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Maximize the Tax Deductions Available for Your Generosity

4/21/2017
Photo of Natalie Simmons

Many nonprofit organizations rely on charitable giving to make ends meet. For donors, these contributions help make a difference in their community, while also reducing their tax burden at the end of the year. 415 Group Principal Natalie Simmons, CPA, explains what donors should know about these deductions.

“Many of our clients are extremely charitable, and they make significant contributions to nonprofit organizations each year. Whether it’s a large or small donation, these deductions add up, and they can directly impact your tax return.

The most common issue we run into is with documentation, particularly for noncash donations. For example, if you donate an item with a value greater than $5,000, such as a piece of artwork, you’ll need to have an appraisal done. The appraisal documentation must be attached to your return; otherwise, you cannot deduct the value of the item. Vehicle donations have specific requirements as well, which can vary based on the value of the vehicle and what the organization does with the vehicle donation.

To deduct a cash donation of $250 or more, the IRS requires a letter from the recipient organization. Many individuals dismiss those thank you letters, thinking that a copy of their check is enough. But the IRS requires that letter as proof that it was a financial contribution and not a purchase. For example, if you attend a charity dinner and the tickets cost $500 per couple, the thank you letter will often disclose the cost of the meal, which cannot be deducted as a charitable contribution on your return.

At 415 Group, we help our clients develop charitable giving plans to ensure that they receive the maximum tax deduction.” 

The reporting requirements for claiming charitable contributions of cash on your tax return can be strict. If you don't follow them, your deductions may be disallowed by the IRS. You should also be aware that stringent rules also apply to donations of non-cash property.

Property Gift Examples

Have you considered giving stock to a worthy organization? When it comes to giving charitable donations of property that have declined in value, the rules are tougher than they used to be. But you can still maximize deductions for gifts of property that have appreciated in value. In fact, if you play your cards right, you can deduct more than what you paid for the property without paying tax on the appreciation in value.

Basic rules: If you contribute property that would have qualified for long-term capital gain if you had sold it instead of donating it, you can deduct an amount equal to the property's fair market value (FMV). Conversely, if you've held the property for a year or less, the deduction is limited to your basis (generally, your original cost).

This tax rule can change the way you give property to charitable organizations. It is especially important if you're contemplating a gift of stock or other securities.

Gift Example: Suppose you own stock bought ten months ago for $5,000, which is currently worth $7,500. If you give it to charity now, you're entitled to deduct an amount equal to your basis in the stock, or $5,000. However, if you wait two more months to donate the stock, your deduction is increased to the FMV of $7,500.

That way, you receive the tax benefit of the stock's appreciation in value. But you're not taxed on the $2,500 difference!

Conversely, if you own stock that has decreased in value, it generally makes sense to sell the stock first and then donate the proceeds to charity. Then, you can claim a capital loss on your tax return. This loss can offset capital gains plus up to $3,000 of ordinary income. Any excess is carried over to next year.

Be aware that there are potential tax pitfalls related to charitable gifts of appreciated tangible, personal property. For instance, if you donate property that is not used to further the charity's tax-exempt function, your deduction is limited to your basis in the property.

Let's review the key tax rules.

Cash gifts: You cannot claim an itemized deduction for any contribution of cash, checks, credit card charges or other monetary gifts unless you keep a record of the donation. The record can be in the form of a bank record or a written communication from the charity (such as a receipt or letter). It must show the name of the charity, the date of the contribution and the amount.

Non-cash gifts: If you give a non-cash gift to charity, you generally can deduct an amount equal to your basis in the property. However, if the property would have qualified for long-term capital gain if you had sold it, the deduction is equal to the property's fair market value. For example, this would apply if you donate stock you've owned for more than one year. (See right-hand box for examples.)

The records you must keep for tax purposes depend on whether your deduction exceeds the thresholds of $250, $500 or $5,000. When figuring if your deduction is $500 or more, combine deductions for all similar types of property donated to any charitable organization during the year.

Note: You cannot take a deduction for donated clothing or household items, such as furniture and electronics, unless the items are in good used condition or better.

In order to be deductible, contributions must be made to "qualified" organizations. You can find out if a charity is qualified by going to the IRS website and using its Exempt Organizations Select Check tool.

Deductions Less Than $250

If you make a non-cash donation of any amount, you should generally obtain a receipt from the charitable organization showing its name, the date and location of the donation and a reasonably detailed description of the property. A statement or other written communication from the charity with this information will suffice. But a receipt is not required if it would be impractical to obtain one (for example, you leave items at an unattended drop site).

In addition, you must keep reliable written records containing the following:

  • The fair market value of the property at the time of the donation and how you valued it.
  • The basis of the property if you held it for a year or less.
  • The amount you're claiming as a deduction if you donated a partial interest.
  • The terms of any conditions attached to the gift.

Deductions of at Least $250 but Not More than $500

In addition to the recordkeeping requirements described above, you must obtain a written acknowledgment of your contribution from the charitable organization. The acknowledgment should include a description of the property donated (but not necessarily its value), whether the organization provided any goods or services in return, and a description and good faith estimate of any goods or services. Exception: The latter requirement does not apply to an intangible religious benefit such as admission to a religious ceremony.

The written acknowledgment must be obtained by the earlier of:

  • The date you actually file your tax return for the year of the contribution; or
  • The due date, plus extensions, for filing the return.

Deductions of More than $500 but Not More than $5,000

You must have the records and written acknowledgment described above for deductions of $500 or less. Furthermore, your records must include all of the following:

  • The manner in which you acquired the property (for example, purchase, gift, inheritance or exchange).
  • The approximate date you received the property (or the date of creation or completion).
  • The adjusted basis of the property other than publicly held securities.

If circumstances do not enable you to supply information on the date of receipt and basis of the property, attach a statement to your return explaining the situation.

Deductions of More than $5,000

In addition to meeting all the requirements for deductions up to $5,000, you generally are required to obtain a qualified written appraisal of the property from a qualified appraiser. A "qualified appraiser" must be certified by a professional organization or meet education and experience requirements under IRS regulations.

When determining if your deductions exceeds the $5,000 threshold, combine your deductions for all similar items donated to any charitable organization during the year.

Important: The higher the deduction you're claiming, the more you have at stake. Your tax professional can help maximize the benefits on your tax return.

 

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