Charitable Giving

Substantiating Charitable Contributions

The tax code encourages charitable giving by allowing individuals to claim then as itemized deductions. However, in order to sustain these deductions in an IRS audit, it is important to be mindful of the substantiation rules.

For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the charity showing its name, plus the date and amount of the contribution. For a contribution of property other than money, you generally must maintain a receipt from the charity showing its name, the date and location of the contribution, and a detailed description (but not the value) of the property.

Stricter substantiation requirements apply in the case of charitable contributions with a value of $250 or more. These donations must be substantiated by a contemporaneous written acknowledgement of the contribution by the charity. The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the charity provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services.

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property (excluding publicly-traded securities) with a value of more than $5,000, and to attach an appraisal summary to the tax return.

If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70.

Please call us if you have any questions about these rules.

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The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Donating a Used Car to Charity

One of the unpleasant aspects of buying a new car is the inconvenience involved with getting rid of your old car. One option that many people consider is donating their old car to a charity. The donation approach saves you the trouble of trying to sell the car, and many charities offer the added convenience of picking up the car at your home.

The other benefit of donating your vehicle is of course the potential tax deduction. It is important to bear in mind, however, that the amount of the deduction you will be allowed to claim is subject to special limitations. In some cases, the deduction you can claim might be less than what you think the car is actually worth.

If the charity sells the car, the deduction will be the actual sales price of the car, as long as the charity does not materially improve it prior to the sale. The thing to keep in mind is that these sales are often at auction or in bulk sales, and as a result, they typically result in sales below the “Blue Book” value.

If the charity uses the car in its operations or materially improves the car before selling it, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the “Blue Book” listings for used cars published by the National Automobile Dealers Association or another established used car pricing guide. However, if the car is in poor condition, because it needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide will not be able to establish the car’s value. Instead, you must establish the car’s true market value by any reasonable method. 

If you do decide to donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.  If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm’s length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. The charity should provide you with this acknowledgement within 30 days of the sale.

If, instead, the charity uses (or materially improves) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation.

And finally, it is important to remember that the value of the deduction to you will be less than the cash you are likely to earn if you sell the car.  If the sale price of a car is $3000, and you are in the 25% tax bracket (and you itemize your deductions), the cash value of the tax deduction will only be $750.  Therefore, if your sole objective is to maximize your financial well-being, then donating a vehicle will not be in your best interest.  If on the other hand, you value the convenience of the car donation process and are interested in helping out a charity, and you view the tax deduction merely as an added bonus, then a car donation might be right for you.

Charitable Donations of Appreciated Stock

      If you are planning to make a relatively substantial contribution to a charity, college, etc., you may want to consider donating appreciated stock from your investment portfolio instead of cash. While a charitable organization is likely to be indifferent between a cash or stock contribution, the tax benefits from a stock donation can be much more significant to the donor. 

This tax planning strategy is derived from the general rule that the deduction for a donation of property is equal to the fair market value of the donated property, rather than the cost basis of that property.  Therefore, if the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

For example, let’s assume that you would like to make a $10,000 contribution to a charity.  If you make a cash gift, you can deduct this contribution as an itemized deduction.  If however, you donate stock with a market value of $10,000 and a cost basis of $5,000, you not only obtain a $10,000 charitable deduction, you also avoid paying the tax on $5000 in stock appreciation.

This strategy will only work for appreciated stock that you have held for more than a year. If not, it would be treated as “ordinary income property”, and the charitable deduction would be limited to the stock’s cost basis.  In addition, it is never a good idea to contribute stock that has a market value that is less than your cost basis.  In that case, you are better off selling the stock, retaining the tax benefit of the loss, and contributing the cash. 

So if you are thinking of making a substantial gift to your charity of choice, consider donating appreciated stock that you have owned for more than a year.  It might be a win-win for both you and the charity.

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Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, West Palm Beach and Jupiter, as well as  South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Tax Law extends IRA charitable giving provision

Here is a nice write-up from the WSJ on a  key provision in the latest tax bill passed by Congress:

The mammoth tax bill just passed by Congress resurrects an expired provision allowing special charitable donations of individual-retirement-account assets for taxpayers 70½ and older. The benefit has been extended through 2011 and gives extra time to those who want to donate this year.

The provision itself is simple—at least as tax rules go. It allows a taxpayer who is 70½ or older to contribute a total of $100,000 in IRA assets to one or more qualified charities. The payout can satisfy the required minimal distribution. The donor gets no deduction, but neither does he or she have to report the payouts as income.

That last point is key: If the donor had to claim the payout as income and then deduct it, there could be problems. The deduction itself could be limited because of other tax rules, or else the donation might swell the donor’s reported income, possibly raising Medicare premiums or taxes on Social Security payments. Instead, the donation bypasses tax calculations altogether.

 

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.