CHARITABLE CONTRIBUTIONS
This section explores some of the special rules that apply to charitable contributions, including deductions, non-cash contributions, car donations, etc. The latest tax law changes that were recently passed are also discussed. Use this information to help you make the most of your contributions.Tax-Free IRA to Charity Distributions Reinstated
The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity has been reinstated for 2010 and 2011. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.Important - Because the extension of this benefit was passed so late in December Congress included a provision that allows transfers made in January of 2011 to be treated as if made in 2010. Thus the distribution counts against the 2010, not the 2011, $100,000 exclusion limitation and can be used toward a taxpayer’s 2010 minimum distribution requirement if it hasn’t already been met.
The key benefits of this provision lie in the fact that the distribution:
(1) Is not included in the taxpayer’s income for the year,
(2) Counts toward the taxpayer’s minimum required distribution for the year if any, and
(3) Does count as a charitable contribution for the year (although not a deductible contribution).
How does a taxpayer benefit from this provision?
- By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
- This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
- For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
- Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.
Special Rules for Car Donations
Congress has imposed tough rules that substantially limit the deduction for this charitable donation.It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the FMV one might consider as the listed bluebook FMV of the vehicle. As a result and to keep taxpayers from deducting more than the charity benefited from donation, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.
Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.
In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS has developed new Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.
There is an exception to these rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.
What is a Charitable Organization?
Money or property that you donate to "qualified" charitable organizations can be included in your itemized deductions as a charitable contribution. But what is a "qualified" charity? IRS Publication 78 lists all qualified organizations.- Churches, synagogues, temples, mosques, and other religious organizations.
- Federal, state, and local governments, if your contribution is solely for public purposes. This generally includes local government, public schools, Indian tribal government, and governments of U.S. Possessions.
- Nonprofit schools and hospitals.
- Nonprofit volunteer fire companies, public parks and recreation facilities, and civil defense organizations.
- Organizations organized and operated for charitable purposes, such as the Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, March of Dimes, etc.
- Certain organizations that foster national or international amateur sports competition.
- War veterans' organizations, including posts, auxiliaries, trusts, or foundations organized in the United States or any of its possessions.
- Domestic fraternal societies, orders, and associations operating under the lodge system.
- Certain Canadian and Mexican charities allowed by treaty - however, generally to deduct your contribution you must have income from sources within the country.
If you have questions regarding a specific charity or charitable contribution, please feel free to inquire with this office.
Charitable Away-From-Home Travel
Charitable deductions are allowed only for travel expenses (meals and lodging included) by volunteers who do charitable work for their organization while away from home on the charity's behalf. Unlike other areas of taxes, meals are not subject to the 50% limitation. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. If the taxpayer's personal vehicle is used for the charitable travel, then the taxpayer may deduct cost of gas and oil, but not depreciation, insurance or repairs. In addition, the current standard mileage rate of $.14/per mile may not be used.Tax Breaks for Charity Volunteers
If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:- Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals at 100%. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities.
- The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible).
- If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
- You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.
All charitable contributions must be substantiated. Click here for substantiation rules.
Charitable Contribution Substantiation Rules
Cash Contributions - Cash contributions, regardless of the amount, must be substantiated with a bank record or written communication from the donee showing the name of the charitable organization, date and amount of the contribution.The recordkeeping requirements may not be satisfied by maintaining other written records. This means that unless the charitable organization provides written communication, cash donations put into a “Christmas kettle,” church collection plate, pass-the-hat collections at youth sporting events, etc., will not be deductible. Donations made by a debit or credit card can be substantiated by a bank record.
These rules make it easy for the IRS to audit a taxpayer’s charitable contributions by correspondence. They need only request that you provide copies of the required substantiation by mail. If you are unable to provide it, they can make the appropriate tax, interest and penalty adjustments and send you a bill. Generally, the charitable contribution audit is an automatic companion audit item for other audit issues.
Non-Cash Contributions - No deduction is allowed for a charitable contribution of clothing or household items unless the clothing or household item is in good used condition or better. Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.
Generally, the verification rules for contributions of clothing and household items require that you obtain a receipt from the charity including its name, date and location of the contribution, and a reasonably detailed description of the property. In addition, you must also keep a record of each item contributed, indicating the name and address of the charity, date and location of the contribution, and a description of the property in detail that is reasonable under the circumstances. If the contribution is valued at $250 or more, the acknowledgement from the charity must indicate whether you received any goods or services in return for your contribution and the value of those services. Contributions of property valued at $500 or more must be substantiated by your records that also indicate how the property was acquired, the approximate acquisition date, and your cost or basis in the property. For contributions totaling $5,000 or more, a qualified appraisal is generally required.
If you have questions regarding how these rules may affect your specific situation, please call.
Deduction Limits
Charitable deductions are limited by income depending upon the type of contribution. Contributions in excess of the deduction limits described (1), (2), and (3) below, may be carried forward for five years. An amount can be carried over even though an individual does not itemize their deductions in the year of the contribution (carryover then equals excess over 50% of AGI).1. 50% limit: Generally, contributions to specified organizations are deductible to the extent they don't exceed 50% of the taxpayer's Adjusted Gross Income (without any reduction for net operating loss carrybacks). This category includes churches, tax-exempt educational institutions and hospitals, federal, state local governmental units, if the contribution is used for public purposes, community chests, and certain private operating foundations.
2. 30% limit: This limit applies for gifts (other than capital-gain property) made to all other groups other than 50%-limit organizations. 30%-limit organizations include veteran organizations, fraternal organizations, public cemeteries, and private non-operating foundations. However, in a tax court case, the court ruled that a war veteran organization qualified for the 50% limit.
Contributions are deductible to the extent of the 30% limit only if they are made for the use of a charitable organization. A special 30% limit applies to gifts of capital gain property to 50%-limit organizations that are deducted at FMV.
3. 20% limit: This applies to gifts of capital gain property made to all qualified organizations other than 50%-limit organizations.
Foreign Charities
Generally, no deduction is permitted for contribution to a foreign charity. However, that does not include contributions to U.S. Charities that perform part of their charitable function outside the U.S. An exception to this rule is Mexican, Canadian and Israeli charities.Canadian Charities - Certain Canadian charitable organizations covered under an income tax treaty with Canada are deductible. In order to deduct the contribution, the taxpayer generally must have income from sources in Canada.
Mexican Charities - Certain Mexican charitable organizations covered under an income tax treaty with Mexico are deductible. The organization must meet tests that are essentially the same as the tests that qualify U.S. organizations to receive deductible contributions. To deduct a contribution to a Mexican charity, the taxpayer must have income from sources in Mexico.
Israeli Charities - Contributions to certain Israeli charities organized under an income tax treaty with Israel may be deductible. The organization must be created and recognized as a charitable organization under Israeli law. The amount deductible is the amount that would normally be allowed under U.S. rules, but not more than 25% of AGI from Israeli sources.
For further information regarding the charity deduction provisions of the income tax treaties with Canada, Mexico and Israel, please call this office.
Non-Cash Contributions
Downloadable Forms: Noncash Contribution Statement IRS Form 8283 (Gifts over $5,000)When you give away household items like clothing, appliances and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's "fair market value" (i.e., the price similar property would sell for in the open market).
Unfortunately, one of the most difficult problems connected with noncash donations is determining their FMV. In fact, when you give away property of high value, the job of determining worth is best left in the hands of a professional appraiser. Or, when you donate property that has increased in value, special tax rules apply and you should consult with this office before you make your donation.
The guidelines offered below are provided as aids for setting value on the most common types of noncash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:
- Used Clothing and Household Items - No deduction is allowed unless the clothing or household item is in good used condition or better. The IRS has been given authority to deny a deduction for any item with minimal monetary value, such as used socks or undergarments.
o Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what you paid for them. A visit to a local thrift shop may help give you an idea of current selling prices for items like yours.
o Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. Photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
- Cars and Other Vehicles: See Donating Cars to Charity.
