Tax Tips Blog

Ryan asks: I’m retired with a federal pension and social security. Financially I do not need to work, but I miss it. I really enjoyed working, but I don’t want the pressure of a full time job anymore. I’ve been told that if I set up a foundation, I can freelance, doing the same work I use to do, only instead of having people pay me, ask them to donate the money to my own foundation. I’ll get to continue to do the work that I enjoy. Technically I will not have any earnings, so I won’t have to pay any taxes on the money I earn. I will get to direct 100% of my earnings to charities of my choosing. And everyone who hires me will get a tax write-off, so it will work great for everyone. My question is, how do I go about setting up this foundation?

My response:Hello Ryan!  By any chance does your idea sound a little bit too good to be true? Well it is.

In the situation you described, you would be providing your services as an independent contractor (note how many times you referred to the income as “earnings” - that should have been a hint that it was taxable).

As far as tax law is concerned, you are not allowed to “assign income”; thus anything you earn are your earnings to report. In the case you described above you would be reporting your earnings as a sole proprietor and you will owe federal taxes and self-employment taxes on any net income from your activity. If you are younger than full retirement age as far as social security is concerned it may affect your social security benefits.

The fact that you wish to donate your earnings to charity, whether that be your own foundation or another charity, is irrelevant; thus, under the circumstances that you described I don’t think you would like to set up a foundation. If one were to want to set up a foundation, a qualified attorney can help you do so.

Best wishes,

Gina

Dale from Ohio asks: I found your blog from searching google and I was wondering if you could help me. I have a client that is having a difficult time paying me. I know they have the ability to pay me, but actually receiving payment for my services is a problem. This is a nonprofit organization that I have some fondness for. Could I ask for a receipt for the work as a charitable donation? I do have documentation as to what my time is worth from similar work and receipts for my travel and other out of pocket costs that I incurred.

My response: Hello Dale! If you do not have a tax advisor (and since you’re searching the internet for an answer to this question, I’m guessing you don’t), I highly recommend that you find one as soon as possible. It sounds to me as if you have a business, since you used the word, “client”. If this nonprofit organization is your client, then you must have (or should have) recorded your “travel and other out of pocket costs” already. And as I’m sure you’ve heard before you are not allowed to deduct the time or services that you donate to a charity. In an attempt to help you with your problem I will share some personal experience. I too have found that some charities, even those with plenty of cash, seem to think everything they receive should be a donation. For that reason, I now include a check for a donation with my bill for the work I have done for the charity. I request that they do not deposit my donation until they have paid my fee. You may want to consider this option, but you should be aware that you will have to record the full amount of the income you receive and you may not be able to deduct any of the donation that you are giving. You tax professional will be able to help you figure out if this is a viable or beneficial option. Best wishes, Gina

Joseph from Springfield, MO asks:

I understand that for 2006 & 2007, a person can take their RMD from their IRA, have it sent directly to a charity (church) and not have to report that amount as income on Fm 1040.  The receiving charity would have to provide verification the gift was indeed received.  Do you have any information on how the gift is handled, i.e., can it in fact be done?  Is there a special code used on the 1099 to advise Internal Revenue that this transaction is different from the ordinary RMD distribution or is some other form completed to attach to the 1040?  Your comments will be appreciated.
Joseph

My response:
Hello Joseph!  Thank you for visiting my blog.

President Bush did sign legislation that allows IRA owners who are 70-1/2 or older, who are required to make minimum distributions, donate those distributions directly to charity.  There are certain rules that must be followed, one of which is that the trustee must send the withdrawal directly to the charity.  These distributions will count against your required minimum distributions for the year and it is excluded from your income.  When you receive your 1099 from your trustee (the person who made the withdrawal and sent it directly to a qualified charity), they will indicate the “Gross Distribution” in Box 1 and the “Taxable Amount” in Box 2a.  They will indicate, with the appropriate distribution code, in box 7 that the withdrawal was made via a trustee transfer directly to a qualified charity.  Since there are other requirements that must be met it is best to have your tax accountant discuss this with your trustee to make sure the transaction is carried out appropriately.

I hope this answers you question.

Best wishes,
Gina

Follow-Up:
Ms Gwozdz,
Thank you for the prompt and informative reply to my question.  I have
asked for information from the IRS 800 number somewhere.  The local
office folks hadn’t even heard about the matter.  Local tax preparers had
no information, only suppositions.  One CPS I talked with at least knew
about the rule but would not have any definitive information until he
attended a meeting in December to get updated on tax changes. 

Its very hard to tax plan if you don’t know the rules.  Now its possible
to take some action.

Thanks again for the information.

Joseph

Living in a small town, it’s not uncommon to hear people willing to trade their goods or services for your goods or services, but it’s not only happening in small towns. It’s everywhere…including the Internet.

The Internet term is “ebartering”, which can take various forms. There are message boards where people post ads saying they are willing to exchange web site design services (or whatever they have to offer) in exchange for printing or advertising (or whatever they want that you have to offer).

There are also bartering exchanges, a central location, where people from all over sell their goods and services for “barter credits” that they can then use to purchase goods and services from other members.

Some people are under the assumption that since no cash is trading hands there are no tax consequences to these transactions. They are wrong.

The IRS considers barter exchanges as if they were “cash exchanges” and therefore they are completely taxable and possibly deductible. When you exchange your goods or services you are required to report the FMV of your goods or services as income received.

If you exchanged your goods or services for a deductible business expense, like office supplies or advertising, then you are allowed to deduct the FMV of what you received.

If you exchanged your goods or services for something personal in nature, like a round of golf, then you still have to report the barter income your business received, but you are not allowed to deduct the round of golf.

The IRS requires you to report and pay taxes on your barter income in the year in which it accrues, whether you are on the cash basis or the accrual basis of accounting. This is why businesses try to spend all their barter credits before the year ends; otherwise, they will be reporting income from the barter, but no related expense.

If you can’t find anything in your barter exchange that you want to spend your barter credits on, see if you can contribute your barter credits to a charity such that you can take a charitable donation as your business deduction.

Most taxpayers are aware that if they donate cash or personal items to a qualified organization they may be able to claim an itemized deduction for the fair market value of their donation. It is also pretty common knowledge among taxpayers that you are not allowed a deduction for the value or time of the services you provide. What many tax payers commonly neglect to deduct are the following…

You can deduct 14 cents a mile for each mile you drive for charitable purposes, plus parking fees and tolls. This includes your mileage to Goodwill or Salvation Army to drop off your old clothes and furniture. If you’re a weekly (or monthly or occasional) volunteer at a Hospice, Hospital, Cancer Center, etc. this mileage is all deductible.

Alternatively, you could deduct the actual costs of transportation, like gas, oil changes, parking fees, and tolls, but you would need receipts to prove them.

If you incur expenses while traveling away from home while performing services for a charity, including out of pocket costs for round-trip travel, taxi fares, and other costs of transportation between the airport, bus station, train stations and hotel, plus lodging and meals are deductible in full.

NOTE: These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are deductible, but the cost of your own entertainment or meal is not deductible.

You can deduct the cost of your uniform (Hospital Scrubs, Cub Scouts, etc.) when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

Remember, to document you charitable giving such that you can receive a tax break at the same time. Keeping a log book is the easiest way to make sure you don’t miss a deduction.

And make sure that the organization you are providing these services to a qualified organization. Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, is a list of organizations eligible to receive tax-deductible charitable contributions. You can find this publication here.