As the year 2018 draws to a close, you may want to begin planning and preparing to file your income tax return. While the return is not due until April 15, 2019, you will start receiving tax information forms in January. One recommended practice is to create a filing system so you have all the necessary information to complete your tax return.
The following categories, tax documents and personal information should be considered when creating your filing system.
- Family Information Your Social Security number or tax ID number. The Social Security numbers for your spouse or dependent children. Dates of birth for family members. Income for adult dependents. Childcare records and payments.
- Employment Information Forms W-2 from all employers. Forms 1099-MISC or Schedule K-1 reflecting self-employment income. Business expenditures and income.
- Retirement Amounts Forms 1099-R for payments from IRAs, annuities and other retirement plans. Forms 1099-SSA for Social Security payments.
- Sales or Interest Interest on Forms 1099-INT, 1099-OID or 1099-DIV. HSA amounts on Forms 1099-SA. Property sales on Forms 1099-B or 1099-S.
- Other Income Rental income, expenses and cost of purchase. Hobby income, prizes income and trust income. Any other Forms 1099-MISC. State tax refund.
- Taxes State and local income. Vehicle and property tax.
- Medical All payments for prescriptions, clinics, hospitals and doctors. Form 1095A, Form 1095B or Form 1095C for your medical insurance plan.
- Education Form 1098-T or Form 1098-E. Qualified educational tuition, fees and expenses.
- Charitable Cash and noncash gift receipts.
If you itemize deductions, you must have documentation to substantiate your charitable gift amounts. Charitable giving documents will vary depending upon the type and value of the gift. Gifts of cash are substantiated by a receipt from the organization or reliable written records. Cash gifts of any amount are deductible only if you have reliable written records, such as a bank record or a receipt from the charity with the amount and date of the gift.
There are specific requirements for gifts valued at $250 or more. The charity must send you a receipt stating the amount of your gift. Normally, the receipt indicates that the charity provided no goods or services to the donor. You must receive the receipt prior to filing your tax return.
If you make charitable gifts through payroll deductions, you must have a written record. Generally, you must retain a pay stub or Form W-2 that describes the amount withheld by the employer for the charitable gift and a pledge card or other document prepared by the charitable donee organizations. The pledge card or other document must also state that the charitable organization does not provide goods or services in whole or partial consideration for the contribution.
A volunteer may deduct expenses that are directly related to his or her volunteer work for a charitable organization. For this purpose, the volunteer must maintain records of the expenditures. In addition, the charity should send the volunteer a statement that describes the volunteer's activities and indicates whether any goods or services were transferred by the charity to the volunteer in exchange for his or her efforts.
No Conservation Easement Deduction Without Deed in Perpetuity
In Pine Mountain Preserve LLC et al. v. Commissioner;
No. 8956-13; 151 T.C. No. 14 (26 Dec 2018), the Tax Court denied two conservation easement deductions because the owner retained the right to substitute building parcels and change the boundaries of the deeded conservation property. One easement with no retained right to substitute property was approved.
Pine Mountain Preserve LLLP (PMPL) owned approximately 6,000 acres near Birmingham, Alabama. In 2005, 2006 and 2007, it deeded conservation easements on approximately 1,300 acres to the North American Land Trust (NALT). PMLP obtained qualified appraisals and reported deductions of $16.5 million in 2005, $12.726 million in 2006 and $4.1 million in 2007.
The IRS audited PMPL and denied all of these deductions because PMPL retained rights to change land boundaries for the conservation easements.
PMPL retained rights in the 2005 and 2006 conservation easement deeds to substitute other land for the one acre building lots in the applicable parcels. PMPL maintained that the conservation easement deduction "granted in perpetuity" requirement of Reg. 1.170A-14 (b)(2) was met because there would be the same size property subject to the conservation easement even if there were lot substitutions.
The Tax Court held that Sec. 170(h)(2)(C) required a perpetual right to specific property. Substitution of other property is not permitted. Because the 2007 conservation easement deed did not permit substitution, it was deemed valid.
Real estate values change with different parcels. The practical problem the Tax Court had with permitting substitution of parcels after tax returns are filed is that the new one acre lots may have different value than those reported as the basis for the charitable deduction. Therefore, the reported deduction value could be incorrect because the substituted lots and the resulting conservation easement property could have different valuations. It is likely that the Tax and Circuit Courts will not permit future land substitutions for this practical valuation reason.
"Split the Difference" Conservation Easement Value
In Pine Mountain Preserve LLLP et al. v. Commissioner;
No. 8956-13; T.C. Memo. 2018-214 (26 Dec 2018), the Tax Court determined the value of a 2007 conservation easement deduction.
Pine Mountain Preserve LLLP (PMPL) had initially valued conservation easement deductions for 2005, 2006 and 2007 in the amount of $33 million. At trial, PMPL valuation expert Raymond Veal increased the claimed value to approximately $99 million. The PMPL appraiser used a "before and after" method.
The IRS appraiser used comparable easement values to determine the charitable deductions. The IRS appraiser claimed a total value for the three conservation easements of $2.5 million using the comparable sales method.
Because the Tax Court disallowed the 2005 and 2006 conservation easements due to a prohibited power to substitute property, only the 2007 conservation easement value was relevant. PMPL expert witness Raymond Veal used a "before and after" approach as permitted by Reg. 1.170(A)-14(h)(3)(i). With this method, Veal claimed the 2007 conservation easement on approximately 240 acres qualified for a charitable deduction of $9.11 million.
The IRS appraiser Gary McGurrin used a comparable sales method and valued the 2007 easement at $2,000 per acre. He determined a charitable deduction value of $449,000. PMPL contested the accuracy of McGurrin's comparables.
The Tax Court noted Reg. 1.170(A)-14(h)(4) requires the conservation easement value to reflect both the "before and after" change in value of the conservation easement parcel and the potential increase in value of contiguous parcels owned by PMPL. Because Veal's valuation did not consider the impact on adjacent parcels, the Tax Court gave equal weight to both appraisers' valuations. Therefore, the 2007 conservation easement deduction was valued at $4,779,500.
Applicable Federal Rate of 3.4% for January -- Rev. Rul. 2019-3; 2019-2 IRB 1 (19 December 2018)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2019. The AFR under Section 7520 for the month of January is 3.4%. The rates for December of 3.6% or November of 3.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.