Community Accounting & Tax, LLC., Chester, Virginia, Serving Metro Richmond and Southside Virginia.

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Court Prohibits Charitable Deduction for Religious School Tuition

In a case decided late last month, a couple’s attempt to deduct expenses for their children’s religious education as charitable contributions was rejected by the Tax Court. In Sklar v. Commissioner,  the court held that: (1) because the couple’s tuition payments were made to schools that in part provide secular educational services; and (2) because the tuition was not in excess of tuition charged by schools in the area, the payments did not qualify as charitable contributions. The court also rejected the couple’s arguments that provisions enacted in 1993 operated to change the contribution rules to allow such deductions.

Posted: 12-30-05

Deduction for Donated Vehicles Rests on When Charity Sells Vehicle

Because taxpayers must obtain a charity’s written acknowledgment of their vehicle donation before they can claim a charitable deduction of $500 or more, deductions could be limited where a charity does not sell a car before the taxpayer files his or her 2005 tax return; amended returns may be required. IR-2005-149 (12/22/05).

Effective for vehicles donated to charity on or after January 1, 2005, the American Jobs Creation Act of 2004 provides that, generally, a taxpayer’s deduction is limited to the gross proceeds from the sale of the vehicle by the charity. The charity must provide a written acknowledgment within 30 days after the vehicle is sold that notifies the taxpayer of the amount of the gross sales proceeds.

According to the IRS, questions have arisen as to whether the charity must sell the vehicle in 2005 for the donor who donated a vehicle in 2005 to receive a deduction for 2005. The charity, the IRS said, does not need to sell the vehicle in 2005 for the taxpayer to take a deduction on his or her 2005 return. In fact, a taxpayer can take a charitable contribution deduction for the year the vehicle is transferred to the charity, even if the vehicle is not sold by the charity until a later year.

However, a taxpayer cannot take a charitable contribution deduction of $500 or more for a vehicle donation unless the taxpayer has received a written acknowledgment of the donation from the charity and attached the acknowledgment to the return. Thus, if a taxpayer donates a vehicle in 2005 and does not receive the charity’s acknowledgment by the time the individual files his or her 2005 tax return, the individual cannot deduct the vehicle contribution.

If the taxpayer receives the written acknowledgment after filing the tax return for the year of the donation, the taxpayer may, after receiving the acknowledgment, file an amended return for that year and claim the deduction on the amended return. The taxpayer must attach the acknowledgment to the amended return.

Posted: 12-30-2005

Sickness or Disability Payments Excluded from Wages under FICA

The IRS issued final regulations that address the treatment of payments made on account of sickness or accident disability under a workers’ compensation law for purposes of the Federal Insurance Contributions Act. T.D. 9233, 70 Fed. Reg. 74,198 (12/15/05).

For purposes of the Federal Insurance Contributions Act (FICA), Code Section 3121(a)(2)(A) excepts from “wages” payments to an employee or any of his or her dependents on account of sickness or accident disability only if the payments are received under a workers’ compensation law. In addition, under Code Section 3121(a)(4), unless made under a workers’ compensation law, payments received on account of sickness or accident disability are wages subject to FICA during the first six months the employee is out of work.

In the past, the IRS has taken the position that amounts that are excluded from gross income, in the absence of a specific statutory or regulatory exclusion from wages, constitute wages for FICA. In March 2005, the IRS reversed course and issued proposed regulations treating payments made on account of sickness or accident disability under a workers’ compensation law as not being subject to FICA. The IRS has now finalized those regulations.

Under the final regulations, payments made under a statute in the nature of a workers’ compensation act are treated as having been made under a workers’ compensation law and, therefore, are excluded from wages for FICA purposes. The final regulations also align the interpretation of what constitutes payments received under a workers’ compensation law for purposes of Code Section 3121(a)(2)(A) with the interpretation of amounts received under a workers’ compensation law for purposes of Code Section 104(a)(1). Under the final regulations, the definition of workers’ compensation law under Reg. Section 31.3121(a)(2)-1 applies for payments on account of sickness or accident disability made on or after December 15, 2005.

The final regulations also explain that no additional guidance related to the Federal Unemployment Tax Act (FUTA) is necessary because those payments are made to employees of states and local governments and FUTA does not apply to services performed by state or local governments.

The regulations are effective December 15, 2005, and apply to sickness or accident disability payments made on or after December 15, 2005.

Posted: 12-30-2005