Author: Frank Pelosi, CPA, CVA
One of the strategies to reduce your taxable income is to make a charitable contribution to a qualified organization before the calendar year ends.
Common examples of qualified organizations include churches, religious organizations, nonprofit educational organizations, nonprofit hospitals and medical research organizations, volunteer fire companies, etc. Some foreign charities also qualify as qualified organizations. To ensure that you are eligible for a charitable contribution deduction, ask your organization if it is a qualified organization OR you can use the online tool on the IRS website to determine the status of an organization.
In addition to assuring that the contribution is to a qualifying organization, it’s important to maintain proper documentation of your contribution. A valid charitable contribution may be disallowed by the IRS if not adequately substantiated.
Methods of contribution
Charitable contributions can be in various forms. Common methods include cash /check/ credit card donations, donations of stock or a piece of property, IRA distributions, donations of your time, etc.
Size matters when it comes to documenting your donations
In general, for monetary donations of any amount, a deduction will be disallowed unless a bank record, a written receipt or communication from the charity is maintained. This should show the name of the organization and the date and amount of the contribution. Bank records include a statement, electronic funds transfer receipt, scanned image of both sides of a cancelled check or a credit card statement. Written communication includes electronic mail correspondence.
Note: Charitable cash handouts—such as cash placed on church collection plates—will not result in any deductions unless the donor obtains a qualifying receipt or written communication.
Property donations valued at less than $250 must be substantiated by:
- a written receipt or letter from the charitable organization showing its name, date and place of contribution and a detailed description of the property; or
- reliable written records containing the above listed information along with
- the fair market value (FMV) of the property at the time contributed and how the FMV was calculated (for example a signed copy of an appraisal),
- property’s cost or basis,
- terms or conditions attached to the gift,
- amount of deduction claimed,
- for securities: the issuer’s name, the type of security, and whether it is regularly traded on a stock exchange or over-the-counter market.
For cash and property contributions of $250 or more, donors must get a written acknowledgement from the charity. Cancelled checks or other reliable records are not sufficient proof in this case.
- The acknowledgement must be obtained no later than the tax return due date (or extended due date, if applicable) of the tax year the contribution was made.
- If the return is filed before the due date, the donor must possess the acknowledgement when the return is filed.
- The acknowledgement can be made on paper or electronically, and one written acknowledgement can be obtained for multiple gifts of $250 or more to the same charity.
- The acknowledgement must include the amount of cash donated or the description of the property donated. In case of property donations, the charity does not have to value the property; this is the donor’s responsibility.
- Each donation is viewed as a separate contribution; therefore, if you make multiple contributions to the same charity then the substantiation rules apply to each separate donation. For example, if you give $100 each month to a charity, then the donation can be substantiated by cancelled checks or receipts from the charity; a written acknowledgement is not required even though the total amount donated adds up to $1,200.
- The acknowledgement must also contain a statement of whether or not the charitable organization provided any goods or services in consideration, in whole or in part, for any of the cash or other property transferred to the organization. If the donor received anything from the charity in return, a good faith estimate of the value of the goods and services the donor received should be included in the acknowledgement with a disclosure that only the net amount is deductible. If only intangible religious benefits are received, the acknowledgement should so indicate and no valuation is required.
Note: if the net value of the donation is less than $250 (for example, the actual contribution is $300 and the donor receives $60 of goods in return), then no acknowledgement is required.
Contributions by payroll deductions can be substantiated by a pay stub or W-2 that shows the amount of contribution withheld from the employee’s pay during the year and a pledge card or other document prepared by or at the direction of the charity that includes a statement indicating that the organization does not provide goods and services in return for donations made by payroll deduction.
Volunteers: If total out-of-pocket expenses are $250 or more, the charity must provide a written receipt that describes the services provided by the volunteer and whether any goods or services were provided by the charity in return.
Payments to colleges and universities for the right to purchase tickets to athletic events are generally 80% deductible. If 80% of the price of the ticket is $250 or more, then a written acknowledgement is required.
For property contributions more than $500, Form 8283 (Noncash Charitable Contributions) must be attached to the tax return. A written record must be maintained containing the same information required for property donations valued at less than $250. Additionally, on Form 8283 the property’s acquisition date and its basis or cost is required.
For property contributions more than $5,000, other than publicly traded securities, a qualified written appraisal must be obtained. Additionally, a completed Section B of Form 8283 (Appraisal Summary) signed by the appraiser and the charitable organization must be attached to the donor’s tax return.
- For non-publicly traded securities, a written appraisal is required only when the deduction claimed exceeds $10,000.
- The $5,000 threshold is applied per item or per group of similar items (for example, a donation of five bags of clothing valued at $1,500 each would be considered property donation of more than $5,000).
- In the case of partnerships or S corporations, the acknowledgement must be obtained by the entity and a copy of Form 8283 must be provided to every partner or shareholder who received an allocation of the charitable contribution who, in turn, must attach a copy of the Form 8283 to their personal tax returns.
There can be additional compliance requirements for particular types of donations as well as limitations on the deductibility of donations, depending on the type of donations and the organization receiving the donation.
In addition to time and tangible property, you can donate, among other items: IRA distributions, intellectual property rights, and conservation easements. You should also be aware that there are limits on the amount of the contribution deduction that you can claim and rules regarding carryover of unused contributions.
Remember! Contributions to political candidates are never tax-deductible.
Please contact our office to get further information and for a sound planning strategy for your charitable contributions that provides you with the maximum possible tax deduction.