I’ve written a lot on the issue of donating vehicles to charities and the abuses by people claiming much higher values than they would actually sell for.  As a result, our rulers in DC passed a law late last year limiting the deduction to whatever amount the charity was able to sell it for.  This law took effect as of January 1, 2005. 

In typical fashion, IRS has come out with a new form (1098–C) for the charities to fill out documenting the donations and sales amounts.  You can download pdf versions of  the 2005 Form 1098–C and its instructions from the IRS website.

Effective as of October 1, 2005, the rates they charge will go up by a full percentage point, to 7.0%.

I have updated my Quick Reference page accordingly.

Q:

Subject: Audit Question

Dear Tax Guru,

My husband is being audited for his 2003 return. He finished his MBA in May 2003, began working in September 2003 and deducted his last semester of tuition fees when he filed his return. Apparently a tax expert gave a seminar in school explaining why MBA students can make this deduction, but maybe he was mistaken. Anyway, my husband is not working in the same field or for the same company that he left when he took time off to go for his MBA. Do you think there is any justification he can use for claiming this deduction?

Thanks in advance for your help,

A:

It sounds as if your husband misinterpreted the rules for deducting education costs.  As long as I’ve been in the tax business (over 30 years), this has been one of the craziest Catch 22 type rules.  Basically, you are only allowed to deduct education costs related to the profession you are already in.  Education costs incurred to enter new professions have never been deductible. 

I’ve always thought this law to be counter-productive in regard to the country’s work-force, which should be encouraged to learn the skills necessary to adapt to the changing business environment, such as factory workers learning how to use computers.  Unfortunately, the words “Logic” and “Congress” are as incompatible as any two words could be.

It doesn’t look good for your husband in regard to salvaging this deduction.  He will owe the extra tax plus interest.  However, the penalties that auditors routinely toss in are completely negotiable and can be waived if your husband can convince the auditor that this was an accidental misinterpretation of the law.  If he hasn’t already done so, he should also make sure he has deducted all of his job hunting costs.

Another lesson that you both should take from this is the wisdom of using a professional tax preparer instead of trying to interpret the laws and regulations on your own. 

Good luck.

Kerry Kerstetter

Update:

Employee Could Deduct Cost of MBA That Helped Him Move Ahead in Company

New rules for alternative vehicle purchases, leases

IRS S corporation audit plan draws mixed reviews

 Letting go of business – Succession planning.

Judge to tell IRS to reopen collection bids – Others, such as the Soprano and Gotti families, are anxious to get the contracts to use their special skills to collect money for the IRS.

TIGTA finds IRS is lax in combating identity theft – Not good, especially considering how much of our vital info IRS has in its possession.