As the end of the year approaches, thoughts turn to giving, tax planning, and being thankful for the benefits the year has brought. Charitable giving and happiness seem to complement one another, a process that may be enhanced if you are aware of what is and is not deductible and what steps are necessary to ensure your gift does the most good.
A common December ritual is to gather all of the information we have received regarding various charitable causes and determine where we would like to make contributions prior to year end so those contributions will be eligible for a deduction on our current income tax returns. Underlying this process is our recognition that the nonprofit sector is vital to the well-being of our communities. The Charitable Giving Coalition has reported that for each dollar deducted, communities see three dollars in public benefits. Eighty-eight percent of Americans report giving to charity each year.1 Studies also show that happier people give more, that giving indeed causes increased happiness, and that these two relationships may operate in a circular fashion.2
Nevertheless, prudence dictates that there’s more to finding happiness than writing a check. Charitable giving has its own do’s and don’ts—one must attend to technical rules governing these deductions. Moreover, how you manage the process can make a difference; and it may be beneficial to consider alternatives to the traditional cash contributions. While comprehensive discussion of these issues must await a meeting with your own counsel or financial advisor, consider the following, basic roadmap.
Contributions You Can Deduct
Generally you can deduct contributions of money or property you make to, or for the use of, a “qualified organization.” These are further discussed below under “Organizations That Qualify.” The contribution is “for the use of” a qualified organization when it is held in a legally enforceable trust for the qualified organization or in a similar, legal arrangement. If you give property to a qualified organization, you generally can deduct the fair market value of the property at the time of the contribution. If your 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. If you pay more than fair market value to a qualified organization for goods or services, the excess may be a charitable contribution. In order for the excess amount to qualify, you must pay it with the intent to make a charitable contribution. If you make a payment to, or for the benefit of a college or university and, as a result, you receive the right to buy tickets to an athletic event in the athletic stadium of the college or university, you can deduct 80 percent of the payment as a charitable contribution. If any part of your payment is for tickets (rather than the right to buy tickets), that part is not deductible. You subtract the price of the tickets from your payment, and then deduct 80 percent of the remaining amount. If you return the ticket to the qualified organization for resale, you then can deduct the entire amount you paid for the ticket.
There also is an exception to these rules if you receive a “token item” which requires that (1) you receive only a small item or other benefit of token value, and (2) the qualified organization correctly determines that the value of the item or benefit you received is not substantial and informs you that you can deduct your payment in full. The organization determines whether the value of an item or benefit is substantial by using IRS Rev. Proc. 90-12 and 92-49 and the inflation adjustment in IRS Rev. Proc. 2012-41.
Contributions You Cannot Deduct
The charitable income tax deduction is available for contributions only to qualified organizations. There is sometimes confusion regarding the organizations that qualify, since there is a much larger umbrella of nonprofit entities which do not necessarily qualify for the income tax deduction under Internal Revenue Code (IRC) §170. Further, some organizations that do not qualify for the charitable deduction, such as civic leagues, labor unions, chambers of commerce, and other organizations that are related to the contributor’s business activities, may still qualify for a business tax deduction for business-related expenses.
The value of your volunteer time or services is not deductible, although there is a special deduction for automobile mileage.3 Nor can you deduct contributions to memorial funds set up for an individual or family. These are nondeductible gifts to the individual or family, rather than a charitable income tax deduction, again because the fund itself does not qualify as a qualified organization. While you may want to deduct fees for appraising the fair market value of donated property, these are not deductible as charitable contributions. You can claim them, however, subject to the 2 percent of adjusted gross income limit, as a miscellaneous itemized deduction on Schedule A (Form 1040).
Contributions of Property
If you contribute property in-kind to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property has increased in value, you may have to make some adjustments to the amount of your deduction. The adjustment will depend on whether the property is considered “ordinary income property” or “capital gain property” for income tax purposes. There also will be adjustments if the property is subject to debt, or if you hold only a partial interest. Congress has also established special rules for certain types of property, which you may wish to discuss with a tax advisor prior to contributing such property.4 The types include:
- Clothing and Household Items
- Car, Boat, or Airplane
- Taxidermy Property
- Property Subject to a Debt
- Partial Interest in Property
- Fractional Interests in Intangible Personal Property
- Qualified Conservation Contribution
- Future Interest in Intangible Personal Property
- Inventory from Your Business
- Patent or Other Intellectual Property
Organizations That Qualify
A charitable contribution must be made to a “qualified organization.” Qualified organizations include, but are not limited to, federal, state, and local governments and organizations organized and operated only for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals. To be eligible to receive deductible charitable contributions, the entity must apply for IRC §501(c)(3) status by submitting a formal application that provides detail regarding the administration and operations of the organization, and then must be qualified and notified by the IRS that it qualifies as a charitable organization that can receive tax-deductible contributions.5 Once qualified, the organization must submit annual information returns to the IRS. The organization must then also make their application and annual returns available to the public for inspection upon request and without charge (except for a reasonable charge for copying).
You can also use “donor-advised funds” available at many charities, where the donor contributes directly to the charity, the charity invests the funds and sets up an account for the family, and allows the family to advise the charity on where and when to make distributions from the account. These can operate like an endowment, and are convenient for clients who wish to make a charitable contribution but have no specific charities in mind.
Some organizations also will provide “charitable gift annuities,” which involve a contribution to the charity in exchange for an immediate or deferred annuity payable to the donor, with payments based on calculations provided by the American Council on Gift Annuities. The annuity is calculated so that there is a partial, charitable, income tax deduction available at inception.
You can receive confirmation directly from the organization about whether your contribution qualifies for deductible, charitable contributions, or you can check directly with the IRS at its website or call the customer service number.6
When to Deduct
The deduction is available in the year in which you actually make a contribution in cash or other property (or in a later carryover year, as explained below). A check is considered delivered on the date you mail it, while a text message is considered delivered when sent, and credit card charges when you make the charge. You can find discussion of other methods of delivery in IRS Publication 526.
Deduction Limitations for Contributions to Public Charities
|Description||AGI Limit||Deduction for Basis of FMV|
|Securities and real estate|
|Tangible personal property|
|Related to donee’sexempt function||30%*||FMV|
|Unrelated to donee’sexempt function||50%||Basis|
|Ordinary income property||50%||Basis|
|Inventory contributed by a C Corporation,used in donee’s exempt function||10%||Lesser of:2 x basis
Basis + FMV – basis
Limits on Deductions
There are limits based on the character of charitable contributions made, which are further detailed in Exhibit A. If your total contributions for the year are 20 percent or less of your adjusted gross income, you do not need to be concerned with these limits. If any category exceeds the limits described, you can consult with IRS Publication 526 to determine how to figure the allowable deduction.
Carryover. For any charitable contributions in excess of the limits in a particular year, you may be able to deduct the excess in each of the next five years until it is used up. However, the total charitable deduction for the year to which you carry the contributions cannot exceed 50 percent of your adjusted gross income for that year. There also is a special rule for carryover of a qualified conservation easement, allowing a carryforward for 15 years. Contributions you carry over are subject to the same percentage limits in the year to which they are carried. For example, contributions subject to the 20 percent limit in the year in which they are made are also 20 percent limit contributions in the year to which they are carried.
Itemized deductions phase-out. For 2013, the total of your charitable contributions deduction and certain other itemized deductions may be limited if your adjusted gross income is more than $300,000 ($250,000 if single).
Records to Keep
Receipts. An organization generally must give you a written statement if it receives a payment from you that is more than $75 and is partly a contribution and partly for goods or services. Keep the statement for your records.
Cash contributions. You can no longer deduct a cash contribution, regardless of the amount, unless you keep one of the following: (1) a bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution; (2) a receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution; or (3) the payroll deduction records.7
Contributions less than $250. For a contribution of less than $250, the donor must maintain either a bank record or a written communication from the charitable organization indicating the contribution date and amount. Other acceptable evidence includes canceled checks or reliable written records showing the organization’s name and the date and amount of the contribution. This prevents a deduction for many cash contributions. For payroll deductions you can use a pay stub, Form W-2, or other document furnished by the employer, or a pledge card.8
Contributions of $250 or more. You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your contribution from the qualified organization or certain payroll deduction records. If you made more than one contribution of $250 or more you must have either a separate acknowledgment for each contribution or one acknowledgment9 that lists each contribution, the date of each contribution, and total contributions. In figuring whether your contribution is $250 or more, do not combine separate contributions.
Artwork worth more than $20,000. If you contribute artwork that has an appraised value of $20,000 or more, a complete copy of the signed appraisal must be attached to the return. For single objects worth more than $20,000, a photograph must be available upon request. If such a contribution is valued over $50,000, Rev. Proc. 96-15 provides a process for requesting a Statement of Value from the IRS to substantiate the values of the gifts, which still requires an appraisal from the taxpayer.
How to Report
Cash contributions and out-of-pocket expenses. These are entered on Schedule A, Form 1040-Line 16.
Reporting expenses for sponsored students living with you. With your return you must submit (1) a copy of your agreement with the organization sponsoring the student, (2) a summary of the various items you paid to maintain the student, and (3) a statement that gives the date that student became a member of your household, the dates of his or her full-time attendance at school, and the name and location of the school.
Non-cash contributions. These are entered on Schedule A, Form 1040-Line 17. If the total deduction exceeds $500, you must complete Form 8283 and attach it to the Form 1040. Use Section A of Form 8283 to report non-cash contributions for which you claim a deduction of $5,000 or less per item (or group of similar items). Also use Schedule A to report contributions of publicly traded securities. If you claim a deduction for a single item valued over $5,000, then you must complete Section B of Form 8283 for each item or a group of similar items (other than publicly traded securities, which go in Section A). The $5,000 threshold is met by summing contributions to all organizations, while a separate Form 8283 Section B must then be completed for each organization, which must in turn complete and sign part IV of Section B.
Donee organization. The qualified organization must file a Form 8282 if, within three years of receiving property for which it was required to sign the Form 8283, it sells, exchanges, consumes, or otherwise disposes of the property. The organization must also send you a copy of the form. A Form 8282 is not required if you signed a statement in Section B of Form 8283 that the appraised value of the item, or a specific item within a group of similar items, was $500 or less.
Contributions over $5,000. Donors must attach their qualified appraisals to their returns. This does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property.
Irrevocable deferred gifts can also sometimes produce current income tax deductions. The strategies for achieving these deductions may be more suitable for clients who have assets but little income, or who wish to make a gift while retaining some control or continuing to enjoy the financial benefits of particular assets. Planned giving, sometimes referred to as “gift planning” or “purposeful gifting,” typically involves an irrevocable deferred gift to qualified charities. Although beyond the scope of this article, planned gifts can include life insurance, bequests in your will, charitable remainder trusts, charitable lead trusts, private (family) foundations,
supporting organizations, and donor-managed investment accounts.
Congress and the Treasury have given us many options for making contributions to charitable organizations. Although there can be tremendous tax advantages to giving in whatever form, taxpayers need to be compliant with the special rules for substantiation and reporting in order to preserve their tax deduction. With proper guidance we can help our clients navigate these rules and support the public policy which encourages these gifts. The charitable community is a vital pillar of our culture and society, and our guidance can assist in nurturing this process.
Items You Can Deduct
Money or property you give to:
(From IRS Publication 526)
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt or maintain a public park)
- Nonprofit schools and hospitals The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.
- War veterans’ groups
- Expenses paid for a student living with you, sponsored by a qualified organization
- Out of pocket expenses when you serve a qualified organization as a volunteer
Items You Cannot Deduct
Money or property you give to:
(From IRS Publication 526)
- Civic leagues, social and sports clubs, labor unions, and chambers of commerce
- Foreign organizations (except certain Canadian, Israeli, and Mexican charities)
- Groups that are run for personal profit
- Groups whose purpose is to lobby for law changes
- Homeowners’ associations
- Individuals (and memorial funds) – nondeductible gifts
- Political groups or candidates for public office
- Cost of raffle, bingo, or lottery tickets
- Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
- Value of your time or services
- Value of blood given to a blood bank
Scott M. Nelson is a partner in the firm of Hellmuth & Johnson, PLLC, assisting individuals and closely held businesses with tax, business and all aspects of estate planning, Scott is a Fellow of the American College of Trust and Estate Counsel, an officer of the MSBA Probate & Trust Law Section Council, and has served as a board member or officer for various professional and nonprofit organizations. He is a frequent faculty member and guest speaker on estate and tax planning issues and publishes professional tax, estate planning, and business succession articles. He services clients in Minnesota and the Western Wisconsin region.
1 Charitable Giving Coalition, “Charitable Giving in America,” www.protectgiving.org.
2 “Feeling Good About Giving: The Benefits (and costs) of Self-Interested Charitable Behavior,” Working Paper 10-012, Harvard Business School, 2012.
3 For 2014 the permissible deduction is 14 cents per mile. IR-2013-95, 12/06/2013.
4 More information about these special rules can be found in IRS Publication 526.
5 IRS Publication 4220, Applying for 501(c)(3) Tax-Exempt Status, provides the details for receiving recognition from the IRS.
6 Search for IRS-qualified charitable organizations at www.IRS.gov/charities-&-non-profits/exempt-organizations-select-check. The telephone number is (877) 829-5500, and the TTY/TDD line is (800) 829-4059. A more detailed description of qualifying organizations can be found in IRS Publication 526.
7 Bank records may include (1) a canceled check, (2) a bank or credit union statement, or (3) a credit card statement.
8 If you make a contribution by payroll deduction, you must keep (1) a paystub, Form W-2 or other document furnished by your employer that shows the date and amount of the contribution, and (2) a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.
9 The acknowledgment must be written; you must receive it upon the earlier of (a) the date you file your return or (2) the due date, including extensions for filing the return; and it must contain the following: (a) the amount of cash contributed; (b) whether the qualified organization gave you any goods or services; (c) a description and good faith estimate of the value of any goods or services received; and (d) a statement that the only benefit you received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.