This year is a key one for taxpayers who are charitable inclined. It’s filled with some expanded tax benefits, but there’s also a long time trap you could fall into.
The IRS and the Tax Court regularly deny deductions for charitable contribution deductions though acknowledging the contributions really were made. With some tax deductions, it’s not enough that taxpayers prove they made they payments. The taxpayers need the right proof. Charitable contributions are one of the deductions that require the extra step.
Under the charitable contribution regulations, you must have certain documentation in hand before filing your tax returns, and in some cases you have to include the right paperwork with your income tax return.
Here are the key rules:
To deduct a cash gift of $250 or less, you must have in hand a “bank record” with the name of the charity and the date and amount of the gift. Acceptable records include a canceled check, a bank copy of a canceled check, or a bank or credit card statement. Payroll deduction donations can be documented with a paycheck stub, W-2, or pledge card with the required information.
A single contribution of more than $250, whether of cash or property, can be deducted only if you have a written acknowledgement of the gift from the charity before filing the tax return.
If you received anything of value in return for a contribution, such as a gift or promotional item, you deduct only the difference between the amount you contributed and the value of what you received. When you made a single payment to a charity in excess of $75 and receive goods or services in return, the charity must provide you a written disclosure of the value of the goods or services you received.
You can deduct unreimbursed expenses incurred on behalf of a charity, such as the cost of traveling to a location to perform volunteer services. You must keep adequate records of the expenses you deduct. But if a single contribution of this type is $250 or more, you also must have a written acknowledgement from the charity with a description of the services you provided, whether or not the charity provided goods or services in return, and the value of any such goods or services.
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Donations of property have additional and tougher rules.
Used household property generally must be in “good used condition or better” when donated to be deductible. Household items include furniture, furnishings, electronics, appliances, linens, and similar items. Not included are food, antiques, works of art and jewelry. Most charities give donors receipts verifying the condition of the property, though they won’t put a value on the property. Some tax advisors recommend keeping photographs or videos of the donated property.
An item of property worth more than $500 and less than $5,000 can be deducted regardless of its condition but only if you complete Form 8283, Section A and attach it to your income tax return.
When any type of property worth $5,000 or more is donated, you must obtain a qualified appraisal of the property and must complete Form 8283, Section B and attach it to your tax return.
When the deduction claimed for a donation of property is more than $500,000, both the qualified appraisal and Form 8283 with Section B completed must be attached to the return.
When property isn’t valuable enough for an appraisal to be required or justified, you estimate its value. Any reasonable method can be used to make the estimate.
When property is donated to a public charity, you generally deduct the current fair market value. That applies whether the property has appreciated or depreciated while you owned it. A public charity is one identified as a 501(c)(3) tax-exempt organization. Lower amounts often are deductible if you give to a non-public charity, such as a private foundation. There’s also a lower deduction when business inventory is donated. Check IRS Publications 526 and 561 for detailed rules.
For contributions of a car, boat, or plane for which a deduction greater than $500 is claimed, the allowed deduction is the lower of (1) the gross proceeds of the vehicle’s sale by the organization or (2) the fair market value on the date of the contribution. A caveat: If the vehicle’s fair market value is more than your cost or other tax basis, the deduction might be reduced to your cost or basis.
But there are two exceptions to the limit on deductions for vehicle contributions. One exception is when the vehicle was used or improved by the charitable organization. The other exception is when the organization gives or sells the vehicle to a needy individual. In either case, the fair market value on the date of the contribution generally can be deducted.
There are special rules for donations of appreciated tangible personal property, which usually means art, collectibles, and antiques. When you’re considering such a donation, talk with a tax advisor about the best way to make the donation and how to maximize the amount you can deduct.
After meeting these rules, keep in mind charitable contributions generally can be deducted only if you itemize expenses on your tax return instead of taking the standard deduction. That means your total deductible itemized expenses must exceed the standard deduction amount. There’s an exception for 2020. You can deduct up to $300 of charitable contributions made in cash without itemizing expenses.
Another limit on charitable contributions is that you can’t take charitable contributions deductions exceeding a certain percentage of your adjusted gross income. Contributions above the limit can be carried forward to future years to deduct. The deduction limit depends on the type of charity you contribute to and the type of property contributed.
For individuals, deductions for most contributions to public charities are limited to 60% of adjusted gross income for the year. But there’s a special rule for 2020. You can deduct up to 100% of your adjusted gross income for charitable contributions made in cash to public charities.
There are other limits for gifts to private foundations, gifts of long-term capital gain property, and other situations. See IRS Publication 526 or a tax advisor for details.