The year-end charitable giving season is upon us, and Grant Thornton LLP wants to make sure Americans don’t miss out on the federal tax rewards available for their charitable contributions.
“In general, Americans are very charitable people and it’s an added benefit that our government rewards us for it,” said Justin Ransome, a partner in Grant Thornton’s Washington National Tax Office. “However, strict adherence to some very specific rules is required in order to reap the tax benefit of this generosity.”
While the following list is not exhaustive, it contains some of the more common issues that can trip up individuals trying to claim charitable contribution deductions on their tax returns. One uncommon issue for consideration in making your charitable gifts in 2010 is the expiration of the 2001 and 2003 Bush tax cuts and the uncertainty as to whether Congress will act to extend these tax cuts for some or all taxpayers. As with all deductions, the higher your tax rate, the greater the benefit of your charitable deduction will be. Thus, without further Congressional action, consider whether it might be best to wait and make your charitable contribution in 2011. To learn how these charitable deduction rules may apply to you, please contact your tax adviser.
1. Determine the amount of your deduction. For cash contributions this is not a problem. For gifts of property, the amount of your deduction is generally its fair market value (FMV). Contributions of certain property may be limited to your basis (i.e., what you paid for it) such as ordinary income property (e.g., inventory), tangible personal property put to an unrelated use by the charity and capital gain property contributed to a private foundation.
2. Understand the AGI percentage limitations. Charitable contributions for any given year are only deductible up to a certain percentage of your adjusted gross income (AGI) (20 percent to 50 percent depending on the type of property contributed and the type of recipient organization). You can carry over the excess amount for the next five years.
3. Meet the substantiation requirements. For contributions of cash or property, always get a receipt from the charity. For contributions of property, the receipt will need to reflect the fair value of the property donated. Donated clothing or household goods must be in at least “good used condition” to be deductible. If the contribution of property is in excess of $5,000, a qualified appraisal of the donated property must be obtained.
4. Meet the reporting requirements. If you have made a gift of property in excess of $500, you must file Form 8283. If you have made a gift of property in excess of $5,000 (other than publicly traded securities), you must complete the appraisal summary on Form 8283, Section B and have the charity complete and sign Part IV. If the gift of property is in excess of $500,000, the qualified appraisal must be attached to your income tax return.
5. Understand the timing rules. Contributions made by check are considered delivered on the date they are mailed and must be deducted in the year of the mailing. Contributions made by credit card must be deducted in the year that the charge occurs. Pledges to make a contribution generally are not deductible until payment is actually made. Similarly, a contribution of an unsecured promissory note is not deductible until paid.
6. Confirm that the organization is a qualified organization. Make sure your donations are made to an organization qualified to receive deductible contributions. The IRS website (http://www.irs.gov) lists most qualified organizations in Publication 78, but many churches, synagogues, temples, mosques and government organizations are not required to be on the list even though they are qualified organizations. Foreign charities generally are not qualified organizations. Political organizations that participate in political campaigns or attempt to influence legislation are not qualified organizations.
7. Do not deduct contributions of services or use of property. You can’t deduct your time for donating services, only your out-of-pocket expenses. So you can’t deduct your artistic performance, professional services or the value of permitting a charity to use your property. You may only deduct mileage and out-of-pocket expenses paid in providing services to a charity.
8. Give appreciated property to charity. Donate appreciated property to charity because you avoid paying tax on the long-term capital gain you’d incur if you sold the property. So donating property with a lot of built-in gain can lighten your tax bill. But don’t donate depreciated property. Sell it first and give the proceeds to charity so you can take the capital loss and the charitable deduction.
9. Give directly from an IRA. Taxpayers 70½ and older can make tax-free charitable distributions from individual retirement accounts (IRAs). Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Note: The statute underlying this tip expired on Jan. 1, 2010, but is expected to be extended to Jan. 1, 2011, before year end. Before employing this tip, check with your tax adviser to ensure that the statute has been extended.
10. Do not deduct raffle tickets or bingo; beware of tickets to fundraising events. When purchasing tickets to a fundraising event, you must reduce the charitable contribution by the value of the event. Sometimes, the charity will provide you with the value of the event to be used for this purpose. If the organization lists the full ticket price (unreduced by the value of the event) as a contribution, you must still reduce the deduction by the value of the event. If your donation to a college or university includes the right to purchase seating at athletic events, only 80 percent of the payment is treated as a charitable contribution. The actual ticket purchase price is not deductible.