by Lisa A. Winton, MBA, MST, AICPA Technical Manager–Taxation, Washington, DC

Notice 2006-110 explains how charitable contributions made by payroll deduction may meet the recordkeeping requirements of Sec. 170(f)(17), as added by Section 1217 of the Pension Protection Act of 2006. The IRS and Treasury expect to issue regulations under Sec. 170 to incorporate the Sec. 170(f)(17) requirements; taxpayers may rely on the notice until regulations are issued.

To substantiate a deduction, regardless of amount, Sec. 170(f)(17) requires a taxpayer to maintain a bank record or written communication from the donee showing the (1) name of the donee organization, (2) contribution date and (3) amount contributed.

For a contribution made through a payroll deduction (regardless of amount), a pay stub, Form W-2 or other employer-furnished document that mentions the amount withheld for payment to a donee organization, along with a pledge card prepared by or at the direction of the donee organization, is acceptable as a “written communication from the donee organization” under the Sec. 170(f)(17) requirements.

by Lisa A. Winton, MBA, MST, AICPA Technical Manager—Taxation, Washington, DC

The AICPA has identified 10 common, avoidable errors made on Federal tax returns that can affect tax liability, delay return processing and, perhaps, draw the IRS’s attention:

1. Leaving off attachments: All required schedules and forms should be attached to Form 1040, using the “Attachment Sequence Number” shown in the upper-right-hand corner of each schedule or form. Other statements and schedules can be attached at the end of the return, even if they relate to another form or schedule. The taxpayer’s name and Social Security number should be included on every page of each form submitted.

2. Forgetting prior-year carryforwards: Prior-year returns should be checked for any items (e.g., capital losses or charitable deductions) that exceeded the deductible amount and need to be carried forward to the current year.

3. Reporting investment income incorrectly: Earnings from money market funds are dividends, even though they are often mistakenly reported as interest income.

4. Overpaying Social Security taxes: Taxpayers who worked two or more jobs in 2006 and whose total earnings exceeded $94,200 may have overpaid Social Security taxes. The instructions accompanying Form 1040 explain how to claim a credit.

5. Unnecessarily declaring a state tax refund as income: State tax refunds should not be declared as income on Federal tax returns if the taxpayer did not receive a tax benefit from deducting state taxes. Taxpayers who took the standard deduction in 2005 do not have to include a state tax refund in income for 2006. Taxpayers who were subject to the alternative minimum tax (AMT) in the year the state income taxes were deducted may not have obtained the full benefit of the regular tax deduction for state income taxes; see IRS Pub. 525, Taxable and Nontaxable Income.

6. Failing to document donations: Written acknowledgment from the charity is required to deduct monetary donations of $250 or more. If the gift was property valued at less than $500, the written acknowledgement must describe the property; the taxpayer must file Form 8283, Noncash Charitable Contributions, for property contributions valued at more than $500. Donations of used clothing and household items after Aug. 17, 2006, must be in “good” or better condition. For 2007, taxpayers have to keep records of all donations by cash or check, showing the details of the contribution. Given that many banks do not return cancelled checks, taxpayers will have to be diligent in getting a detailed acknowledgment from the donee, even if the contribution is under $250.

7. Not properly tracking investment basis: Basis is the original value of an investment. For example, if a taxpayer owns mutual fund shares, each year the fund reports the dividends and capital gains earned, which are taxable in the year reported. When the taxpayer sells the shares, the gain is the difference between the sale proceeds and the taxpayer’s basis (amount realized less adjusted initial investment). Basis increases once any financial gains the taxpayer has reinvested are taxed. If taxable gains (i.e., the dividends and capital gains reported) are reinvested, they are added to basis to reduce gain (or increase loss) on sale.

8. Making numerical errors: All calculations should be reviewed for accuracy. Because some calculations affect other figures, mistakes can cascade; thus, all affected computations should be reviewed. Also, entered Social Security numbers and Form W-2 information should be double-checked.

9. Failing to calculate AMT: As many as 16 million taxpayers are predicted to become subject to the AMT for the first time during the next two years. Form 6251, Alternative Minimum Tax—Individuals, should be completed, just to check if it applies. Otherwise, the taxpayer may receive a tax bill from the Service, with underpayment interest. 

10. Assuming that itemizing deductions is better than taking the standard deduction: Itemizing deductions does not automatically result in the lowest Federal tax bill. For example, a taxpayer who has paid down most of the interest on a home mortgage might be better off taking the standard deduction. For 2006 returns, the standard deduction for a single taxpayer is $5,150 and $10,300 for married taxpayers filing jointly. Taxpayers should compare itemized deductions to the standard deduction and claim whichever is larger.