line: To the extent you have long-term gains for this year, triggering capital losses before year-end may produce a tax benefit of only 15% (or possibly only 5%). Depending on your exact situation, you could actually collect greater tax savings by triggering capital losses during a year in which you have minimal or no long-term gains. That could be next year. On the other hand, triggering capital losses this year to offset short-term capital gains is almost always a good idea. Call us if you have questions.

Warning: Beware of the wash-sale rule when considering sales to trigger tax losses. You cannot deduct the loss if you purchase substantially identical securities within the period beginning 30 days before and ending 30 days after the date of the loss sale.

Consider Giving Appreciated Securities to Your Children. A great way to reduce the tax hit on an appreciated security is to give it your child (or grandchild). The child (grandchild) can hold the security until the year she turns 14 and then sell without being subject to the "kiddie tax." The resulting capital gain will probably be taxed at only 5% (assuming the current tax rate structure is left in place). Remember that giving the security to your child is considered a gift. However, you can use your annual $11,000 gift tax exclusion to shelter the transaction from any gift tax. For larger gifts, you can use part of your $1 million lifetime gift tax exemption to avoid any gift tax hit. However, dipping into your $1 million exemption could result in a higher estate tax bill after you die.

Investments in Retirement Accounts Get Less-favored Treatment. Remember that nothing has changed for investments held in tax-deferred retirement accounts (traditional IRAs, 401(k) accounts, SEPs, Keogh accounts, and the like). All the accumulated income and gains from investments held in these accounts will eventually be taxed at higher ordinary income rates when you start taking withdrawals. For this reason, it may make sense to keep investments that throw off high-taxed interest income in your tax-deferred accounts, while holding stocks and mutual funds expected to generate long-term gains and qualified dividends in your taxable accounts. On the other hand, equity investments you expect to hold for one year or less should probably be kept in your tax-deferred accounts or in a tax-free Roth IRA. Also, if the dividend/capital gain producing investments are likely to have significantly higher returns than the interest-producing investments, the benefit of the tax deferral may make holding those higher return assets in the tax-deferred account the way to go. If in doubt, we can help you figure out the optimal mix of investments to hold in your taxable and tax-favored accounts.