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Americans donate millions of dollars to charities every year. The Tax Code encourages charitable giving by allowing a deduction. However, there are strict acknowledgement/substantiation rules that must be followed in order for you to claim your deduction.
You must have an acknowledgment from the charity by the time you file your return for the contribution year to claim your deduction. If you do not have it by the tax return filing date ( generally April 15th), an extension on filing your return (generally up to six months) can give you a little extra time to receive the acknowledgment. In the event that you file your return late, you can claim a deduction only if you can prove you had the written acknowledgment in hand by the filing deadline or filing extension date.
Here’s what you need from charitable organizations to claim your deductions:
- If your contribution is an outright donation of $250 or more made in cash or by check, the organization must indicate the amount that you gave, and state that you received nothing in return (or designate that a certain amount did benefit you, in which case that portion is not deductible).
- If your contribution is an outright donation of $250 or more of property, or cash and property, the organization must describe the property and state that you received nothing in return. It does not have to put a value on the property it received.
Cash donations of less than $250. All donors of charitable contributions by cash, check, or other monetary gift must retain records that each charitable contribution was actually made, regardless of the amount. To fulfill this burden, a donor has two choices on what paperwork to retain:
- A bank record; or
- A receipt, letter, or other written communication from the donee indicating the name of the donee organization, the date the contribution was made, and the amount of the contribution.
Donations of clothing and household goods
All donations of clothing and household goods are subject to all of the regular rules on substantiation, plus the taxpayer must prove that they are items in at least good condition. Only clothing and household goods in good condition or better qualify for a deduction.
There is only one exception to the “good-or-better” quality exception:
- A deduction of more than $500 is claimed for the single clothing or household item, and
- You include a qualified appraisal with respect to the item with the tax return on which the deduction is claimed.
Keep in mind that the fair market value of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when new. Similarly, used clothing and other personal items are usually worth far less than the price you paid for them. Valuation of items of clothing does not lend itself to fixed formulas or methods.
Donations of vehicles and boats have their own special rules. Any vehicle not used by the charity cannot be claimed as a deduction in an amount greater than the amount for which it is sold by the charity (generally the wholesale price, or lower). To evidence this, the IRS implemented the use of the Form 1098C, Contributions of Motor Vehicles, Boats or Airplanes. The charity to which you donate your vehicle must report its receipt and sale or gift of the vehicle to the IRS using this form. Additionally, to claim a deduction for the gift of the vehicle, you must receive a copy of this form from the charity, and submit it with your tax return. There are significant time constraints under which the charity must provide you with this form, although some lenient transition rules are currently in place. If you donated a vehicle to a charity, or are considering doing so, please call our office so we can help you get that deduction.
Special rules apply to contributions made to an organization by payroll deduction. You are not required to obtain a special acknowledgment from the organization, unless you have $250 or more withheld from any single paycheck. Even in that case, you will be able to substantiate your contribution with pay stubs, your W-2 form, or any other document from your employer showing the amount withheld, and a pledge card or other document stating that the charity didn’t give you goods or services in exchange.Your employer may also prepare the pledge card under the direction of the charity.
ax complications, apart from questions of proof, do not ordinarily arise when you make a cash gift to a charity. However, complications can and do arise when you make a gift of appreciated property.
Appreciated property is property that has a current fair market value that is higher than your tax basis in the property. Basis is the yardstick for measuring gain or loss and usually is the original amount you paid for the property. However, special basis rules apply for inherited property, property acquired by gift, and property for which depreciation deductions are allowable, such as property used in a trade or business.
Your charitable deduction will depend on whether the appreciated property is ordinary income property or capital gain property. Ordinary income property includes business inventory and a capital asset, for example stock held for investment, that you owned for one year or less. Capital gain property includes capital assets that you owned for more than one year as well as certain real and depreciable property used in a business.
In general, your deduction for ordinary income property is limited to your basis. For example, you bought stock five months ago for $5,000. It’s now worth $8,000. An immediate contribution of the stock would give you a deduction of $5,000, not $8,000. Now suppose you bought the stock more than one year ago for $5,000 and again contribute it when it’s worth $8,000. Here, you normally would be able to deduct the full $8,000. In either case, you would not be taxed on the $3,000 in appreciation. That is a far better result than if you sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.
Unfortunately, not all contributions of appreciated capital gain property give you a deduction for the full value of the property even if held for more than one year. Your deduction is limited to basis when you contribute tangible personal property that is put to an unrelated use by the charity. For example, if you contributed a painting to a hospital and the hospital used it for display, the use of the painting would be unrelated to the hospital’s charitable purpose and your deduction would be limited to basis. On the other hand, a painting contributed to a museum and used for display by it would not be an unrelated use and your deduction would not be limited.
Special percentage limitations also come into play. If the property qualifies as capital gain property and it is real estate or stock, your deduction generally is limited to 30 percent of your adjusted gross income unless you make a special election.
As you can see, claiming charitable deductions can be complicated. Please call us if you aren’t clear about what you will need to claim deductions for your contributions.