By Ben Alexander, CPA
If you have the privilege of being able to give back, you are familiar with the uplifting aura that follows. There are also more tangible reasons for giving back, especially as individuals and companies begin year-end planning and enter the holiday season where community needs are so evident. Charitable contributions - whether of the cash or noncash variety - are as much a part of year-end tax planning as Form 1040. Like everything associated with the Internal Revenue Code, however, the rules governing the deductibility of charitable contributions are not quite as simple as most taxpayers assume them to be.
The watchword with respect to the deduction of any charitable contribution is "substantiation." Most taxpayers are familiar with the form acknowledgement letters they receive from their charitable donees each year, and a charity is required to issue such an acknowledgement if the donation was in excess of $250. But what if the charity fails to issue such a receipt, or the donation was valued at less than $250? Not surprisingly, the actual check, a bank statement, a payroll deduction record, credit card receipt, or other contemporaneous evidence of the donation is also sufficient. (A telephone bill is also acceptable if the donation was made via text message, provided that the bill states the name of the charitable organization, the date of the contribution, and the amount given.)
Charitable acknowledgment letters come in all shapes and sizes. From a technical perspective, however, every charitable acknowledgement should be in writing, state the amount of the contribution, and state whether the charity provided you with any goods or services as a result of your contribution (and if so, provide a good faith estimate of the value of such goods or services received).
You should receive the charitable acknowledgment letter by the day you file your tax return or the due date for filing the return, whichever is earlier (including extensions, i.e., October 15). If received after the appropriate date, the IRS may not honor it.
Most taxpayers make one or more charitable contributions of clothing or household items each year. These contributions are inherently difficult to value and are subject to special reporting requirements. If the donation is valued at less than $250, then the receipt need only state the name of the charitable organization, the date and place of the contribution, and a description of the property contributed. If the donation is valued in excess of $250, but less than $500, then the acknowledgment must also state the value of the goods or services, if any, that were received in exchange for or in conjunction with the contribution. And if a noncash donation is valued in excess of $500, then you must file Form 8283 with your tax return.
Noncash charitable contributions are generally valued using their "thrift shop" value. This approach is subjective and generally requires only that the valuation be reasonable. In order to complete Form 8283, taxpayers are well served to know how the donated property was acquired, and if acquired by purchase, the amount of the purchase price. Noncash gifts in excess of $5,000 must be accompanied by a formal appraisal unless the gift involves publicly traded stock.
A donation of appreciated property - usually publicly traded stock - offers an added tax benefit. For example, assume that you have agreed to make a charitable contribution of $10,000 and that you own 100 shares of IBM that you purchased for $5,000 but is now worth $10,000. If you were to make your donation in cash, then your deduction would be worth $10,000, but if you contribute your IBM stock instead, then your contribution is effectively worth $10,750. That is, the charity receives the same $10,000 either way, but you never have to pay the $750 in capital gains taxes you would otherwise incur if you sold the stock.
A more unique charitable donation involves the gift of an irrevocable remainder interest in property. Such a gift requires no more than the irrevocable transfer of the right to the property upon your death. An example illustrates where such a gift might be very appealing:
Assume that Bob, age fifty-five, knows that he will have significantly more income and an unusually large tax obligation this year. He has no children and is willing to make a gift of an irrevocable remainder interest in his personal residence - valued at $500,000 - to a local charity. As a result of current interest rates, the IRS rules would value his gift at approximately $370,000! While this technique certainly has its drawbacks (e.g., you cannot change your mind, a sale before death is more complicated, etc.), Bob would receive a huge charitable deduction yet would incur no current out-of-pocket cost.
The most important thing about charitable giving is doing it for the right reasons. Understanding the tax rules that govern the resulting deduction makes it a little bit easier to give.
About the author:
Ben Alexander, CPA, is a tax manager specializing in estate planning for Lattimore Black Morgan & Cain, PC.