Charitable contributions made to qualified organizations may help lower your tax bill. The IRS has put together the following eight tips to help ensure your contributions pay off on your tax return.
1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations and candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining value, refer to Publication 561, Determining the Value of Donated Property. These forms and publications are available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Beginning after August 17, 2006, there are new rules for cash donations.
For contributions made in tax years beginning after Aug. 17, 2006, no deduction is allowed for any contribution of a cash, check, or other monetary gift to a charity unless the donor maintains as a record of the contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. This provision applies to any gift of money regardless of the amount.
This means that there is no de minimis exception to the new substantiation requirements for gifts of cash to charities. Thus, an individual who makes gifts of cash while attending services at his religious organization, won’t be able to deduct them without proof, e.g., in the form of a letter from the organization. The organization will not be able to provide such a letter unless it has some method of knowing who made the deduction (for example – it is placed in an envelope with the donor’s name and address on it).
Many religious organizations provide such envelopes to their members, and then after the end of the year send the members a statement showing what they contributed during the year. To conform with the new rules, the statement should show the date and amount of each contribution and not just the total contributed for the year.
Donation of Cars and Property
The Internal Revenue Code allows taxpayers a contribution deduction for the fair market value of property donated to a qualified charity. Notice that I said “fair market value.” Here is an excerpt from the IRS publication 526 that discusses contributions in depth. You can download or view this publication at the IRS website (www.irs.gov).
What is the definition of fair market value? It is the price at which a seller is willing to sell and the buyer is willing to purchase the item, with neither being under pressure to make the decision.
For large ticket items like used automobiles, there are many sources you can research to get a range for its value. For example, Kelly Blue Book online (www.kbb.com) is a good source. Another is the Recycler publication in California. Newspaper classified ads can provide you with a reasonable range of a car’s value. Whatever source you use, print out and keep the documentation in case you are audited! Take lots of pictures as well. In fact, a video of a car running or even an appliance, computer, etc is very wise as you must be able to establish that the property was in “good working or usable condition.”
The Salvation Army has a “valuation guide” on its web site (http://www.salvationarmyusa.org) that is a useful tool in valuing used clothing, furniture, etc. At the time of this writing, the above is the active link directly to that section of their website. If it does not work, then visit their home page and do a search for “valuation guide.“
Keep in mind that the condition of the property you are selling must be comparable to the condition of the property for which you are using its value as being representative of the value of your item. Take pictures of the items you are donating!! This will help establish their condition.
I have been concerned about recent advertisements concerning the donation of cars. In the Los Angeles area, we hear repeatedly on the news commercials suggesting listeners donate their car, regardless of its condition, and they will get the highest blue-book value as a charitable deduction. Often, the spokesperson admits that the transmission is broken, or there is some other major problem, and they can’t sell the car without fixing it. So, you are lead to believe that you can donate this vehicle (that must be towed to one of these charities), and you will get the maximum blue book value as a deduction. In my opinion, that is misrepresentation. The law is clear. You can only deduct the fair market value for most items. For certain property that has appreciated in value, there are other adjustments that must be made.
Going back to our example of the car that will not run, its value most likely lies in its parts. If the car is new enough, then the value could be what it would be worth if it was working, LESS THE COST TO REPAIR THE TRANSMISSION OR WHATEVER ELSE WAS BROKEN. The bottom line is that you CANNOT deduct the blue book value for a comparable a car that is in good condition and runs if your car is broken or is in poorer condition!
When you decide to deduct a contribution of property, be sure to document its condition and how you determined its value. As mentioned previously, take pictures of the property at the time of donation. Keep printouts from KBB.COM (for vehciles) or newspaper classified ads of similar items. If you are donating clothing or furniture, pictures are important and help establish the condition of the property. For property of high value, get an appraisal.
The IRS recently released a couple of publications that deal exclusively with donations of autos.
IRS Publication 4302 ; IRS Publication 4303 ; IR 2004-84
These are available on the IRS website. They are called A Donor’s Guide to Car Donations, and A Charity’s Guide to Car Donations.
In announcing the release of the publications, IRS Commissioner Everson said: “Supporting charitable activities through tax deductible contributions is an important element of tax law and serves the national interest. But we encourage people to proceed carefully when donating vehicles. There are instances where the donations may provide little benefit to the charity.”
Guide for charities. IRS Publication 4302 (“A Charity’s Guide to Car Donations”) describes four common types of car donation programs:
(a) The charity uses donated cars in its charitable program or distributes the cars to needy individuals. This program does not affect the charity’s tax-exempt status and donors may deduct their contributions.
(b) The charity sells cars that are donated and uses the proceeds to fund its charitable programs. Results are the same as in (a).
(c) The charity hires a private, for-profit entity to operate the car donation program. If there is a valid agency relationship and the program is subject to the charity’s oversight, the results are the same as in (a).
(d) The charity grants a for-profit entity the right to use the charity’s name in soliciting donations of cars. The charity receives either a flat fee or a percentage of the proceeds from sale of donated autos to support its programs, but has no control over the for-profit entity’s activities. Because there is no agency relationship, contributions are treated as made to the for-profit entity and not to the charity. Donors may not deduct the value of their autos.
Guide for donors. IRS Publication 4303 (“A Donor’s Guide to Car Donations”) says that would-be donors of automobiles should (1) check out the charity, (2) check the value of the vehicle being donated, and (3) check their responsibilities as a donor, as follows:
(a) If the donor wants to claim a deduction for the donation of a car, he should make certain the charity is a qualified organization. Otherwise, the donation is not tax deductible.
(b) The deduction is limited to the fair market value of the car, i.e., the price that a willing buyer would pay and a willing seller would accept for the car, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts. According to IRS, some fund-raisers claim that donors can, in all cases, deduct the full value of their vehicle as found in a used car guide, such as “blue book” value. A used car guide may be a good starting point to value a car, but IRS says that fair market value may be substantially less than blue book.
Blue book value is normally based on a vehicle in reasonably good operating order and without significant damage to the body. If a vehicle needs extensive repairs, its value may be substantially less than blue book value.
(c) If the total deduction for a donated car is $250 or more, the donor must obtain a contemporaneous written acknowledgment from the charity. The charity can provide a paper copy of the acknowledgment or an electronic (e-mail) acknowledgment. If the deduction is more than $500, the donor must complete Section A of Form 8283 and attach it to his return. If the deduction is more than $5,000, the donor must get a written appraisal from a qualified appraiser and also complete Section B of Form 8283, which also requires the signature of an authorized official of the charity.
Legislation is pending that will change these rules.
The House passed version of the 2004 JOBS Act (H.R. 4250) would bar a charitable deduction for contributions of motor vehicles, boats, or aircraft valued at $250 or more unless the donor obtained a qualified appraisal of the property on or before the date of the contribution. According to the Committee Report, the definition of qualified appraisal generally follows the current law definition, subject to additional guidance that would be spelled out in IRS regs. The House provision would apply to contributions made after June 3, 2004.
The Senate passed bill (S. 1637) would apply to cars, boats, and planes valued at more than $500. No deduction would be allowed unless a contemporaneous written acknowledgment of the contribution by the donee organization was attached to the return claiming the deduction. The acknowledgment would have to identify the donor and include the VIN or similar number of the vehicle. If the donee sold the vehicle without any significant intervening use, the acknowledgment would have to also indicate the gross proceeds from the sale. The donor’s deduction would be limited to that amount. Donee organizations would be subject to penalties for failure to furnish or furnishing a false or fraudulent acknowledgment. The Senate provision would apply to contributions after June 30, 2004.
It is important that if you are planning to donate property with the expectation of claiming a contribution deduction, you should read the publication 526 carefully. There are strict rules regarding the record keeping requirements. Contributions of property valued over $5,000 require a written appraisal by a qualified appraiser.
As a heads-up, if you overstate your contribution deduction by certain percentages, you can be hit with an unpleasant penalty in addition to having your deduction reduced.
I certainly support and encourage people to contribute property to charities as they can put the donation to the use and benefit of others in need. However, please remember that when it comes to determining what you can deduct for your donation, there are strict rules that must be followed.
Here is an excerpt from the American Jobs Creation Act of 2004 that pertains to this area.
¶704. Tightened rules for charitable donations of cars, boats and planes
The charitable contribution deduction for a noncash contribution (including a vehicle) generally equals the fair market value (FMV) of the contributed property. Under pre-Act law, charities are required to provide donors with written substantiation of certain vehicle donations of $250 or more. Taxpayers are required to report noncash contributions totaling $500 or more and the method used for determining FMV.
The Act generally limits the deduction for motor vehicles, boats and airplanes contributed to charity after 2004 for which the claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicles and imposing higher substantiation requirements. ( Code Sec. 170(f)(12) , as amended by Act. Sec. 884(a)) If the charity sells the vehicle without any “significant intervening use” or “material improvement” (discussed below), the donor’s charitable deduction can’t exceed the gross proceeds from the sale. ( Code Sec. 170(f)(12) )
New substantiation requirements and related penalties. A deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement from the donee. ( Code Sec. 170(f)(12)(A) ) The acknowledgement must contain the name and taxpayer identification number of the donor and the vehicle identification number (or similar number) of the vehicle. In addition, if the charity (donee) sells the vehicle without performing a significant intervening use or material improvement of such vehicle, the acknowledgement must say that the vehicle was sold in an arm’s length transaction between unrelated parties, and state the gross proceeds from the sale and that the deductible amount may not exceed the gross proceeds.
In all other cases, the charity’s acknowledgement must indicate the intended use and its duration, or any material improvement of the vehicle, and that it will not be transferred in exchange for money, other property, or services before completion of the use or improvement.
An acknowledgement is considered contemporaneous if provided within 30 days of sale of a vehicle that is not significantly improved or materially used by the donee, or, in all other cases, within 30 days of the contribution.
Penalties apply if a donee organization knowingly furnishes a false or fraudulent acknowledgement, or knowingly fails to furnish an acknowledgement carrying the information required by Code Sec. 170(f)(12) in the manner and time prescribed by that section.
IRS may create exemptions. The Act also provides that IRS may prescribe regulations or other guidance exempting sales of vehicles that are in direct furtherance of the donee’s charitable purposes from the requirement that the donor may not deduct an amount in excess of the gross proceeds from the sale, and the requirement that the donee certify that the vehicle will not be transferred in exchange for money, other property, or services before completion of a significant use or material improvement by the donee. The Conference Report indicates that such guidance may be appropriate, for example, if an organization directly furthers its charitable purposes by selling automobiles to needy persons at a price significantly below FMV.
“Significant use” or “material improvement test.” The Conference Report says that to meet the “significant use test,” an organization must actually use the vehicle to substantially further the organization’s regularly conducted activities and the use must be significant (e.g., food kitchen’s deliveries to the needy). A material improvement includes major repairs to a vehicle, or other improvements that improve its condition in a way that significantly increases the vehicle’s value. The Conference Report indicates that cleaning the vehicle, minor repairs, and routine maintenance are not considered a material improvement.
Time-Share Use as a Charitable Contribution
If you have ever attended a charity auction, it is not uncommon to see a week’s use of a time-share included in the items donated for auction. The time-share owners who donate these weeks generally do so in anticipation of being able to take charitable donation deduction on their tax returns. Unfortunately, that is not an allowable deduction. Read on.
How does one determine how much one can deduct for such a donation? The answer may come as a surprise. Per an IRS revenue ruling(1), the use of a property, or the permission to use and occupy a property, does not constitute a gift of property. In addition, the Internal Revenue Code does not allow a charitable deduction for a gift of a partial interest in a property unless this is done in trust(2). Therefore, no charitable contribution deduction is allowed for the use of a time-share property.
Time-share owners are generally required to pay an annual maintenance fee that covers the pro rata upkeep of the resort itself, plus housekeeping services. The question arises: Can the time-share owner deduct the maintenance fee for the week donated?
IRS regulations (3) allow deductions for expenses incurred in connection with personally rendered services to a qualified organization. However, services provided by others, even if paid for by the taxpayer, are not personally rendered to the charity and thus are not deductible. Since this includes the services provided by the time-share management company that are paid for with the taxpayer’s maintenance fees, the time-share’s maintenance fees for the donated period are not deductible.
However, if the taxpayer incurred other expenses in connection with the donated use of the time-share, such as driving to the time-share property to let the winning bidder into the unit, a deduction for those expenses would be allowed under IRS regulations (3). This is because the time-share owner would be performing the service directly for the charitable organization; a mileage deduction at the rate of 14 cents per mile would be allowed.
As a bottom line, the donation of the use of a time-share does not constitute a charitable contribution.