Many of my clients are asking questions about charitable contributions while they get their documents together for the 2017 returns. I thought it might be a good idea to give an overview of charitable contributions and how best to lock down those deductions.
Americans donate millions of dollars to charities every year. The Tax Code encourages charitable giving by allowing a deduction. However, there are strict acknowledgement/substantiation rules that must be followed in order for you to claim your deduction.
Acknowledgements
You must have an acknowledgment from the charity by the time you file your return for the contribution year to claim your deduction. If you do not have it by the tax return filing date (generally April 15th), an extension on filing your return (generally up to six months) can give you a little extra time to receive the acknowledgment. In the event that you file your return late, you can claim a deduction only if you can prove you had the written acknowledgment in hand by the filing deadline or filing extension date.
Here’s what you need from charitable organizations to claim your deductions:
- If your contribution is an outright donation of $250 or more made in cash or by check, the organization must indicate the amount that you gave, and state that you received nothing in return (or designate that a certain amount did benefit you, in which case that portion is not deductible).
- If your contribution is an outright donation of $250 or more of property, or cash and property, the organization must describe the property and state that you received nothing in return. It does not have to put a value on the property it received.
Cash donations of less than $250
All donors of charitable contributions by cash, check, or other monetary gift must retain records that each charitable contribution was actually made, regardless of the amount. To fulfill this burden, a donor has two choices on what paperwork to retain:
- A bank record; or
- A receipt, letter, or other written communication from the donee indicating the name of the donee organization, the date the contribution was made, and the amount of the contribution.
Donations of clothing and household goods
All donations of clothing and household goods are subject to all of the regular rules on substantiation, plus the taxpayer must prove that they are items in at least good condition. Only clothing and household goods in good condition or better qualify for a deduction.
There is only one exception to the “good-or-better” quality exception:
- A deduction of more than $500 is claimed for the single clothing or household item, and
- You include a qualified appraisal with respect to the item with the tax return on which the deduction is claimed.
Keep in mind that the fair market value of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when new. Similarly, used clothing and other personal items are usually worth far less than the price you paid for them. Valuation of items of clothing does not lend itself to fixed formulas or methods.
Vehicles and boats
Donations of vehicles and boats have their own special rules. Any vehicle not used by the charity cannot be claimed as a deduction in an amount greater than the amount for which it is sold by the charity (generally the wholesale price, or lower). To evidence this, the IRS implemented the use of the Form 1098C, Contributions of Motor Vehicles, Boats or Airplanes. The charity to which you donate your vehicle must report its receipt and sale or gift of the vehicle to the IRS using this form. Additionally, to claim a deduction for the gift of the vehicle, you must receive a copy of this form from the charity and submit it with your tax return. There are significant time constraints under which the charity must provide you with this form, although some lenient transition rules are currently in place. If you donated a vehicle to a charity, or are considering doing so, please call our office so we can help you get that deduction.
Payroll deductions
Special rules apply to contributions made to an organization by payroll deduction. You are not required to obtain a special acknowledgment from the organization, unless you have $250 or more withheld from any single paycheck. Even in that case, you will be able to substantiate your contribution with pay stubs, your W-2 form, or any other document from your employer showing the amount withheld, and a pledge card or other document stating that the charity didn’t give you goods or services in exchange. Your employer may also prepare the pledge card under the direction of the charity.
Larger gifts
There are additional recordkeeping rules for larger gifts of property. If you plan any unusually large gifts, there are a number of other complicated limitations that apply, and there are many sophisticated ways to structure your contributions so that both you and the organization get the maximum benefit. For example, for property valued at more than $500, you must include with your return a written description of the donated property and such other required information as the IRS may require. For property valued at more than $5,000, you also must obtain a qualified appraisal. If your contributions of property are valued at $500,000 or more, you must attach the appraisal to your return.
As you can see, claiming charitable deductions can be complicated. Please call us if you aren’t clear about what you will need to claim deductions for your contributions.