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Charitable tax donations

What Clients Should Know About Charitable Tax Donations

Mar 1st 2019
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Although fewer people will be taking charitable gift donations on their taxes, some individuals still look for every deduction they can get. This is an area where a client’s creativity and imagination are not considered virtues by the IRS. They need advice.

Here’s what they need to know:

  1. “Real” charities: There are many good causes and many charities. All charities are good causes, yet all good causes are not charities. The IRS wants the one your client picks to have a 501c(3) designation.
  2. Holding periods: When considering gifts where you are expecting a big deduction, the IRS wants the donor to have owned the item for at least a year.
  3. Written confirmation: Gifts of $ 250.00 or more to a charity must be acknowledged by the charity in writing. If your client attended a gala, they usually indicate how much of the ticket price is considered a contribution. If they donate cash or property worth $ 250 or more, they need a letter.
  4. Fair market value: Most charities need money, not stuff. They will accept your items but will likely intend to sell them. The value of your gift is usually the amount at which they can sell it.
  5. $ 500, $ 5,000 or $ 500,000: Charitable deductions totaling $ 500 or more mean you are filling out IRS form 8283. Donations of property of $ 5,000 or more require a qualified appraisal. Bigger gifts, like a $ 500,000 real estate donation, require the appraisal to be attached.

Now, let’s review some specific items people commonly donate:

  1. Used Clothing: They donate children’s clothing that no longer fits. They should deliver it directly to that charity, hand it over to a live person and get a receipt. Organizations like Goodwill usually have a printed value guide.

Bottom Line: This is simple and straightforward.

  1. Used Furniture: It’s pretty similar to used clothing. Donated items must be in good, usable condition. Organizations like the Salvation Army provide valuation sheets with ranges.

Bottom Line: Still pretty simple.

  1. Used Vehicles: You see the billboards and hear the radio ads: “Donate your car!” This is another fair market value situation. Assume the charity will send the car to a vehicle auction company. There are certain exceptions to “what the charity gets for it.” If the organization sells it to a local person at a reduced price, that doesn’t have to be your “value.” The fair market value criterion comes into the picture. (4)

Bottom Line: Still simple, but your client might think their car is worth more than a buyer at an auto auction will pay.

  1. Jewelry: People often inherit jewelry from their parents and grandparents. Whether it’s because styles have changed or the piece doesn’t fit, many decide to donate the item to charity. The organization sells it, getting the fair market value. That’s the deduction.

Bottom Line: Charitable deductions surrounding jewelry can be complicated because of the emotions involved.

  1. Antiques: After 20 years of Antiques Roadshow on PBS, people are convinced their old stuff is worth money. The charity might accept it, but it’s probably going to be sold to generate cash.

Bottom Line: Clients should pay less attention to the last item featured. OK, so it was bought at a yard sale, and you could buy a small house with the proceeds. Pay attention to the short clips at the end when people say they thought it had monetary value, but it is only sentimental.

  1. Artwork: This gets complicated. First of all, artists can’t donate their own work for more than the cost of materials. That law went into effect in 1969. If you donate a painting to a museum and they intend to display it, you are on pretty solid ground. The key words are “related use,” which means it furthers their mission. If they intend to sell it, you are looking at your original cost basis.

Bottom Line: Hopefully, your client has a relationship with the museum and the art they are considering donating is something they actually want.

  1. Real Estate: We’re back to donating something similar to securities. You should get the fair market value as your deduction, yet the property will obviously require an appraisal.

Bottom Line: For charities, this is likely where the big money is to be found.

Certain other rules apply to the seriously rich:

  1. Personal Foundations: If you are giving that asset to your own personal charity, your donation value is the lower of the cost basis or fair market value.
  2. Ceilings on Deductions: If you donate more than 20 percent of your adjusted gross income, you need to be concerned. Under the new tax laws, you can donate up to 60 percent of it to a public charity.

The takeaway: Your client can take personal deductions for charitable contributions, but the IRS won’t just take their word for it. 

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