Charitable Contributions

Transcription

1 Phone: Fax: Charitable Contributions Why give to charities? Many people give to charities for a wide range of reasons- help those in need, makes people feel good, because of personal experience, gives people a sense of pride, and yes, for the tax deduction. Here are some examples of charities and their missions- The United Way, founded in Denver in 1887, focuses on improving education, achieving financial stability and promoting healthy lives. In 2011, Goodwill Industries whose mission is to help people find employment, helped 189,000 people obtain a job and spent over 82% of its revenue (or $3.5 billion) directly on employment and job training programs. Susan G. Komen spends 93% of its revenues on education, research, screening and treatment (only 7% is spent on administration, which is super efficient). Of course there are thousands of other charities, organizations and foundations performing broad services as well as providing very narrow and local community outreach activities. Regardless of the mission or objectives, not every organization qualifies as a charity. Who qualifies as a charity? Typically any organization that has received their 501(c)(3) tax exempt status is a qualified charity, yet churches and other religious organizations might be exempt from this requirement. The term charities is all encompassing (like Kleenex or Linoleum) since several organizations and foundations exist to promote education, science, literary works, prevention of animal cruelty, etc. At times it is easier to consider who is not a qualified charity- social and sport clubs, labor unions, chambers of commerce, groups ran for personal profit, lobbyists, HOAs, individuals and political groups, among others. In addition, the value of your time, services and blood, and the cost of raffle, bingo or lottery tickets are not considered charitable donations. These are specifically prohibited in IRS publications. Foreign charities also do not qualify. The only exception is Canadian, Mexican and Israeli charities, but you generally must have foreign income in order to qualify for the deduction of these contributions. Altruism is always important- unfortunately not all altruism is tax deductible. Rev Page 1 of 6

2 Are there ways to earmark money for an individual? Yes, but be very careful. To deduct a contribution made to a qualified organization, the donation must not be earmarked or directed by the donor. However, and this is a big however, if you notify the organization that you prefer the donation to go to a certain person, and you state that you understand it might not, then the contribution may be deducted. For example, your son goes on a charitable trip with a local church. If you donate money and you earmark it specifically for your son s expenses, etc., that contribution is not allowed. But if you say that you prefer the donation to go to your son but you understand that the charity has full authority to use the money as they wish, the contribution can be deducted. Most organizations understand this arrangement, and they further understand that future donations will probably cease if they don t make the right choice. There are other situations where this preference arrangement can be applied. What are some other charitable deductions? Students Living With You: You may be able deduct qualifying expenses for a foreign or American student who lives in your home under a qualified exchange agreement, is not your relative and is a full-time student in the twelfth or lower grade. Out of Pocket Expenses: Some of your expenses associated with volunteer work and other contributions to charities may be deductible. Your expenses must be unreimbursed and directly connected with the services provided. They cannot be personal, living or family expenses. Some out of pocket expenses include donations made to underprivileged youth (such as tickets to a baseball game or a movie), required uniforms (think hospital volunteers), foster parent costs, expenses associated with being a church deacon, and travel expenses including mileage and lodging. Meals are very tricky and more discussion is required. What are some of the donations I can deduct? There are several different types of property donations, some of which are very obscure. Generally your donation of clothing, household items, food, cash and cars are the most common. However, you can also donate taxidermy property (really?), your interest in a property, a qualified conservation, business inventory and intellectual property such as patents. And Yes, there are rules for all this. Clothing and Household Items: These donations must be in good used condition or better, and include furniture, electronics and appliances. Household items do not include food, paintings, antiques, jewelry and other collections. While these items might be deductible, they are not considered household items. How items are grouped and entered on your tax return changes some of the reporting requirements to the IRS. Cars, Boats, and Airplanes: Most charities who accept cars et al will sell them at auction and then provide you with documentation of the sale. If the donation (i.e., the sale proceeds) exceeds $500, a form 1098-C is sent to the IRS. Typically this is mailed after your tax return is efiled and accepted, although more advanced tax software is now allowing the attachment of this form in PDF format (which is pretty cool). If this figure is between $250 and $500, all you need is a written statement from the organization (not form 1098-C). Rev Page 2 of 6

3 Also, a bit of caution and disclosure is in order here. First, many salvage and junk yards might appear as charities. Do your homework before you donate. Second, and arguably more important, you can typically do better by selling the car, boat or airplane directly, and donating the cash to a charity of your choosing. For example, your clunker is worth $1,000 on craigslist, but at auction it might be only worth $500. Your tax deduction increases by $500, and your local charity gets a quick $1,000. Everyone wins. There are some other rules and exceptions of course, such as the deduction amount if the car is used by a charity in carrying out their mission activities (for example, Meals on Wheels). In this situation, you would be able to deduct the fair market value of the car and not the auction price. Food: You can donate food and deduct the value of the contribution if the food meets quality and labeling standards. The use of the food must also be related to the organization s tax exempt purpose, and be used for the ill, needy or infants. A written statement from the organization must be provided to you detailing these provisions. Cash: Cash contributions include those paid by cash, check, electronic funds transfer, credit card, payroll deduction and text messages. See Do I need receipts for my donations? below. Do I need receipts for my donations? Yes. Period. Okay, there is one tiny exception. Noncash Donations: There are four areas to discuss when it comes to noncash contributions. 1. Less than $ Between $250 and $ Between $500 and $5, Over $5,000 Less Than $250: Receipts or written statements are required unless impractical to do so (you leave property at an unattended drop-off site). There s your tiny exception. Between $250 and $500: You must obtain a written acknowledgement showing the description of the donation (not necessarily the value), and whether goods or services were received for the donation. Each donation over $250 must have a separate acknowledgement. Between $500 and $5,000: Same rule as above, but the acknowledgement must also state how you obtained the property, along with the date and approximate value. If you purchased several items over several different dates, and donate them at once, the IRS generally accepts various on tax forms. Over $5,000: Same rules as above, plus you typically need a written appraisal from a qualified appraiser. This applies to a single item, or a group of similar items. Rev Page 3 of 6

4 Cash Donations: There are a ton of rules and misconceptions, so here we go. You cannot deduct a cash contribution, regardless of the amount, unless you have- 1. A financial record showing the name of the organization, date and amount, or 2. A receipt or written statement from the organization. The financial record can include a canceled check, bank statement and credit card statement showing the organization, date and amount. For payroll deductions, a paystub or a W-2 showing the amount is sufficient. And for cell phone or text donations, the IRS is allowing copies of your phone records or statements if it shows the organization, date and amount. Myth Buster: The days of saying you donate $20 a week to church, and therefore you want to deduct $1,040 are long gone. Since 2007, you must have a receipt for every dollar you donate. Sure you can deduct any amount, but your audit will disallow the deduction without evidence. See Does deducting charitable contributions cause an audit? below. An organization is required by law to give you a written statement for any single donation over $75. Read that again. The organization is required. Please do not confuse this as donations under $75 do not require the taxpayer to keep receipts. How do I determine the value of my donation? For cash, this is easy. But for those property donations where a receipt or written statement did not reflect the amount or value, there are several ways to assign the fair market value. First, the IRS Publication 561 Determining the Value of Donated Property provides some general information about household items and clothing, and provides more specific information on cars, boats, airplanes, jewelry, art, real estate, patents, etc. Second, and more practically, there are several online sources to help you piece together the value of your college freshman s unneeded high school clothes. Intuit / TurboTax created a site called ItsDeductible ( Much to our chagrin, TurboTax did a wonderful job with the creation of this online tool. Good stuff. Goodwill Industries has a Donation Valuation Guide which illustrates general pricing for the items they sell in their stores. Salvation Army also lists several items and their associated value ( Remember, since 2007 the IRS, as directed by Congress, now requires that household items and clothing be in good used condition or better. What the heck does that mean? It s subjective for sure. Rev Page 4 of 6

5 ebay / craigslist can also be a good resource to show the fair market value of items that perhaps aren t easily valued. For example, if you donate a washing machine you demonstrate or prove the fair market value by finding one or two listings of the same item on ebay or craigslist. While these sites aren t listed as authoritative by the IRS per se, they do offer a sound basis for fair market values in our opinion. Another suggestion is take pictures as proof or evidence of the quantity and condition of the items donated. If you are donating a bag of clothes, this is perhaps unnecessary. But if you are donating more expensive items such as appliances, books, furniture, etc., pictures might tell a thousand words. This can also prove invaluable for large estate donations as well. Quid Pro Quo: If you donate something in exchange for goods or services this is known as a quid pro quo contribution. For example, you donate $100 to a charity and they give you voucher to a movie worth $40 (which the theatre donated and deducted as well). Your deduction is limited to $60 but the since your donation exceeds $75, the organization is required to furnish a disclosure statement. This statement must inform you that the deduction is limited to the difference between the contributed goods or services and a good-faith estimate of the fair market value of the goods or services. What are the limits of my donations? There are the 50%, 30% and 20% rules: 1. Cash contributions are generally limited to 50% of your adjusted gross income (AGI). 2. Property contributions are generally limited to 30% of your AGI. 3. Contributions of appreciated capital gains assets (in full) are typically limited to 20% of your AGI. Contributions in excess of their respective limits can be carried forward to future for five consecutive tax years. There are also limits place on businesses for the deductibility of their charitable donations. Rev Page 5 of 6

6 Does deducting charitable contributions cause an audit? Perhaps. No one can say for sure, but there are donation ratios and averages that the IRS can use to determine if you are an outlier. In addition, the reporting requirements on your tax returns are changing every so often giving the IRS more detail of your contributions. This in turn facilitates certain triggers. Recently the IRS has increased its requests for documentation in lieu of full audit or examination. We have seen several letters being received during the summer that ask for receipts and other proofs of payment for medical expenses, tuition and charitable contributions. The IRS is saying Hey, your tax return is not being examined per se but we are auditing your donation amounts.. just send us your stuff.. please (no, they don t really say pleasein fact they use that awful font and letter formatting that appears menacing and they mail it in time to arrive right around 5:30PM on a Friday, preferably with the following Monday being a legal holiday). If you cannot prove your deduction, your tax returns will be adjusted with penalty and interest. What precisely triggers these audit letters is unknown, but it is an efficient way for the IRS to crackdown on erroneous deductions. Make sure the amount that you deduct is defensible. We also expect the expansion of these letters to other areas on your tax returns besides medical, tuition and donations. Please call or us anytime with your questions and concerns. Thank you in advance, and we look forward to working with you! Tina Watson, CPA, MBA Jason Watson, EA, MBA direct direct tina@watsoncpagroup.com jason@watsoncpagroup.com You may also contact us through facebook.com/watsoncpagroup or follow us Rev Page 6 of 6