charitable donations Archives

CPA Tip: Charitable Contributions and the World of Doing Good

It is never too early for tax planning, especially when it comes to charitable contributions. This seems to be an area where clients come up short in April because they forget what they contributed during the year, or lack the proper documentation.

The IRS has provided some tips.

1. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. Many times clients ask if they can deduct payments made to a family member that is struggling financially.

2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that’s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services. If you received any benefits from your contribution to a tax-exempt organization, you must compare that you paid.

4. If you give property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.

8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift. I recommend that clients get documentation for all charitable deductions as a matter of discipline.

______________________________________________________________________________

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Informed Giving: Even in Tough Times, Non-Profit Organizations Need You

For over three decades I have experienced charitable giving on several levels: 1) Like most people, I support those organizations that are dear to me, 2) I have sat or sit on non-profit boards, usually as Treasurer, but occasionally President., 3) As a CPA, I have obviously counselled people on their contributions, the most of exciting of those was a donation of a Picasso.

But, in order to donate correctly, you should follow the rules set out by the tax code and the IRS:
1. Tax-exempt status. Contributions must be made to
qualified charitable organizations to be deductible. Ask the charity about its
tax-exempt status, or look for it on IRS.gov in the Exempt Organizations Select
Check, an online search tool that allows users to select an exempt organization
and check certain information about its federal tax status as well as
information about tax forms an organization may file that are available for public
review. This search tool can also be used to find which charities have had
their exempt status automatically revoked. Don’t hand out cash to street vendors unless you are sure they represent a legitimate company.

2. Itemizing. Charitable contributions are deductible
only if you itemize deductions using Form 1040, Schedule A. A real bummer for those who are not wealthy enough to own a home, or have other deductions that qualify them.

3. Fair market value. Cash contributions and the fair
market value of most property you donate to a qualified organization are
usually deductible. Special rules apply to several types of donated property,
including cars, boats, clothing and household items. If you receive something
in return for your donation, such as merchandise, goods, services, admission to
a charity banquet or sporting event only the amount exceeding the fair market
value of the benefit received can be deducted.

4. Records to keep. You should keep good records of
any donation you make, regardless of the amount. All cash contributions must be
documented to be deductible – even donations of small amounts. A cancelled
check, bank or credit card statement, payroll deduction record or a written
statement from the charity that includes the charity’s name, contribution date
and amount usually fulfill this record-keeping requirement. When donating things like clothes, take pictures, itemize, and always get a receipt.

5. Large donations. All contributions valued at $250
and above require additional documentation to be deductible. For these, you
should receive a written statement from the charity acknowledging your
donation. The statement should specify the amount of cash donated and/or
provide a description and fair market value of the property donated. It should
also say whether the charity provided any goods or services in exchange for
your donation. If you donate non-cash items valued at $500 or more, you must
also complete a Form 8283, Noncash Charitable Contributions, and attach the
form to your return. If you claim a contribution of noncash property worth more
than $5,000, you typically must obtain a property appraisal and attach it to
your return along with Form 8283. Obviously, I had to obtain a written appraisal of the Picasso, and fill out the form.

Don’t wait until December 31 to figure this out. Collect your donation receipts in a big envelope throughout the year. Then, match them to your checks and credit cards.

6. Timing. If you pledge to donate to a qualified
charity, keep in mind that for most taxpayers contributions are only deductible
in the tax year they are actually made. For example, if you pledged $500 in
September but paid the charity just $200 by Dec. 31 of that same year, only
$200 of the pledged amount may qualify as tax-deductible for that tax year.
End-of-year donations by check or credit card usually qualify as tax-deductible
for that tax year, even though you may not pay the credit card bill or have
your bank account debited until after Dec. 31.

For more information, see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Source: IRS

______________________________________________________________________________

A CPA’s Guide to Charitable Tax Contribution Documentation

Year’s ago I went to great lengths to report and document the tax donation of a client’s Picasso. The tax return was completed and signed by the qualified appraiser, who supplied by the client. Little did I know that this appraiser was the same person who sold the art to the client. When challenged by the IRS, the IRS appraiser carried more weight due to his “independence” over our appraiser.

At this time of year, clients ask what kind of tax documentation is needed for their year end tax donations. Here is a partial list of tax documentation requirements that may help:

Cash donations: Written communication from the charity and proof of payment for each donation.
Non cash donation of less than $250: Donee receipt. I always also recommend pictures and a detailed description.
Non cash donation of $250- $500: Contemporaneous written acknowledgement, pictures and a detailed description.
Non cash donations between $500 and $5,000: Written acknowledgement with all the aforementioned items along with a detailed history of how purchased, date, cost, and form 8283.
Non cash donations over $5,000: Signed Qualified appraisals, form 8283, detailed photos

There are other requirements like for stock, boats, etc. However, this should provide a good starting point over the next two weeks. It is recommended that you contact your tax advisor before taking any of these steps. As CPAs we see that tax situations vary among taxpayers. Be careful when claiming tax deductions for any charitble donation.

______________________________________________________________________________