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Freedom and Equality

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

This is likely the most familiar and oft-quoted statement from the Declaration of Independence.  From this statement, we connect freedom with equality.

If every person is created equal and has inalienable rights, they must also have certain freedoms to exercise those rights.  This profound statement initially separated us from the English monarchy, but over time, it accomplished much more.  It’s the basis for ending slavery and granting women equal suffrage and property rights.  Granted it took a long time for some of these concepts to take root in our culture and society, but it has happened.

Our social and political systems have evolved in a positive manner.  However, I believe there is cultural shift occurring which deviates from what was initially envisioned in the Declaration of Independence.  We seem to be embracing the idea that freedom and equality are determined by the outcome.  The goal has become achieving an equal result, rather than an equal opportunity.  I believe the intent of the Founding Fathers and the strength of our country has been the equality of opportunity, not the guarantee of a specific outcome.

Although there can be difficult obstacles and challenges to surmount, anyone can succeed in America.  You don’t have to be of a particular gender, race, religion or social class.  There aren’t any barriers that categorically deny you advancement, which is not the case in many other countries of the world.

Lately, it appears the equality of opportunity is being undermined.  We seem to be slowly moving away from a free-market capitalistic society and drifting towards a socialistic ideal of uniformity.  We are embracing some nebulous idea of fairness, rather than freedom and equality.  We often think it unfair if someone has more fame or fortune than us, and in order for us to be equal, we must all enjoy a similar lifestyle.

I believe we are all created equal by our Creator, but if you study the Scriptures, it is clear the Creator doesn’t define equality as equal results.  He defines it by equal value and worth.  The mere fact that we all have different gifts and talents precludes us from being able to achieve an identical result.

Furthermore, the role of government and society is to create and fair and equal rules, not guarantee a specific result.  History has proven it’s impossible to guarantee equal results for everyone. Such attempts have only created a different class of “haves” and “have-nots”.   These countries usually have a large majority who suffer while those who chart the course to equality benefit greatly.

America has a unique connection with freedom and equality.  As we celebrate our Independence via the signing of the Declaration of Independence, be thankful for the opportunity we have to be free.   Our freedoms were designed by the Creator, who assures equal value and worth to each person, not a guaranteed end result.

Controlling Oil Prices

President Obama announced yesterday that he was authorizing the release of 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) over the next 30 days.  The decision was made in coordination with our European allies who also will be releasing an equal amount.

Supply disruptions from the ongoing conflict in Libya were cited as the rationale for the release, but several industry analysts and commenters question this rationale.  The current stockpile of oil and gas hasn’t dramatically decreased since the Libyan conflict began, and most industry analysts believe there are adequate supplies, irrespective of what happens in Libya.  Although oil prices climbed dramatically at the beginning of the conflict, they have dropped nearly 10% over the past few weeks.

Many commentators suspect the real motivation is an attempt to drive potential speculators from the market.  If this was the intent, it seems to be working… at least for the moment.  Yesterday, the market price for oil dropped $5 per barrel, and gasoline futures dropped $0.14 per gallon.

Although we may all profit from lower fuel prices, the long-term cost of this decision may not be worth the short-term benefits.  The effects of this strategy may be short-lived.  By current estimates the world consumes nearly 89 million barrels of oil per day (the U.S. consumes 21 million barrels each day).  Thus, releasing 1-2 million barrels per day isn’t going to have a dramatic effect on long-term  supplies.

If hindering the profits of traders and speculators was a primary motivation, then it’s huge misappropriation of power.  The SPR was created to protect the country against a sudden disruption of oil supply, especially for the military.  Although the SPR has been tapped for non-military uses in the past, it was never intended to be a tool to control market prices.  It’s dangerous for politicians to use a strategic asset to achieve a political or economic result.

In my mind, such actions raise serious questions.

  • Where in the Constitution does the government have the power to manage the price of a particular asset or commodity?
  • Is the government now in the position of trying to make or break a market?
  • Who gets to decide when the price is too high or too low?
  • How does a national asset become a tool to manage a particular market?

I agree that government has a role to enforce free and fair trading practices.  If illegal and unethical trading occurred, then go after the culprits, or pass legislation if rules need to be  changed.  Absent illegal or immoral activities, the government doesn’t have a right to control the market because our political leaders don’t like the result of what is happening.   Government’s attempt to regulate and control market prices sounds a lot like socialism – not free enterprise.

We may never know for certain the true motivation for this decision, but the people who work and study this stuff full-time, have reasonable suspicions of the real intent behind the release of oil from the SPR.  If the chasing speculators out of the market was the primary motivation, it was a terrible decision.  The government’s attempt to artificially control prices never works out well in the end.  Furthermore, this type of foray into the free markets is a dangerous exercise/abuse of power.

Do we really want to be European?

Let me start by stating that I’m not anti-European.  I have European roots, European friends, and am fascinated with their rich history and heritage.  I really enjoy the cuisine, cobblestone streets, outdoor cafés and centuries-old buildings.  I also respect their current government and political structures, but I happen to disagree with some of their fundamental economic philosophies.

I often hear politicians and friends say that we should be like____ (insert name of European country).  It was one of the biggest arguments for passing Obamacare (i.e., we were the only major industrialized country without socialized medicine).  People seemed to forget who leads the development of new medical products, procedures and technology, but that is a separate matter.

I’ll admit, that there are days when I would enjoy a 35 hour work week, 4+ weeks of vacation (holiday) and a 13th month pay, but I know that it comes with a cost.

  • Gasoline and diesel prices are nearly double the U.S. pump prices
  • Accommodations are small and vehicles even smaller
  • High taxes
  • Complex and intrusive government regulations
  • High unemployment

Since the recession hit in 2008, the U.S. unemployment rate has been on par with the European Union.  However, the U.S. unemployment rate has historically been considerable lower than France, Germany, Italy and Spain.  The United Kingdom is the notable exception.   We may be contending with a 30-year high rate, but unemployment in France and Spain has barely dipped below 8% in the past five years.

As economic recovery has dragged along, the unemployment rate remains high, which has caused many economists to speculate that we may have reached a new level of “full  employment.” You can read this article for a greater discussion on the rationale for this speculation.

Time will tell if this is true, but there aren’t any indications that unemployment is going to dramatically decrease in the near future.  This may be an unintended consequence of our drive to be more European.  Concerns of higher taxes, more regulation and mandatory health coverage may be causing employers to refrain from expanding their workforce.  You may argue the merits of such structural changes, but it will definitely require a shift in the American psyche for us to accept 7-9% constant unemployment as normal.

I’m not advocating for the Europeans to change their social or economic structures.  It’s great if it works for them, but that doesn’t mean it is right for the U.S.  I also don’t believe that we have all of the good ideas.  We can definitely learn from our international brethren.  However, we must be careful in trying to reshape our economy and society to be like someone else.  Albeit different, every nation has its challenges and struggles.  There is no utopian society.

Consequently, we should ponder whether we really want to be like the Europeans or any other nation for that matter.  Embracing our differences doesn’t mean we have to stop celebrating what makes them or us great.

A Double Dip Recession

Many recent economic indicators are pointing to a slowing of the U.S. economy.  This has raised the speculation that we may be headed for a double dip recession.

The following  definitions will help us to speak the same language:

  • Recession – two successive quarters of negative economic growth as measured by GDP
  • Recovery – increase in economic activity and growth in GDP following a recession
  • Double Dip Recession – short period of recovery followed by another recession

As much as we may like steady economic growth, history has proven that the economy is cyclical.  There are periods of economic growth and decline.  There are also times of boom and bust.  While there have been several recessionary periods, the last double dip was thirty years ago when the economy slowed in late 1981 after rebounding from a recession in 1980.

The most recent recession may have officially ended in the summer of 2009 as GDP stopped declining, but that doesn’t mean that all has been well with the economy for the past two years.  Growth has been rather meager and sporadic, and there certainly hasn’t been any boom in economic growth to restore the trillions of dollars of wealth lost from 2007-2009.

Here are some of the recent economic statistics that make the current outlook a little bleak.

  • The unemployment rate bounced back up to 9.1% in May 2011
  • 54,000 new jobs were created in May, down from 232,000 in April
  • Retail sales dropped 0.2% in May 2011, the first decline since June 2010; auto sales were down 2.9% for the month
  • For the ninth straight week, over 400,000 people filed new claims for unemployment
  • Although oil prices have declined in recent weeks, gas is still approximately $1.00/gallon more than a year ago, and continued unrest in the Middle East and the upcoming  hurricane season in the U.S. could cause another spike
  • Higher fuel and commodity prices are causing significant inflation in food prices
  • Housing values continue to fall and an estimated 25% of all homeowners owe more on their home than its current market value
  • A $14 trillion national debt and $1.4 trillion annual budget deficit make it difficult for the U.S. government to spend money to help stimulate economic growth

Time will tell if we have a double dip recession or be able to avert it.  Irrespective of the economic terms of recession and recovery, the immediate economic outlook is not exceptional.  Things may not get much worse, but I don’t think things are going to change all that dramatically in the near future.

I believe there are three primary factors that will continue to hinder our growth.

  1. Unemployment – It’s hard to have strong economic growth when 10% of the population is out of work, and another 5-10% have either given up looking for work or are underemployed.
  2. Housing – Aside from the fact that housing has historically been a leading contributor to economic recovery, current market values put more people at risk for default and make it difficult for people to relocate.  Additionally, your house is often your largest asset, and it’s hard to have much confidence in the economy when you consider how much money you have lost and continue to lose on your investment.
  3. National Debt – The magnitude of the debt and annual deficits pose a substantial risk to the country and the economy.  The debt is manageable because interest rates are at historic lows.  A return to even moderately normal rates would place tremendous pressure on the Treasury and a rise in government interest rates will reverberate through the entire economy.

Unfortunately, there is no easy fix to any of these problems, and our political leaders have not demonstrated the ability or willingness to seriously tackle the issues.  Thus, I think the best we can hope for in the near term is an economy that sputters along with relatively stagnant growth overall.  The worst could be traumatic.

These are a few of my thoughts… what do you think?

U.S. Credit Rating Outlook – Is the Third Time a Charm?

You may have heard the cliché, “The third time is a charm.” When it comes to the future credit rating of the U.S. government, the cliché, “Three strikes and you’re out,” might be more applicable.

Presently, there is a lot of discussion concerning the U.S. debt limit.  After borrowing $14.3 trillion, the U.S. government has reached its limit on how much money it can borrow.  Accounting gimmicks and creative cash flow techniques are allowing the government to continue spending approximately $3 billion each day more than it receives in revenues.  However, the U.S. Treasury is expected to exhaust these measures by early August.  Unless Congress acts before then, the U.S. government will default on some of its obligations.   You can read this article for a discussion on why I doubt this will happen.

A few weeks ago, two major credit ratings agencies, Moody’s Investors Services and Standard & Poor’s provided a negative outlook on U.S. debt.   This doesn’t  mean that they have downgraded the credit rating, but it’s an indication to investors that this is a realistic possibility in the near future.

On Wednesday, Fitch Ratings said it was putting U.S. debt on watch for a credit downgrade later this summer.  This will be the third major credit ratings agency to state their concerns regarding the current debt and deficit situation of the U.S. government.

All three of the agencies have expressed doubt that the U.S. government will default on its debt. The negative outlooks reflect a general lack of confidence in the ability of Congress and the President to reach a meaningful agreement to significantly alter the current trajectory of the debt and deficit spending.

If you follow politics, you probably are not surprised by the current lack of progress and substantial political posturing.  Washington frequently reaches agreement right before a deadline expires, and often enacts a temporary postponement to give itself more time.  Consequently, I don’t think the ratings agencies are really surprised by the current delays.  Instead, I think the negative outlook is driven by their pessimism of our political leaders to make significant changes in fiscal policy.

They realize that raising the debt ceiling is easy.  It’s a simple vote Congress passed many times in recent years.  The real obstacle is reaching an agreement to dramatically reduce the annual deficit, which could come via spending cuts or increasing revenue.

It’s not a charm that a third credit rating agency has a negative outlook on U.S. debt.  It could be viewed positively if it motivates our political leaders to reach an agreement, but based on recent statements and reactions… don’t count on it.  Instead of being a charm, I suspect the recent ratings outlook is more like another strike.

Sacrifice and Personal Benefit

By definition sacrifice is not easy.  It costs you something of value.  Most of our sacrifices are made with an expectation of some benefit at the end.  Without a reward, it seems like an exercise in futility.

No sacrifice is easy, but easiest one to make is when you expect some personal benefit in exchange for your efforts.  You may forego certain foods, pay money at a gym and spend your time exercising.  All of these cost you time and money, but the prospect of healthy and fit body make it worthwhile.

The next easiest sacrifice to make is one made for someone you love and care about.  Parents make sacrifices on a daily basis for their children, yet they do it willingly and happily, because they love their kids and want them to have a better life.  Although you may not personally benefit, it’s worth it to see someone you love reap the rewards.

The most difficult sacrifice to make is the one you make for someone you don’t even know; to lay down your life for a cause you believe in without any benefit to you or our family.  This describes the sacrifice that so many of our soldiers have made serving our country.  Thousands of soldiers gave up their lives on behalf of complete strangers.

Consequently,  Memorial Day should be more than just another day off from work, a long weekend or the unofficial start of summer.  Memorial Day ought to be the day we honor the soldiers who died during military service.  They, and their families, made the ultimate sacrifice obtaining, securing and defending our freedoms.

For many of them, they sacrificed their lives with no personal benefit.  Now… don’t’ read what I’m not writing.  I’m not suggesting that they died in vain, nor were their lives cut short for no reason.  On the contrary… they made a tremendous sacrifice for someone else’s benefit… not their own.

Their names may be inscribed on a Memorial somewhere, but most of those who gave their life are not known or recognized outside of their family and friends.  A certificate and impeccably folded flag may be all that a family has to acknowledge the sacrifice they made.  Few of them received a Silver Star, Medal of Honor, were buried at Arlington National Cemetery or will have their names recorded in the annals of history for their acts of bravery.  Yet, everyone who gave their life committed a great act of bravery.

I would even posit that those who are relatively unknown made a sacrifice with no personal benefit.   It’s amazing when you consider the number of men and women who have given their lives in a rather anonymous way.  Their sacrifice should be highly honored.  You can honor them any day, but Memorial Day is a special time when we as a nation honor those who sacrificed with no personal benefit.

Celebrate Memorial Day… and take a few minutes to remember and honor the people you will never know who sacrificed their lives for you and I.

Do Rich People Pay Taxes?

What do you think… do rich people pay taxes?

Here is a quick answer… Yes!

You may not think that they pay enough, or their fair share, but let me assure you that rich people pay taxes.  Having practiced public accounting for over 20 years and dealing with millionaires and billionaires, I know they pay taxes.  A select few pay more income tax in one year than the average American will make in a lifetime.  When you look at the statistics, it’s actually low-income people who don’t pay income taxes.

Despite the facts, it makes great headlines to claim that rich people don’t pay taxes.  Last week, a CNNMoney article reported that 4,000 millionaires didn’t pay any federal tax in 2010.   The Tax Policy Center was their source of information.  Since I’m always looking to learn and stay abreast of innovative ideas, I read the article hoping to glean something useful.   Not surprising, the details of the article didn’t exactly support the headline.  Here are a few points of contention and contradiction that I noted.

  • Although the article references 2010, it’s unclear how they can make claims about 2010.  The IRS is still processing 2010 returns filed a few weeks ago.  Plus, many high-income taxpayers’ returns are on extension until October 15, 2011.  They don’t cite the source of their statistics, but it certainly isn’t the IRS.
  • The exclusion of municipal interest income from federal income tax was mentioned as a prime example of how millionaires avoid paying taxes.  This is not a tax break for the wealthy.  All interest income from municipal bonds is exempt from federal taxation, irrespective of your wealth or tax bracket.  The contributors failed to mention that this not a tax issue.  It’s a Constitutional issue dealing with the sovereignty of the States.  If Congress could tax municipal interest income, I’m suspect that they would.
  • A capital loss carryover was cited as another possibility.  Capital loss carryovers are generated from the economic loss incurred when you sell something for less than you paid for it.  I don’t think offsetting prior losses with current gains is a great “loophole.”
  • The mortgage interest deduction was another.  This is completely bogus.  You can only deduct interest on $1.1 million of mortgage debt.  Even if you were paying an incredibly high interest rate of 10%, your mortgage interest deduction would be $110,000; far short of being able to shelter $1 million of income each year.
  • Charitable contributions were listed as another possibility.  This is a little better than the mortgage interest deduction, because you can deduct up to 50% of your adjusted gross income to certain qualified charities.  It may get you closer to eliminating your tax liability, but it’s still only 50%.  Furthermore, you have to give the money away. The tax savings might make it more affordable to give, but you’re still out the economic value of what you contributed.
  • Foreign tax credits are also cited.  Generally, you are allowed a credit for taxes paid to another jurisdiction on income that is also taxed in the U.S.  It’s supposed to prevent you from  being taxed twice on the same income.  There are limitations on foreign tax credits which make it extremely difficult to eliminate your U.S. tax liability with foreign tax credits.  Even if it is possible, you’re still paying tax, just not to the U.S.  Furthermore, you would have to pay more to the foreign jurisdiction than the IRS to avoid the imposition of U.S. taxes.

Since tax information is personal and private there no actual examples cited.  These were the possible strategies that the contributors cited.  In reality, this article is a headline searching for a story.  None of the examples given are really “loopholes,” nor do they support the notion that millionaires receive special treatment to avoid paying taxes.

Such articles may seem benign, but I disagree.  Whenever one class of people is able to avoid paying taxes (whether real or perceived), it can provide justification for others to be dishonest in filing their taxes.  Additionally, misinformation can easily lead to tax policy with unintended consequences.  The Alternative Minimum Tax (AMT) is a great example.  The AMT was enacted in 1970 to target 155 high-income families who supposedly paid no federal income tax in 1969, but today, millions of middle-class families are subject to AMT.  A provision originally designed to snare the “rich people” is now being imposed on many middle-class families.

It might make a great headline to suggest that wealthy people don’t pay income taxes, but it’s not really true.  There is no magic to avoid paying taxes.  More often than not, rich people pay income taxes.  If you’re still not convinced, become wealthy and see what you find out.

Raising the National Debt Ceiling

Within a matter of days, the U.S. Treasury is expected to hit the ceiling on its authority to borrow money on behalf of the U.S. Government.  Treasury Secretary Geithner has already made plans to extend this timeframe by a couple of months.  Most of it involves deferring payments and accounting gimmicks to buy the President and Congress more time.

I have no doubt that the debt ceiling will be raised.  With a projected budget deficit of nearly $1.5 trillion this year, there is no way our politicians will balance the budget any time soon.  Thus, the Treasury will need to continue to borrow more money to fund the government.  The real issue is how much more borrowing will be allowed and what spending cuts and fiscal reforms will be enacted.

For the most part, the debate over raising the debt ceiling is political theater and brinkmanship.  Sadly, it’s another example of the dysfunction in Washington.  If it wasn’t so serious, it would be funny.  A couple of years ago when George W. Bush was President, the Democrats resisted raising the debt ceiling and the Republicans argued that it was necessary.  Now that President Obama occupies the Oval Office, it’s exactly the opposite.  The Republicans are balking and the Democrats are calling them irresponsible.

Most of the Members in Congress would like to raise the debt limit by $2 trillion, which would fund the government until after the 2012 election.   At the current rate of overspending, the limit would be reached shortly after the 113th Congress is seated and the President is inaugurated in 2013.

Earlier this week, Speaker Boehner said that the Republicans want to cut spending by the same amount that the debt ceiling is raised.  Given the recent agreement on the 2011 budget, it’s doubtful the Republicans will come anywhere near this goal.  While campaigning in 2010, the Republicans promised to cut $100 billion from the 2011 budget.  The final  agreement was $38 billion. Of that amount, a substantial portion included accounting gimmicks and money that wasn’t going to be spent anyway. If they couldn’t agree to cut spending by $100 million, how in the world will they ever come close to eliminating a $1.5 trillion annual budget deficit?

If you believe the U.S. Government needs some significant changes in its fiscal policy, then you must pay very close attention to what happens, and you’ll need to do some digging to get to the truth.  It’s unfortunate, but you can’t take statements by our elected officials at face value.  Most of what they say is political posturing and spin.  Rarely do they tell the whole truth.  There is often more to the story.  The real truth of the $38 million of spending cuts in the latest budget deal is a prime example.

As much as I am troubled by the growing national debt, I think raising the debt ceiling is necessary.  To immediately cut $1.5 trillion of spending from a $3.5 trillion budget is too much too quickly. However, it doesn’t mean that significant changes can’t be made.  The President and Congress need to stop patting themselves on the back for cutting less than 1.5% of total spending.  It’s a pittance in relationship to the magnitude of the problem.

Raising the debt ceiling is necessary to avoid a current crisis, and making significant cuts to the current spending and fiscal policies is needed to evade a long-term catastrophe.

Spending Cuts and Accounting Gimmicks

Three weeks ago, President Obama and Congress reached an agreement on the 2011 Federal budget.  Keep in mind that the government’s fiscal year started on October 1, 2010.  Thus, we were already more than six months into the year before they could reach an agreement of how to spend money for the current year.  How they are able to do that is a different discussion.

After they reached an agreement on the 2011 budget, members of both sides of the aisle trumpeted their success in reducing Federal spending and moving towards more fiscal restraint.  Even for those who wanted greater cuts, they conceded that it was a good start.  According to the budget agreement, federal spending is will be reduced by $38 billion.  This may seem like a lot of money, but keep it in perspective.  This amount is approximately 1% of the total $3.5 trillion of federal spending for 2011 and less than 3% of the projected $1.4 trillion budget deficit.  It’s a good start, but certainly not what you might consider draconian cuts.

The dirty little Washington secret is that a substantial portion of the $38 billion won’t actually reduce federal spending for programs or personnel. Check out this Washington Post article which reveals some of the maneuvers and gimmicks utilized to account for the cuts.   Granted, there will be real cuts and reductions, “But some of the worst-sounding trims are not quite what they seem, and officials said they would not necessarily result in lost jobs or service cutbacks.”  One example cited is the $4.9 billion for the Justice Department’s Crime Victims Fund.  The money was allocated to a reserve fund that wasn’t going to be spent anyway, yet Congress counted it as part of their “spending cuts.”

Although it may seem like a rather trivial matter, it’s a good indication of how Washington works and the way our political leaders think and act.  In  Washington World, money you wanted to spend, could have spent, or even thought of spending all count as “spending cuts.”

If this were true, then I have cut millions of dollars from my spending… but it’s not real.  It makes no difference to my bank account how much money I thought of spending or wanted to spend, but didn’t.  It only counts if I don’t spend it, and it stays in my account.  This is common sense to the rest of the world, but it seems elusive to Washington politicians.

Understanding Washington World and the political spin of politicians will be very important as Congress and the President wade into the battle over the 2012 budget, raising the debt ceiling and tackling the annual deficits and national debt.  It’s in vogue to talk about spending cuts and deficit reduction, but there is often more to the story than what is being said.

This is an issue you should care about whether you support the current spending by the U.S. government or believe it needs to be dramatically reduced.  To me, it’s an issue of honesty and integrity. Hopefully, this matters to you irrespective of your political affiliation or philosophy.

Tax Tip: Charitable Contributions

Americans are some of the most generous and charitable people in the world.  According to a report by the Giving USA Foundation, Americans gave over $300 billion in 2008.  Your primary motivation for giving to a charity should not be saving taxes, but if you are going to give, you might as well reap whatever tax benefits are available.

Like many areas of tax law, a seemingly simple subject can become complex rather quickly.  There is not enough room to cover all of the rules regarding charitable contributions in this short article, but I’ll hit some of the highlights you should be aware of when it comes to claiming a charitable deduction.

The first requirement is to make sure that the recipient is a qualified charity.  You can give money to any person, group or organization you want, but it may not qualify as a tax deduction.  Click here to search the IRS list of officially recognized charities.  Gifts to individuals are not charitable contributions.  You may want to help someone recover from a natural disaster or medical condition, but your gift isn’t tax deductible.  You can’t circumvent this rule by giving money to a charity that is specifically designated to an individual.

Be advised that there are limitations on the amount of charitable deductions you can claim in any one tax year.  The limitations are 20%, 30% and 50% of your adjusted gross income.  The percentage limitation is determined based upon the property you are giving and the nature of the charity.  Any unused contributions can be carried forward for 5 years.

You can receive a deduction for cash or property donated.  Although your services may be invaluable, they aren’t tax deductible.  One of the biggest issues of donating property is determining the fair market value.  You may be able to get away with your best guesstimate when donating clothes to the Salvation Army or Goodwill, but it gets much more complicated for more valuable items that may not be easily valued.

You can receive a charitable deduction for out-of-pocket expenses you pay on behalf of a charity.  It may be preferable for you to give cash and have the charity reimburse you, but this may not always be feasible.   In any event, you must be able to demonstrate that the expenses were incurred for a charitable purpose and not your personal benefit.  Travel expenses can qualify, but it can’t be a clever way for you to deduct your vacation expenses.

While you may be an honest and trustworthy person, the IRS can require you to substantiate your charitable contributions.  Your word may be good, but it won’t work for cash donations.  You either need to have a receipt from the charity or a copy of a canceled check.  Most public charities will provide you with a statement no matter how much you give, and they are required to provide you with a receipt if you give over $250 in any one gift.  The charity must also indicate if you received any substantial benefits for your gift.  You may give $1,000 to your alma mater, but if you receive sporting event tickets worth $200, you can only deduct $800.

These are just a few of the requirements for deducting charitable contributions.  Consult a tax advisor if you have questions about your particular situation.  Savings taxes will probably not motivate you to make a contribution, but it can make it less expensive or allow you to give more.  Either way, don’t overlook the tax savings that can be derived from a properly documented charitable contribution.