Are you looking for a way to lower your 2014 tax bill? Qualified charitable contributions may help lower taxable income — and, as an added bonus, allow you to support worthwhile causes. Approximately 40 percent of charitable giving occurs from Thanksgiving to New Year’s Eve, according to the not-for-profit watchdog Charity Navigator. So now is a good time to review giving trends and the IRS substantiation requirements.
Tax Court: Contributions Failed Substantiation Tests
Charitable contributions are one area that the IRS has cracked down on in recent years. The bigger your charitable deductions, the more stringent the substantiation rules are – and the more likely the IRS is to audit them. A recent U.S. Tax Court case demonstrates that it’s critical for taxpayers to provide (and retain) adequate documentation to support their charitable contribution deductions.
Facts of the case: After his mother’s death, Thad Smith deducted nearly $28,000 in charitable contributions on his 2009 personal tax return for donations of his parents’ household goods, clothing and electronic equipment to AMVETS, a qualified charity. Smith combined all of the donation acknowledgments on two blank “tax receipts” provided by the charity and prepared a spreadsheet that identified the items donated and valued them using lists found on the Salvation Army’s website. However, there was no evidence that this spreadsheet was ever provided to or seen by AMVETS.
The values that Smith placed on many of the items he allegedly donated were considerably higher than the “high” values shown on the Salvation Army’s website. Smith offered no explanation for this discrepancy. He also didn’t obtain any appraisals, take photographs or introduce evidence to establish the condition of the items he allegedly donated. Moreover, he failed to provide written records establishing when his parents had acquired the items or what their cost and fair market values were on the contribution date.
Despite having no doubt that Smith donated property to a charitable organization, the Tax Court ruled that none of his contributions were deductible because he failed the charitable contribution substantiation tests. (Thad Deshawn Smith v. Commissioner, T.C. Memo 2014-203.)
Don’t let this happen to you. The IRS has explicit rules that vary depending on the value of your donation and the type of property contributed. Consult with your tax pro if you plan to donate noncash items worth $250 or more on your personal tax return.
Brick-and-mortar stores have Black Friday. Online retailers have Cyber Monday. Likewise, charities have Giving Tuesday, a global celebration of generosity, to boost their year end donations.
Mark your calendar for this year’s Giving Tuesday on Dec. 2.
Who Are the Most Generous Contributors?
Charitable contributions reached approximately $335.2 billion in 2013, an increase of 4.4 percent over the previous year, according to the Giving USA 2014study. This was the fourth consecutive year of increased generosity. If giving continues to grow at the current pace, annual donations will surpass the 2007 pre-recession peak of $344.5 billion by 2016.
But charities should thank some taxpayers more than others. Corporations accounted for only 5 percent of charitable contributions in 2013. What’s more, the total amount donated by corporations declined by almost 2 percent last year compared to 2012.
Individuals accounted for 72 percent of contributions in 2013. A recent study of people who reported charitable contributions as itemized deductions on their personal tax returns found an “income-giving gap” based on contributions made before and after the recession. Specifically, the Chronicle of Philanthropy reported that people with adjusted gross income (AGI) of $200,000 or more decreased charitable contributions as a percentage of AGI by 4.6 percent from 2006 to 2012. But people with AGI below $100,000 increased charitable giving as a percentage of AGI by 4.5 percent during the recession.
Based on the Chronicle of Philanthropy study, the average American gave 3 percent of his or her AGI to qualified charities in 2012. But generosity varies dramatically depending on where taxpayers live. People in Utah are the most generous, donating an average of 6.5 percent of AGI to qualified charities. Conversely, people in New Hampshire donated the least, giving an average of 1.74 percent of AGI to qualified charities. How do your personal charitable contributions measure up to these statistics?
Learning to Play by the IRS Rules
Not all charitable contributions are tax deductible. The Chronicle of Philanthropy study was based on data from personal tax returns, which covered 80 percent of charitable giving by individuals as tabulated by the Giving USA 2012 study and 74 percent of charitable giving reported by individuals in 2006.
In order to deduct charitable contributions on your personal tax return, you must follow these rules:
Charitable contributions are deductible only if you itemize on your tax return.
To be deductible, charitable contributions must be made to “qualified” organizations. Giving money to an individual or a foreign organization is generally not deductible, except for donations made to certain qualifying Canadian not-for-profits. To determine if an organization qualifies as a charitable organization, go to the IRS Exempt Organizations Select Check.
To deduct a charitable donation of money, regardless of the amount, you must have a bank record or a written document from the charity. Bank records include canceled checks, bank or credit union statements, and credit card statements. These statements should show the name of the charity, the date, and the amount paid. Credit card statements should also show the transaction posting date.
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. (Note: This requirement may be waived for deductions of clothing or household items of more than $500 if you include a qualified appraisal with the return.) Household items include furniture, electronics, appliances and linens.
If a contribution entitles you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
Higher Values Require More Substantiation
The IRS rules vary depending on how much you’re claiming for each contribution.
For a gift of $250 or more (cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization (in other words, a receipt).
The acknowledgment must state whether the organization provided goods or services in exchange for the gift. If so, the organization must provide a description and a good faith estimate of the value of the goods or services. One document from an organization can satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.
If your deduction for a noncash contribution is more than $500, IRS Form 8283 must be filled out and attached to your return. Taxpayers are also required to maintain written records with respect to each item of donated property that include:
- The approximate date the property was acquired and the manner of its acquisition.
- A description of the property.
- The cost or other basis of the property.
- The fair market value of the property at the time it was contributed.
- The method used in determining its fair market value.
Similar items of property are aggregated for purposes of the substantiation rules. The term “similar items of property” is defined to mean property of the same generic category or type, such as clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. IRS Form 1098-C or a similar statement must be provided to the donor by the organization and attached to the donor’s tax return.
If you claim a deduction for a contribution of noncash property worth more than $5,000, you need a qualified appraisal. If you claim a deduction for a contribution of noncash property worth more than $500,000, you must attach the qualified appraisal to your return.
‘Tis the Season
Contributions are deductible in the year made. The holidays are a hectic time for most people, so it’s easy to forget about tax-deductible charitable gifts until it’s too late. Donations charged to a credit card by December 31 count for 2014 — even if the bill isn’t paid until 2015. Checks also count for 2014 as long as they’re postmarked no later than December 31.
If you plan to deduct a sizable charitable contribution on your 2014 tax return, consult with your tax adviser before year end to ensure you are following all the rules.