Have a question regarding the return of a tax-deductible gift that a friend made to a school back in 2003. In 2003 the school accepted the gift and issued him a receipt so that he could deduct the gift from his taxes. Unfortunately in the intervening years he and the school have had an ongoing series of disagreements over policy, and after years of acrimonious back and forth the school has agreed to return his gift to him. So my question is: how should the return of a tax-deductible gift be treated on his income tax? It's too late to go back and file a 1040-X for the year he took the deduction. It seems to me this is taxable income to him if he deducted the gift, much like a refund of income taxes from a state or municipality. Should the school issue some sort of 1099 form to him? Or should the school not worry about his tax implications and just send the check?

AtlantaTaxExpert

Actually, he CAN go back and amend his 2003 return to pay the additional tax.

The three-year statute of limitations applies ONLY for claiming a refund. You can amend past year returns as far back as you want in order to PAY taxes.

Now, is that recommended?? No, it is not, because, in addition to the additional tax, interest and possibly penalties would also be due.

The best course of action would be for the friend to claim the returned gift as "Other Income" on Line #21 of Form 1040, provided he in fact deducted the gift on his 2003 tax return.

ebaines

Thank ATE. So the school shouldn't issue any form of document to him, other than perhaps cover letter with the check? As a tax payer it would annoy me to know that he deducted the gift back in '03, but there's no paper trail that would induce him to report the income in 2009.

Five Rings

You would rather then have him penalized for his generosity?

Let us give the donor the benefit of the doubt and assume his civic duty would urge him to place an entry on line 21.