Deducting Charitable Donations: What You Need to Know

The end of the year will be here before we know it and if you are like most taxpayers, you will be scrambling for some last minute tax deductions. A taxpayer can itemize and deduct such items as medical expenses, state & local taxes, real estate taxes, mortgage interest and charitable contributions. While some of those items are added back if you are subject to alternative minimum tax (AMT) or as in the case of medical expenses, they are only deductible if they exceed 10% of income (7.5% for ages 65 and older); charitable contributions are not affected by these restrictions.

Come year-end, some taxpayers frantically search for additional deductions. However, charitable organizations can use these donations all year around. So I’m sure the question you’re asking is, “do all donations qualify?” Here are a few general rules that you need to follow if you want your donation to qualify on your Schedule A of your Form 1040.

Cash Donations:
• Donations must be made to a qualified organization. Click here to check to see if your organization qualifies.
• Most donations are deductible up to 50% of adjusted gross income (in some cases 20% and 30% ceilings).
• For all cash donations over $250, the taxpayer needs to keep a record of a receipt or cancelled check with the donation amount, date and qualified organization.

Non-Cash Donations:
• As with cash donations, non-cash donations also need a written acknowledgement of the donation for all donations over $250. If the donation is between $500 and $5,000, additional records for cost basis, acquisition date, and fair market value will be needed. Donations over $5,000, along with the information mentioned above, may need an appraisal.
• Non-cash donations over $500 need to be reported on the Form 8283
• You can donate used clothing and household items, but they have to be in good condition or better. Those items count as a donation up to the current fair market value and not the cost of the item

Nondeductible Donations:
• Donations made to an individual are never deductible
• Donations to foreign charitable organizations are not considered to be a qualified organization
• Any donations made to a political campaign are not considered to be a deductible charitable contribution
• Any donations where you are provided benefit over your donation, is not deductible
• If you donate more than the value of the benefit, you can deduct the difference as a charitable contribution.

There are more specific rules based on different types of charitable contributions, so be sure to consult your tax advisor with any detailed questions you may have regarding your donation.

By: Jill Blakeman, CPA

Year-End Charitable Contributions: Food For Thought

In the spirit of the holidays, many American give to those in need. The average charity receives about 40 percent of its annual contributions between Thanksgiving and New Year’s Day, according to Charity Navigator, a not-for-profit watchdog organization.

Charitable Deductions: IRS Gift to Taxpayers

One of the biggest reasons people decide to open their pocketbooks at year-end — beyond the altruistic spirit of the holidays — is that charitable gifts are tax deductible if you itemize on your tax return. You may generally deduct up to 50 percent of your adjusted gross income — without regard to net operating loss carrybacks — but 20 percent and 30 percent limitations apply in some cases.

If you want a contribution to reduce your 2013 tax bill, you need to act before you ring in the New Year, however. A donation paid by credit card is deductible in 2013 as long as it posts on your statement before Jan. 1, 2104 — even if you don’t actually pay the bill until later in 2014. Payments by check can be deducted in 2013 as long as they’re postmarked by December 31, 2013.

Securing Your Deduction

If you’re audited by the IRS, the tax agency will probably scrutinize your charitable deductions. So, always keep copies of all supporting documents. For example, cash contributions require a bank record or written communication from the charity that details the name of the charity, as well as the date and amount of the contribution. Bank records include:

• Canceled checks,
• Bank or credit union statements, and
• Credit card statements.

If you donate cash or property worth $250 or more, ask the charity for a contemporaneous written acknowledgement (in other words, a receipt) that describes the nature of the donation and a good faith estimate of the value of the goods or services.

The value of cash gifts is easily determined, but the value of other goods and services is less clear. All clothing and household items (such as furniture, electronics, appliances and linens) must typically be in “good used” condition (or better). If not and you deduct more than $500 for the item, you must include a “qualified appraisal” with the return.

Deductions of non-cash items worth more than $500 require you to attach a completed IRS Form 8283 with your return. Non-cash property worth more than $5,000 requires you to obtain a qualified appraisal. If an item’s worth more than $500,000, attach a copy of the qualified appraisal to your tax return. Special rules apply for donations of vehicles, boats and planes.

You also can deduct only the fair market value of a donation to the extent that it exceeds the benefits you receive with the donation (for example, if a contribution entitles you to admission to a charity ball or a sporting event).

Additional Due Diligence

Before writing a check or donating new or used items, visit the IRS website to confirm that the recipient is a “qualified” exempt organization. If not, your contribution isn’t tax deductible. Contributions made to foreign organizations — except donations made to certain Canadian not-for-profits — are generally not tax deductible either.

To protect your donations from bogus charities — such as the disaster relief frauds discussed in the above sidebar — also research these three attributes about your preferred charity:

Accountability and transparency. The charity should make it easy for you to research its good deeds and spending habits. Be skeptical of charities that don’t openly share information — including financial records — with stakeholders.

Fiscal health. Charities that know how to effectively solicit donations (think, cash inflows) and are efficiently run (think, cash outflows) have money left over to pursue their goals and reach more of those in need.

Results. Charities have good intentions, but the proof is in the results, not the mission. Talk to volunteers. Visit the organization’s website. See how many activities they’ve organized and people they’ve served over the last year. Testimonials speak volumes about the difference a charity is really making.

Consult your tax adviser regarding any questions you have about your year-end charitable gifts.

Tis’ the Season for “Charitable” Giving

With the holiday season in full swing many charitable organizations are reaching out to people seeking charitable contributions.  Charitable contributions are a great way to reduce your taxable income, while giving to those organizations that are in need.  Below are a few things to remember during this season of giving:

Before donating to any charitable organization it is important to do your research.  A donation is only deductible if it is given to a qualified charitable organization, as determined by the Internal Revenue Service.  The Internal Revenue Service has an on-line search tool available that allows you to select an exempt organization to view their federal tax status and filings.  This will provide you with information as to whether an organization is eligible to receive tax-deductible charitable contributions amount other things.

A couple of good websites to research charitable organizations can be found at: www.givewell.org and www.guidestar.org

Both of the above websites gather information and publicize it for the public to learn more information about nonprofit organizations.

So, now that you have decided which organization to contribute to, it is important to consider what type of donation you would like to make.  Unrestricted charitable contributions are donations that are available to the organization to use toward any purpose.  This type of contribution can be used by the organization toward general operating expenses, or for expenses that are incurred from carrying out its charitable mission.  A restricted charitable contribution must be used for a specific purpose or project.  If you choose to make a restricted contribution, the organization must administer the gift in accordance with your specifications.  An example of a restricted gift would be a contribution to a particular scholarship fund at a university.

Money is not the only contribution that charitable organizations are seeking to carry out their purpose.  Many organizations are also interested in individuals donating their time and talents to their organizations.  There are countless ways to donate service to organizations.  Some examples of these would be to serve food at a local soup kitchen, read to school children, tutor children after school, etc.  Although the value of your services is not tax deductible, some out-of-pocket costs incurred while doing this service work may be deductible (subject to the deduction limit that applies to charitable contributions).

Feel free to contact us for more information regarding the above information.

Happy Gift Giving!

By: Kristin Metzger, CPA

Be sure you are getting the benefit you intend from your charitable donation

While a tax benefit is not the reason you make a charitable donation, it is a benefit you receive.  We hear many questions related to charitable donations – what is deductible? when is it deductible? what documentation do I need to take the deduction?  Make sure you are maximizing the benefit you receive by following these guidelines:

Individual taxpayers who contribute cash or property to a qualified organization can claim the contribution as an itemized deduction. Not all nonprofit organizations are qualified organizations for charitable contribution deduction purposes.  The IRS publishes a master list of qualified organizations at www.irs.gov (tip: enter “publication 78” in the search box).  Donations to individuals or political organizations are never deductible.

In addition to verifying that the organization you are giving to is a qualified organization, you must also make sure you have the proper documentation in place to substantiate the donation.  Here are the basic guidelines for the proper documentation when donating cash:

• Less than $250: a bank record or written receipt from charity
• $250 or more: additional requirements apply. A bank record or written receipt from charity AND an acknowledgement from charity that includes description of property or amount of cash, and a statement as to whether the donor received any goods or services in connection with the donation.

Because of the requirement for having a bank record, paying via check or credit card is the most prudent way to make a donation.  Note that if you are making a donation or $250 or more, and using cash, you must collect a receipt from the organization at the time of donation, and then receive an acknowledgement letter from the organization, as well.   The IRS will not permit a deduction for any amount if there is no bank record or written receipt.

Remember, hours spent volunteering are never associated with a deduction.  However, if you are subject to out-of-pocket expenses while providing these services, those amounts may be deductible.  Examples include postage, transportation, travel expenses, and office supplies.  The use of an auto for charitable purposes is deductible as a charitable deduction at the rate of $.14 per mile.  Each of these listed expenses should be substantiated with bank records or receipts of the expenses.

Another question we often get asked is when the contribution is considered made, especially for those made close to year end.  The IRS will allow a deduction based on the time of delivery.  If payment is made by check, the contribution is considered made on the date of delivery or mailing (assuming the check is subsequently cashed).  The check does not have to be cashed by December 31^st , in order to take the deduction in that year.  Contributions charged to a credit card are deductible in the year the charge occurs, even though the donor does not pay the credit card until the following year.

The final guideline to making a charitable contribution is how much to give.  The IRS does have limitations for how much of your donation is tax deductible. As a general guideline, deductible contributions cannot exceed 50% of AGI.  Excess contributions are carried over to the succeeding five tax years. These guidelines can get tricky based on the type of donation, so you should always contact your tax advisor before donating a large amount to a charitable organization.

If you are looking to maximize your charitable deductions, beyond the basic cash donation, consider the tax strategy of giving appreciated stock to your church versus cash, as the charitable donation of stock will allow you to bypass the capital gain tax that could be due if the asset were instead sold.

By Lindsey P. Wisnewski, CPA