New law adversely affects charitable tax deduction

Q : Has there been any reduction in the ability to claim charitable contributions under the new tax law? It seems that Congress has generally tried to protect the charitable tax deduction. I think it is important to help support these organizations.

A:

There has been one important change that will adversely affect the deductibility of charitable contributions. The standard deduction has been significantly increased so that most people will not be itemizing their deductions.

I realize that some people will think this is a good thing because most people will have an overall increase in their deductions. But the tax incentive effect of making charitable gifts will be reduced when the standard deduction is used.

Studies tend to show that the ability to get a tax benefit from a charitable gift has little or no effect on most giving. This is particularly true for donations to religious organizations.

Large gifts tend to be more affected by tax savings, and the larger standard deduction will not affect those gifts.

For people with IRAs who are taking required minimum distributions, the law allows an RMD transfer to a charity to create the equivalent of a tax deduction without the need to itemize deductions.

RMDs are required only for taxpayers age 70½ and older, so this strategy is not available for many people, but for those who qualify and are charitably inclined it is one way to avoid the effects of the larger standard deduction.

Q: I am selling a house that included an office and a storage area for my business. The two places were about 14 percent of the total square footage. I expect to sell for an $80,000 gain without considering $5,400 of depreciation on the office. Will I report 14 percent of the gain as taxable and then also include the depreciation as gain?

A:

No, you will only report the depreciation as gain. As long as the office and storage area are part of the same dwelling unit, which means that there is no physical separation from the rest of the house, you only need to report the depreciation as gain.

The law requires that the depreciation claimed be reported as gain when a principal residence is sold. The rule that no allocation of any other gain is required is part of the regulations.

The Treasury Department had first proposed requiring an allocation like the one you suggest — 14 percent of the total gain would have been recognized. But practitioners convinced them that an older court decision would support no allocation. The regulations ultimately adopted this taxpayer friendly position.

Q: I have several rental houses and currently allow my mother and father-inlaw to live in one rentfree. Is the intrinsic value of the rent treated as a gift by the IRS?

I do not believe that this type of arrangement would be treated as a gift. There certainly is some value associated with the use of the property. The gift tax applies to “transfers” for less than full and adequate consideration.

The purpose of the gift tax is to supplement the estate tax by taxing transfers that would reduce the size of the taxable estate. The estate tax applies to a dollar value of a decedent’s estate.

I think it is clear that if your in-laws lived in one room of your home without paying rent there would be no gift. This is so because their use of a room in your home, while it has some value, would not reduce the dollar value of your estate.

If the dollar value of the estate is not reduced there is no potential abuse and no reason for the IRS to try to contend that the gift tax would apply.

Your situation is not as favorable if the in-laws’ use of the property is preventing you from earning rent from that property. The rent-free use could then be viewed as reducing the dollar size of your estate.

If you are forgoing the opportunity to earn rent income, there may be a gift subject to the gift tax. But gifts of $15,000 or less need not be reported, and the gift claim is a challenge for the IRS anyway.