Tag Archives: contribute to charity

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.

Nonprofit_Donation2Come 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

deductionOne 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

Donation_CheckBefore 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:

696304Before 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

Charitable Gifts of Property: Follow Stringent Rules to Ensure Deductions

The tax law imposes stringent requirements for deducting charitable gifts of property. These rules are especially tough when you donate appreciated property. If you do not observe all the rules, your deduction may be reduced, or even eliminated. One recent Tax Court case dramatically illustrates this point. The taxpayer donated property worth tens of millions of dollars — which the IRS readily acknowledged — yet his final deduction was zero because he failed to obtain an independent appraisal!

Basic Rules for Gifts of Property

If you donate property to a qualified charitable organization that would have qualified for long-term capital gain if you had sold it rather than donating it — in other words, you’ve owned the property for more than one year — you’re allowed to deduct an amount equal to the property’s fair market value (FMV). Conversely, if you’ve held the property for a year or less, the deduction is limited to your basis (generally, your original cost of the property).

This provides a unique planning opportunity for some taxpayers. Notably, you can contribute property like real estate or securities that has significantly appreciated in value and then claim a large deduction based on the FMV. The appreciation in value in the property remains untaxed forever.

Generally, your current charitable deduction for appreciated property can reach up to 30 percent of your adjusted gross income (AGI). There is an overall limit of 50 percent of AGI for all charitable deductions. Any remainder above these limits may be carried over for up to five years.

However, the tax law imposes several other special requirements when you give property to charity. For instance, if you donate property that is not used to further the charity’s tax-exempt function, your deduction is limited to your basis in the property. In addition, the IRS requires a written description of property valued at more than $500. And, if you claim a deduction exceeding $5,000 for donated property, you must obtain an independent written appraisal. That was the taxpayer’s undoing in the new case.

Facts of the Case

Joseph Mohamed was a real estate broker and entrepreneur in Sacramento, California. He was also a certified real estate appraiser. Along with his wife, he set up a charitable remainder trust (CRT). Over a two-year period in 2004 and 2005, the couple contributed five properties and a shopping center to the CRT.

Mohamed appraised the properties himself and used the values established in the appraisals to claim deductions on IRS Form 8283, Noncash Charitable Contributions. But he later admitted in court that he never read the accompanying instructions to the form. Instead, he thought a self-appraisal would suffice.

Besides failing to obtain an independent appraisal, Mohamed omitted information required on Form 8283, such as the basis of the properties he had donated to the CRT. For four of the five donated real estate properties, he claimed a combined FMV of slightly more than $1 million. He claimed a FMV of $14.8 million for the fifth property, which he said that he undervalued because he didn’t want to risk an inflated deduction. For the shopping center, he used a FMV of $2 million. Mohamed also left the “Declaration of Appraiser” on Form 8283 blank.

Because of the AGI parameters for charitable contributions (see above), the couple’s deduction for 2003 was limited to $3.8 million. They carried over the excess deduction.

After the IRS audited Mohamed and questioned the self-appraisals, he hired independent appraisers to do the job right. Their appraisals resulted in FMVs similar to the ones established by Mohamed. Furthermore, subsequent sales by the CRT provided prices close to the values used by Mohamed. But the IRS continued to object that the values were excessive, so the taxpayer appealed the case to the Tax Court.

This is where the IRS laid down the law. It disallowed any deduction because Mohamed failed to obtain a written independent appraisal and omitted other required information. The Tax Court spoke sympathetically about the situation and even opined that Mohamed had probably undervalued the donations. What’s more, it acknowledged that Form 8283 could be misleading. But the rules are the rules: The independent appraisals obtained by Mohamed while he was being audited came too little, too late. Despite the harsh outcome, the Tax Court sided with the IRS and denied Mohamed any deduction. (Mohamed, TC Memo 2012-83)

Lessons to Be Learned

The stakes in this area are simply too high for any missteps. Stick to the strict letter of the law and make sure that all the proper information is entered on Form 8283. Remember that an independent appraisal is needed for a gift valued at more than $5,000. We can provide the necessary assistance to ensure that you walk away with top-dollar deductions for your charitable gifts of property.

The IRS conceded that Mohamed donated properties worth millions, yet he could not deduct a single penny. Don’t let this happen to you!