Tax Tips Blog

Dennis asks:I am composer, and I rent out the score and instrumental parts from time to time. I have some special way of reporting the rental income of intellectual property on my Schedule C. I’m not sure exactly how and where, because Turbotax always takes care of it. This year I donated the rental of two of my pieces to a local small legitimate 501c3 non-profit. I usually get a thousand dollars per rental, so I’d like to write it off. Can I just write off my usual retail rental price like that of the in-kind contribution, which would give me a two thousand dollar charitable contribution? Or is there something different I have to do? And by the way, I have a letter of thanks from them that mentions the value of the rentals, and I can substantiate the fees. Many thanks for any advice.

My response: The tax law does not allow you to write off the value of your time that you donate to a charity. Thus, being the original creator of your intellectual property, your property’s tax basis is zero.

If your tax basis is zero your donation value is zero.

As a consolation, I am sure that you received full credit from the charity acknowledging your work and donation. This credit is advertising costs that you did not have to pay for.

Best wishes,

Gina

Ron asks: Under current law, what is the maximum contribution allowable to a traditional IRA for 2007? (Even with the indexing, I expect to make too much to be eligible for a Roth contribution.) We are married, filing jointly, have plenty of earned income to support an IRA contribution, and neither my wife nor I will reach 50 years of age in 2007. Thanks for any help.

My reply: Hello Ron! The maximum contribution allowed is the same as it was last year, $4,000.

Anyone who has earned income (and their spouse) can make nondeductible contributions to an IRA.

As for deductible IRA contributions, eligibility phases out for married couples with Modified Adjusted Gross Income (MAGI) between $83,000 and $103,000. There isn’t an income cap for married couples when neither participates in an employer-sponsored retirement plan. If only one spouse participates in an employer-sponsored plan, deductible IRA eligibility for 2007 phases out between MAGI of $156,000 and $166,000 for the uncovered spouse and between $83,000 and $103,000 for the covered spouse.

Best wishes,

Gina

Scott asks: I am trying to lower my AGI to remain elgible for ROTH IRA contributions. Can any of you give me some ideas? I have maxed out my 401k. My company does not have a flexible spending plan. Any other ideas?

My reply: Eligibility for Roth IRA contributions are based on Modified Adjusted Gross Income (MAGI). You must take your Adjusted Gross Income (AGI) shown on your tax return, subtract IRA conversion income and any minimum required distributions, and add back a bunch of deductions, such as student loan interest and traditional IRA deduction to get your MAGI.

Actually, there aren’t too many options out there short of maxing out your retirement account contributions that don’t involve making less money. And, I hate to say this, but several things you could of done, it’s probably too late to do now, in December.

This is another example of why tax planning is so important early in the year:

• If you have a Health Savings Account (HSA) eligible medical insurance option, that would lower your MAGI.
• If you have any self-employment income, you can start a retirement plan for that business, which would lower your MAGI.
• If you have any paychecks coming, you could ask your employer to set up a deferred salary plan for you, but I seriously doubt they’d spend the money to do this nor do I believe it could be done before 2007 ended.
• Perhaps there’s time for you to take an unpaid absence from work?
• Or is it worth it to you to work for free from now until the end of the year?
• If you are losing money on any of your investments - sell them for the capital loss. I really don’t recommend selling for tax reasons, but it’s an option. Your losses first offset any of your capital gains and then any additional losses, up to $3,000 annually, will offset your ordinary income.

If none of these ideas work for you and you trust Congress not to change the law, and you don’t have a lot of other deductible IRA money, you may want to think about contributing to a non-deductible IRA and converting it to a Roth in 2010 when the income restrictions on conversions are lifted.

Best wishes,

Gina

For those of you still following, I’m sorry for my lack of postings. As anyone who knows me will tell you, for me, tax seasons starts November 15th and this year it’s been pretty busy. Most of the questions I have received are ones that I’ve already answered, so I didn’t feel the need to post them. This one, although short is new…

Carla asks: Are 529 plan contributions deductible, and if so, can one contribute to a 529 plan to reduce annual income, and thus possibly qualify for a Roth IRA contribution if the 529 contribution brings one down to acceptable Roth limits?

My reply: Contributions to §529 Plans, also referred to as College Savings Plans, are not deductible for Federal income taxes. They may be deductible for your state, it depends on your state of residence and other factors.

Best wishes,

Gina