Congress has been making it harder and harder to deduct charitable contributions. Know the latest rules so the IRS won’t be able to deny tax breaks for your charitable donations.
The increase in the standard deduction in the 2017 tax law means you have to give more to receive a tax break. You deduct charitable contributions only if you itemize expenses on Schedule A. To do that, all your itemized expenses must exceed the standard deduction. A minority of taxpayers itemize expenses now.
In addition, the IRS denies a lot of charitable contribution deductions when taxpayers don’t follow all documentation rules. The requirements have been increased over the years, and many taxpayers don’t know the details. They learn the details when the IRS asks to see their substantiation.
It doesn’t matter if you can prove you made the charitable contributions. The IRS and the Tax Court now regularly deny charitable contribution deductions while acknowledging the contributions really were made. If you don’t have the right paperwork, you don’t deduct the contribution.
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 that clearly shows the payment. For payroll deduction donations, a paycheck stub, W-2, or pledge card will suffice.
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 in hand before filing the tax return.
If you received anything of value in return for the contribution, such as a gift or promotional item, you deduct only the difference between what you contributed and the value of what you received. When you make a single payment to a charity exceeding $75 and receive goods or services in return, the charity must provide 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. But if a single contribution of this type is $250 or more, you must have a written acknowledgement from the charity with a description of the services you provided, the value of the services, and a statement of whether or not the charity provided goods or services to you in return. You must keep adequate records of the expenses you deduct. You deduct only the costs you incurred, not the value of your services.
Donations of property have additional and tougher rules.
Used household property must be in “good used condition or better” when donated to be deductible. Household property includes furniture, furnishings, electronics, appliances, linens, clothing, and similar items. Not included in the definition are food, antiques, works of art, and jewelry.
Some charities give receipts verifying the condition of property donations, though most won’t put a value on the property. Many charities acknowledge only receipt of items and won’t list a condition or value. Some tax advisors recommend keeping photographs or videos of 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, complete Section B of Form 8283, 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 have to 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 that qualifies as a 501(c)(3) tax-exempt organization. When you donate to a non-public charity, such as a private foundation, the deduction might be for less than fair market value. 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. That’s unlikely to be the case for a personal use vehicle.
There are two exceptions to the vehicle deduction limit. 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 is deducted.
There are special rules for donations of appreciated tangible personal property, which usually means art 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 the longstanding annual limits on charitable contribution deductions. For individuals, total deductions for most contributions to public charities are limited to 60% of adjusted gross income (AGI) for the year. Gifts to private foundations, of long-term capital gains property, and in other situations have lower limits. For example, gifts of long-term capital gain property can’t exceed 30% of AGI when made to public charities and are limited to the lesser of 20% of AGI or 50% of AGI minus the charitable contributions when made to nonpublic charities (such as private foundations).
Contributions above the percentage limits can be carried forward and deducted in future years.
Before the 2017 tax law, higher income individuals had their charitable contributions reduced by the itemized deduction limitation. The 2017 law suspended that provision, so you receive the full benefit of all the charitable contributions for which you qualify.