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ALERT: Tax PLanning Qs and As

It has been a while since I have posted answers to some of the tax questions which flood my e-mail in-box. Here are some recent ones that should be of interest to most recipients of this ALERT. Unfortunately, some of the questioners are not going to like the answers . . .

I am going to write a computer program for my church to help manage its business affairs. How do I go about valuing the ìone of a kindî program when claiming a charitable deduction? - The Good Soul, Provo, Utah.

I am sorry to report that you probably will not be able to claim ANY significant deduction. Why not? The tax law has a quirk in the charitable giving sections that prohibits a deduction for the contribution of an item that would produce ordinary income if sold. So, if you sold the program you are going to write rather than donating it, the money you received from the sale would be ordinary income to you. So, a gift to charity of the program will not be deductible.

What you would be able to deduct from this exercise are your out-of-pocket expenses incurred in creating the program, such as the cost of disks and paper for reports. How about your time in working on the program? Sorry, that value is not deductible as a charitable contribution, either.

I use the family computer to track my investments. Does this entitle me to deduct part of its cost? When Iím not using it, the rest of the family plays games on it, writes letters, that sort of thing. - Harold from Florida.

The good news is that the use of a computer to produce investment income is deductible; but the bad news is that in practice the deduction will probably be of little value to you. Simply because this deduction scenario has a lot of limitations.

1. You have to have a written record of the investment related use of the computer versus the personal use of the machine to claim a deduction, including one for depreciation.
2. In order to take any deduction, you must itemize them on your return. The IRS reports that only about 30% of all taxpayers itemize their deductions.
3. This deduction would be considered to be a ìmiscellaneousî deduction on Schedule A. Therefore, it is deductible only to the extent the amount claimed exceeds 2% of your adjusted gross income.

So, yes it is deductible . . . in theory, but in practical terms, it is unlikely to generate enough benefit even to justify the time youíd expend in keeping track of your actual use of the computer.

I am not yet 59 Ω, but I need to access some money from my IRAs. I know I can avoid the 10% penalty if I take ìsubstantially equal periodic paymentsî over my life expectancy. But I have more than one IRA. Do I have to take the payments from all of the IRA accounts, or can I access just one of them? - EBD, Manchester, NH.

Yes, you can take the payments from just one account and leave the others untouched. This was a controversy some years ago, and was initially addressed in Private Letter Ruling 9050030 many years ago. While these special statements by the IRS only affect the status of the taxpayer requesting the ruling, the situation posed by your question was becoming such an issue that the Treasury Department issued a Regulation under Internal Revenue Code Ã? 72 (t)(2)(A)(iv), clarifying that any taxpayer can proceed in the fashion discussed above.

If I pay most of the support of my retired parents thereby allowing me to claim a dependency exemption for them, can I also deduct the mortgage interest that I pay for them on their home? - Abe A., Boca Raton, Florida.

Abe, there are a couple of issues here, and neither bode well for your federal tax experience.

First of all, to be entitled to claim a mortgage interest deduction, you generally need two elements to operate: You have at least an recognizable an equitable interest in the property; AND you must be legally obligated to make the payments. Your question is silent on these points, but if the home and the mortgage are in your parentsí names, you fail on BOTH counts and you cannot claim a mortgage interest deduction. Actually, the tax law considers the payments you are making to the bank to be gifts made to benefit your parents. Gifts (to individuals) are never deductible.

Secondly, you also may be running afoul of the dependency exemption rules. Generally, to claim an adult as a dependant, that person most reside with you on a day-to-day basis for a significant portion of the year. These rules have been liberalized somewhat in recent years, but based upon what your question poses; you may have a problem here, as well.

Arenít you glad you wrote!?!?

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