Beyond Good Intentions: What Taxpayers May Have to Show the IRS If Claiming a Charitable Contribution Deduction
Thomson Reuters tax analyst provides guidance for U.S. taxpayers, tax planners, and tax preparers
Many individual taxpayers donate charitable gifts because they want to back a worthy cause, not because they get a tax deduction for the contribution. “But if you are going to make a contribution, you may as well get whatever tax benefit is coming to you,” advised Harris Abrams, a senior tax analyst for Thomson Reuters. “It benefits the donor and doesn’t cost the charities anything – so why not?”
For a monetary contribution in the form of cash, a check, or a credit or debit card transfer, the donor must maintain a bank record or a written communication from the donee organization showing its name, plus the date and amount of the contribution. Other written records, such as a log of contributions, are not sufficient. “These recordkeeping rules apply to any cash contribution, regardless of amount; there's no de minimis exception,” said Abrams.
For a contribution of property other than money, the donor generally must maintain a receipt from the donee organization showing its name, the date of the contribution, location of the property contributed, and a detailed description (but not the value) of the property. However, the donor does not need a receipt for a property donation if circumstances make getting a receipt impractical (for example, where the donated property is deposited at a charity's unattended drop site). In that case, the donor must maintain a reliable written record of the contribution. The information required in that record depends on factors such as the type and value of property contributed.
Stricter substantiation requirements apply for charitable contributions with a value of $250 or more. No charitable deduction is allowed for any contribution of $250 or more unless the donor substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the charity. To claim the deduction, the donor must have the receipt in hand when the return is filed (or by the due date, including extensions, if filed early).
The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the recipient provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any of those goods or services. If the donor received only “intangible religious benefits,” such as attending religious services, in return for the contribution, the receipt must say so. “This type of benefit is considered to have no commercial value and so does not reduce the amount of the charitable deduction,” Abrams explained.
A donor who makes separate contributions of less than $250 will not be subject to the requirement to get a written receipt, even if the donor’s contributions to the same charity total $250 or more in a year.
In general, the substantiation requirements increase with the amount of the contribution. If the total charitable deduction claimed for non-cash property is more than $500, donors generally must attach a completed Form 8283 (Noncash Charitable Contributions) to their returns to claim a deduction.
If the donated property has a value of more than $5,000, the donor generally must get a qualified appraisal for the donated property, and attach an appraisal summary to his or her return. A qualified appraisal is not required for publicly-traded securities for which market quotations are readily available.
A partially completed appraisal summary (which requires less information than an appraisal summary) and the maintenance of certain records are required for (1) nonpublicly-traded stock for which the claimed deduction is greater than $5,000 and no more than $10,000; and (2) certain publicly-traded securities for which market quotations are not readily available.
A qualified appraisal is required for gifts of art valued at $20,000 or more. The IRS may also request a photograph of the donated artwork.
Whatever the value of the contribution, the donor should be sure to comply with all of the applicable substantiation requirements. According to Abrams, “donors who satisfy some but not all of the requirements are taking a chance that none of their claimed deduction will be allowed. And donors should be wary of relying solely on a charity’s written acknowledgement – if the acknowledgement is erroneous or incomplete (even if prepared entirely in good faith), the deduction may be lost.”
Recordkeeping for contributions for which goods or services are received. If a donor receives goods or services, such as a dinner or theater tickets, in return for his or her contribution, the deduction is limited to the excess of the amount donated over the value of the goods or services received. For example, if a donor gives $100 and in return receives a dinner worth $30, the donor can deduct $70. However, the contribution is fully deductible if:
- the donor receives free, unordered items from the charity that cost no more than $9.90 in total;
- the donor gave at least $49.00 (for 2012) and receives only token items (bookmarks, key chains, calendars, etc.) that bear the charity's name or logo and cost no more than $9.90 in total; or
- the benefits the donor receives are worth no more than 2 percent of the contribution and no more than $99 (for 2012).
When a donor receives goods or services in return for a contribution of more than $75, the charity must provide a written statement specifying the value of those goods or services. Donors should be sure to keep these statements to substantiate the contribution.
Cash contribution made through payroll deductions. A contribution made by withholding from the donor’s wages may be substantiated by a pay stub, Form W-2, or other document furnished by the donor’s employer that shows the amount withheld for payment to a charity. A donor can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it does not provide goods or services in return for contributions made by payroll deduction.
The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold.
Substantiating contributions of services. Although individuals cannot deduct the value of volunteer services performed for a charitable organization, some deductions are permitted for out-of-pocket costs incurred while performing those services. To claim these deductions, volunteers should keep track of their expenses, the services performed, when they were performed, and the organization for which they were performed. Receipts, canceled checks, and other reliable written records relating to the services and expenses can be helpful in substantiating these expenses.
As discussed above, a written receipt is required for contributions of $250 or more. “This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, because the charity representative does not know the cost of those expenses,” Abrams noted. However, a volunteer can satisfy the written receipt requirement if he or she has adequate records to substantiate the amount of the expenditures, and gets a statement from the charity that contains a description of the services provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.
Taxpayers should consult with a professional adviser before applying these or other tax strategies.
Up-to-date analyses of legislation and regulations affecting taxpayers are available on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
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