ANSWER

You can't deduct a gift to your son. I suggest you use a Roth IRA...no deduction now (it's not worth much anyway as you've discovered) but tax-free income for your son in retirement.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Great idea, but I think she needs to know about it. Even though you can provide the cash for the IRA, she has to open the account and, since it's a contract, she'll have to sign some papers. Some custodians won't open an account for a minor, but many will. Check with a bank.

Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Here's a look at average charitable deduction amounts for 2005 returns, the latest available.

Remember, if you're audited, you need a receipt or bank record (like a cancelled check) to back up all cash donations and a receipt for any single contribution over $250. As for why the state and federal standard deductions differ, all I can say is the states all make their own rules.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You can't deduct charitable contributions made by someone else. If you give your young daughter $20 to put in the church collection plate, I think you can count that as YOUR contribution and deduct it. Remember you need a receipt or a bank record (like a cancelled check) to substantiate any cash contribution.

The energy credits were available in 2006 and 2007, so 2004 improvements didn't qualify.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

It's tough to know based on this info, but I fear it is possible that 32.5% of the IRA withdrawal could go to taxes. UP to 85% of your father's social security benefits could be taxable and, when added to the pension income, his taxable income could be $40,000 or so. After subtracting his personal exemption and standard deduction, that would leave him in the 25% federal tax bracket (it starts at $31,850 of taxable income for 2007). So, if he has a 7.5% state tax, too, that would add up to 32.5%.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I'm assuming this is a traditional IRA, not a Roth. And, as the heir of an IRA, you are taxed on distributions just as the original owner would have been taxed. Report the distribution on line 15 of the Form 1040. It is completely taxable (assuming your father had not made any nontaxable contributions).

If it is a Roth IRA, distributions are tax-free to you.

One other thing, I'm assuming you were not the designated beneficiary of the account, but rather inherited the IRA under your father's will or intestate rules. Because, if you were the designated beneficiary, the fact that your father was over 70 1/2 has no bearing on your RMDs. You can base the payouts on your life expectancy. Be sure to double check this point.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry to hear about the trouble. If the contributions qualifies as a qualified charitable contributions, which it sounds like it does, you report the full amount on line 15a of the 1040 and then enter $0 on 15b and write "QCD" beside the line, as explained on page 22 of the 1040 instructions: http://www.irs.gov/pub/irs-pdf/i1040gi.pdf

If the 1099-R has the incorrect code, the worst that will happen is you'll get a letter from the IRS (probably in the fall or early next year) asking about the discrepancy. At that point, you send them a copy of the receipt for the donation and an explanation that you asked for a corrected 1099-R and the IRA custodian refused. That should be the end of it.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

First, since you inherited this asset, any gain on the sale is automatically considered long-term. Since it is gold, however, you don't get the 15% maximum rate. Gold is considered a collectible, with a top rate of 28%. If your top bracket is less than that, that rate (say 25%) applies to the profit.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but SSI benefits can not be the basis of a rebate. Although Social Security retirement and disability benefits count, Congress said SSI benefit do not. If she has other income to report, she should use a Form 1040A. See the instructions here: http://www.irs.gov/newsroom/article/0,,id=179201,00.html

As for the gift to your relative, you do not report it at all on your tax return. There is no deduction for gifts to friends and relatives, only to charitable organizations. A lot of people are confused by the $12,000 "gift tax exclusion." But what this means is that you can give up to $12,000 to a person without YOU having to pay a federal gift tax.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

The living trust will have no impact on their income tax return. That would be true even if they had transferred ownership of assets to the trust. Income from such assets flows through to the grantor and is reported on his or her tax return, just as though the living trust did not exist.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Oh, my, you've really raised a complicated issue...and one for which I'm afraid I can't find a definitive answer.

Back in 1973, a Tax Court case (TC Memo 1973-265) allowed a taxpayer to claim a charitable contribution deduction, over IRS objections, for allowing a fire department to turn down a house as a training exercise. And, the deduction was based on the fair market value of the house before its destruction. However, the IRS is fighting a similar deduction in court now, so it's clear the government position is still to oppose such a write-off. Some observers believe the homeowner actually gets a benefit from allowing the fire department to burn down the house, reducing costs of removing the property so he/she can rebuild, for example, or reducing the volume of materials that must be disposed of.

I believe some tax advisors would be willing to recommend such a deduction and be willing to fight the IRS if the return were audited; others would steer clear of the deduction. I'm afraid I can't weigh in one way or another on that point.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Don't you just LOVE taxes?

The question on the first gift is what really happened to the $143.52 in dividends. If you got that money, then your gift to the college is the post-dividend value of $3,383.04; if the college got the dividends, then your gift is the higher amount: $3,526.56.

You deduct what you actually gave to the college.

On the second gift, you should not get credit for the dividends twice. If the college is valuing the gift at the post-dividend NAV PLUS the dividend received, that is appropriate. Again, if the college got the dividends, then you get to deduct that amount.

I hope this helps.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but no. You must itemize deductions in order to claim any charitable contributions. And, you benefit from itemizing only when the total of all your qualifying expenses exceed the standard deduction amount for your filing status.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

You are correct that inheritances are tax-free. However, when a foreign inheritance exceeds $100,000, a form 3520 is to be filed with the IRS. You'll find the form here: http://www.irs.gov/pub/irs-pdf/f3520.pdf and the instructions here: http://www.irs.gov/pub/irs-pdf/i3520.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but no. No matter how generous your intent or how needed the recipient, a gift to a private individual does not qualify as a charitable contribution. Only gifts to recognized charities qualify. So, no deduction.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Inheritances are income-tax free and do not have to be reported to the IRS. In your case, though, it sounds like you inherited property and then sold it. If so, you should report the sale on a Schedule D, to accompany your Form 1040. Your basis in the property would be it value at the time of death of the previous owners. If the value rose between that time and the time you sold, you have a long-term capital gain; if it fell, you have a long-term capital loss to report.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

For gift tax purposes, the value of the gift would be the fair market value of the stock at the time of the transfer. If that amount is over $12,000, then a federal gift tax return would be due. In addition to the annual $12,000 gift tax allowance, every taxpayer has a credit large enough to cover the gift tax bill on up to $1 million of taxable gifts.

For income tax purposes, the basis of the transferred stock remains the same as the basis in your hands. That is, you give the recipient your basis as well as the stock, so any gain accrued while you owned the shares will be taxed to the new owner when he/she sells the stock. The holding period also transfers, so that the new owner's holding period begins on the date you originally acquired the stock.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

When someone dies, an estate is automatically created for tax purposes. If the estate has no assets, because all assets transfer automatically to surviving owners, then the tax liability for the decedent's final return falls on those surviving owners under a provision of the law called transferee liability.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Double check your calculations, because charitable contributions ARE allowed under the alternative minimum tax. One way big donations can trip you up, though, is if your regular tax bracket is higher than the 26%/28% AMT rates. In that case, a big charitable contribution deductions could knock your return tax bill down -- by 35%, for example -- more than the same deduction trims your AMT bill. And, as you know, you're always stuck with paying whichever bill is higher.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

If you can transfer ownership of the shares to your grandchildren before the sale then, yes, the capital gain will be taxed to them, not you. And, since the gift in each case would be less than $12,000 per person, you would not have to worry about the federal gift tax. Your tax basis would travel with the gift, so your grandchildren's profit on the sales would be identical to what you would report if you still owned the shares.

One thing to be aware of, though, is the so-called kiddie tax, which could cut into your hoped-for savings. For 2008, any unearned income over $1,800 on a child's return is taxed at the child's parents' rate. So, to the extent the long-term gain exceeds $1,800, the parents' rate (which could be the same 15% rate that you would owe) would apply.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER:

Sorry, but gifts to your children -- while generous -- are not tax deductible. Only gifts to charitable organizations can be deducted on your tax return.

Although we often hear about the $12,000 gift-tax exclusion, it has nothing to do with tax-saving deductions on your income tax return.

The law allows each person to give up to $12,000 a year to any number of people without having to PAY the federal gift tax. Since you and your wife together can give a child up to $24,000 without worrying about the gift tax, the $20,000 gift to one of your children is tax-free. That means you don't have to pay Uncle Sam for the privilege of making the gift, not that the IRS subsidizes the gift by letting you deduct the amount on your tax return.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors