Are You Charitable?
Many of us are, and we like to make sure that we’re maximizing our tax benefit when we give. That way, we can give more! As one nonprofit executive said, “People donate because they are generous, but the amount is determined by tax policy.”
We may *think* we know what’s required to deduct charitable contributions, but do we really? In 2012 (in Durden v IRS), the Tax Court disallowed a $25,000+ deduction for one couple’s contributions to their church, for which the taxpayers had cancelled checks and letters. The judge even indicated that he believed that the contributions had been made! Outrageous, but the moral of this story is that you must precisely comply with the substantiation requirements.
Recordkeeping – Proving it to IRS
For any cash contribution over $250, you must have:
(1) a “contemporaneous written acknowledgment”
(2) from an exempt entity qualified under section 501(c)(3)
(3) which includes specific language,
(4) for a gift or donation to further the exempt purpose.
Let’s examine these requirements.
(1) Contemporaneous means a receipt or letter dated prior to the filing of your tax return – usually that’s before April 15th. Most charities send receipts in January or February. If you don’t have it, get it before you file. Several taxpayers have attempted to get receipts later (Durden), even after audits commenced, but I’ve seen undated receipts, too.
(2) Churches are not normally required to file applications to qualify under 501(c)(3). All other entities are listed on the IRS website. Make sure you know before you give. Many entities solicit gifts for political work &/or lobbying, but also have a foundation arm which engages only in permissible activities – religious, educational, charitable, scientific, literary, etc. with a public purpose.
(3) The written acknowledgment must state whether or not the exempt entity provided any goods or services in consideration for the contribution. If so, a good faith estimate of the value of the goods or services must be included. Only the excess over the value received is deductible. Museums & zoos often indicate a value to membership; the additional amount is deductible. Often a church will refer to “intangible religious benefits” only; this is to clarify that no estimate of value is required under the regulation.
(4) A gift must evidence donative intent. Participation in games of chance is specifically excluded. You can’t take a deduction for anything you buy from a charity – in a gift shop or used goods store – or raffle tickets, bingo cards, split-the-pot contributions. If you buy an item at a silent auction for *more* than its value, the excess is considered a donation and can be deducted, but you’d better be prepared to prove the excess.
Below $250, you need a bank record (cancelled check or detailed statement); personally prepared records are not sufficient. So, if you want to take a deduction, no cash! Or use envelopes if your church offers that recordkeeping option.
For payroll deduction contributions, you need both a paystub or W-2 and a pledge card that shows the name of the donee(s), such as United Way, Combined Federal Campaign or the specific organization(s).
Noncash Contributions – What about donations of stuff?
Clothing & household goods donated to Goodwill, Salvation Army, AmVets, St. Vincent dePaul, etc. must be in at least good used condition. Over $250, you need a receipt and a detailed list of items. My FMV NonCash Charity spreadsheet or FMV NonCash Charity PDF incorporate a price list. For larger contributions, photos wouldn’t hurt; if you take ‘em with your phone, you can email to me for your file. How much can you give? The practical aggregate limitation on these contributions is $5,000 because….
For contributions over $5,000 (usually antiques, art, jewelry, collections) an appraisal prepared by a qualified appraiser must be obtained and submitted with the return.
It is possible to substantiate and deduct more than $5,000 of clothing, household goods and similar property (say from an estate or home downsizing), but it’s complicated. Talk to me first.
Volunteer Work – Do you have deductible expenses?
You can’t take a tax deduction for the value of your services but you can deduct your unreimbursed out-of-pocket expenses. These would include the cost of phone calls, stamps, paper, supplies (such as for teaching religious education), tickets to take underprivileged kids to events (but not your own ticket), etc. If you’re required to wear a uniform, the cost of buying and cleaning is deductible if the uniform is unsuitable for normal wear. Also allowed are transportation expenses incurred in performing donated services and reasonable meals and lodging while away from home (overnight).
However, you must maintain detailed records of your out-of-pocket expenses – receipts plus a written record of the time, place, amount, and charitable purpose of the expense. If you spend over $250, you also need an acknowledgment from the charity, like the one here.
One major caveat: you can deduct the cost of attending a charitable or religious convention if you’re a chosen delegate, but there can be “no significant element of personal pleasure, recreation, or vacation in the travel.” So go, but don’t have any fun.
Mileage incurred in serving the entity’s exempt purpose also qualifies. See When is mileage tax deductible? for recordkeeping requirements.
Other Special Situations – IRA’s & Stock
There are special rules for donations of appreciated securities (stock) too. You can actually save even more tax with these donations. Call me before you make a decision. Coordination between the charity and your broker is necessary.
Qualified charitable distributions from your IRA may be another good way to make contributions. Especially designed for those required distributions to folks who don’t need the income and don’t itemize deductions, this technique allows for a donation to be given directly without paying tax. Talk to the bank or broker who is trustee of your IRA. At this point, it expires in 2013.
Tax Reform & Charitable Contributions?
In the discussion of tax code reform/modernization/simplification, charity comes up as a topic. While most stakeholders don’t support eliminating the deduction, it does constitute a “Tax Expenditure” worth about $50 billion a year. Assume there will be more discussion.
With that much money at stake, also assume IRS will continue taking a hard line on compliance. Don’t be another test case; everybody flunks.
As usual, I’m available to discuss any of these issues, or other financial or tax situations. Call anytime.