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Using Holiday Gifts for Tax Write-Offs

Using Holiday Gifts for Tax Write-Offs

Who doesn’t love holidays? Everyone does! But you’ll love it even more once you start taking advantage of the holiday gifts as tax write-offs. This time of year, spending money for parties and gift-giving isn’t that hard. For most people, holidays are also a religious time of the year - meaning, they’re occasions that must not be missed. If you read the Bible, you’ll find that its central theme says it is better to give than to receive, even when you’re giving up a great deal.

For tax purposes, however, it’s important that you’re aware of the difference between gifts and donations. You may actually get a tax write-off if you can tell them apart. 

Let’s learn from this situation. Since the holiday season starts with Thanksgiving, you and your friend decide to illustrate the giving spirit by hosting a homeless man with a grand dinner - you and your friend do this each year because both of you are successful businessmen. However, the charity you both did isn’t really tax-deductible. But the IRS also said business gifts you make in the course of your trade or business are deductible up to $25 for each person. Donations to recognized charities are not the same and even if you are giving to a charity, the value of your time or your services cannot be deducted. The same thing applies even if you usually bill by the house and you donated many hours of otherwise time that are billable to charity. Even if you’re trying to get your money where it will do some good, gifts made directly to the needed aren’t deductible as well.

Now, what if you’re looking at making a donation on legit charities. How are you going to find out how much goes to overhead and what your money really supports even if you’ve checked the credentials and IRS tax exemption of an organization? The purpose of public charities and churches is generally to benefit the public and not private individuals. You may even feel uncomfortable once you know about the payment of some charities to executive salaries and other perks. There is some money being funneled to charities by many types of the full 501(c)(3) variety, making contributions to those charities deductible in the taxes of the donors. The stakes are huge and the IRS often scrutinizes nonprofits. The classic problems with some nonprofits are lavish spending and private inurement. Penalties are assessed by the IRS once they find out about this and in extreme cases, the charity can be revoked from the charity’s tax exemption by the government.  When payments for goods or services are big, it doesn’t necessarily violate the law but to be sure that there’s no private inurement, the IRs do a deeper look.

With arrangements like this, the usual key is whether the terms and conditions are at arm’s length. If a founder or someone else is being paid by a tax-exempt church or charity more money that is fair for goods or services, the tax-exempt status of the organization can be jeopardized. The risk is particularly huge if it looks like the charity is the founder’s own private kingdom. The IRS will find out about it eventually because these charities must file tax returns on IRS Form 990 although they’re tax-exempt.

One thing you can learn out of this is that when it comes to giving, don’t let the tax advantage control you in making your decisions. Another best thing to do is to get some tax advice before you make any actions. A tax professional can give you some tested and proven advice if that’s something you really seek - nothing ventured, nothing gained. Incidentally, you also have to make sure that what you give to the donee was received and being used. Ever heard of O. Henry’s “The Gift of the Magi,”? It’s basically about a couple who wants to exchange something special for Christmas. Della decided to cut off her beautiful flowing hair and sell it to a wig maker so she can buy a platinum chain for her husband Jim’s heirloom pocket watch. The gag is, Jim actually sold his prized watch to purchase combs for Della’s hair.

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