Contributions
First, let’s look at what type of organization qualifies to receive deductible contributions. The organization has to be a domestic nonprofit that operates for religious, scientific, charitable, or other qualifying purposes. A trust, community foundation or other organizations could qualify as well. If you don’t know and want to ensure your contribution qualifies, research the organization or ask before donating.
It’s also very important to know gifts that will not qualify for a deduction–cash or noncash:
- Political contributions to campaigns or PACS
- Donations to a specific needy individual(s). GoFundMe for example.
- Contributions to foreign charitable organizations. However, a U.S.-based charity doing work overseas qualifies.
- Donations of services – e.g. a donation of time (Unreimbursed expenses do qualify.)
- Fraternal or professional organizations, except where the contribution funds charitable or educational activities
- Social clubs like fraternities or sororities
Also limited are charitable contributions that benefit you, like purchasing tickets to a charitable event that provides food, drinks, and entertainment. Your deduction is the cost of the tickets less the benefit provided. In most instances, the charity will provide a statement estimating the benefit. If the amount is over $75, the charity is required to provide a written statement. If you donate the entire ticket back to the organization, your deduction is the entire ticket price.
It’s very common to make gifts to universities with a benefit/right to purchase football tickets. You donate a certain sum to your favorite university, and that entitles you, the donor, to purchase tickets – no portion qualifies as a charitable deduction.
Charitable Contributions in Cash
Cash contributions are relatively straightforward—you donate $100 to a qualifying charity (no benefit provided to you) and take a charitable deduction for the same amount. From a tax perspective, it’s very important to retain proper documentation.
For gifts over $250, the IRS requires a written acknowledgment from the charity. While a canceled check will work for gifts under $250, we recommend maintaining written acknowledgments for all cash donations. With scanning technology, it’s easy to hold these in a file and scan them after year-end to ease paper storage.
Planning Tip:
A check dated and postmarked on December 31st is deductible in the same year, even if the charity does not process the check until January. Donations made by electronic bank payment are not deductible until the payment date processed by the bank. Credit card donations are deductible in the year the charge is made, so if made on December 31, make sure you are clear about which year the charge will be processed.
More on Charitable Giving: Noncash Gifts
Noncash gifts are a mixed bag and have a lot of special circumstances. Let’s take the easiest and most common situation first—donating used household goods and clothes to the local branch of Goodwill or The Salvation Army. The deduction for used goods is thrift-shop value—so if you donate a shirt, the value is an estimate of how much the thrift shop can sell the item for. If you don’t know how to estimate the value of your donation, both Goodwill and The Salvation Army have valuation guides on their websites. Try goodwill.org or satruck.org. Make a list of the items you donate. Taking pictures is also a good idea.
This Goodwill Valuation Guide is a good reference.
An often-overlooked noncash charitable contribution is mileage and unreimbursed expenses. Charitable mileage is deductible at a rate of 14 cents per mile. And unreimbursed charitable expenses also are deductible. Keep receipts and document expenses under $250. For expenses exceeding $250, request a written acknowledgment from the charity.
Noncash gifts over $5,000 have special requirements. You need to report these gifts on IRS form 8283, which are subject to an appraisal declaration with an independent appraiser signing Part III of the form. However, there are exceptions where no appraisal is required, such as publicly traded securities.
If you are planning on making a noncash gift of art, real estate or some type of collectible that is about the $5,000 limit, consult a financial advisor prior to donating. There are a number of pitfalls and special rules. Deductions might be limited regardless of appraised value if you created the artwork yourself or have only held the art object for a short time. Not knowing the rules and failing to fulfill all the requirements puts the deduction in jeopardy. You want to pay attention to details.
Planning Tip
Using appreciated securities (held longer than one year) is a great way to make charitable contributions. The taxpayer is allowed a charitable deduction for the full market value of the securities and avoids capital gains tax that normally would be paid if the securities were sold. As noted above, publicly traded securities are also exempt from the normal IRS appraisal requirements, even if the gift exceeds $5,000. A few words of caution: If you have securities with a loss, sell the stock to lock in a capital loss and then donate the remaining cash. If you don’t, you’ll miss the opportunity to take the capital loss.
Motorized Donations
Donating a car, boat or airplane can be complicated, depending upon the value and if the charity uses your donation or sells it. You must obtain a written acknowledgment from the charity for any motorized donation for which you claim a deduction of over $500. There are additional rules depending on how the charity disposes of the vehicle. If the charity sells the vehicle to someone (other than a needy individual) for more than $500 —your deduction is limited to the sale proceeds. The charity can decide to keep the vehicle and improve it or use it for their charitable purposes, in which case your deduction is fair market value. The charity is required to provide Form 1098-C certifying their intent within 30 days of the gift.
Make certain the charity is willing to supply the proper documentation (and is capable of doing this), or, if examined, you risk losing the deduction.
Planning Tip
If you have a used vehicle, donation is an easy way to dispose of it. However, for a vehicle with a substantial value, you might consider selling it yourself (try CarMax) and donating the proceeds to charity—donating cash assures your deduction and sidesteps the documentation issues.
Charitable Limitations and Carryovers
Your adjusted gross income (Line 11, page 1 of Form 1040) serves as the gatekeeper for charitable contributions. For example, cash contributions made to a school, church or public charity are generally limited to 60% of your AGI. Contributions of capital gain property held long-term (publicly traded stock) are deductible up to 30% of adjusted gross income. This lower 30% limit would also apply to art donated to a charity and used for their exempt purpose—for example, if you donate a piece of artwork to an art museum.
A simple example would be a taxpayer with $100,000 of income who wants to make the maximum deductible cash contribution to a charity. The limit would be $60,000, with anything above that amount carried forward. If the deduction is appreciated stock held long term, the maximum deduction would be $30,000.
If the charitable organization does not qualify for the 50% AGI limit, other limits might apply. Gifts made to non 50% organizations are limited to 30% or 20% of AGI.
If you have contributions that exceed the above limits, you may carry forward for five (5) years or until used (whichever comes first). Large gifts over successive years could put you at risk for losing the deduction, so just be aware of the limits and plan accordingly.
Planning Tip
When making a significant gift to a charity, be sure you know the limitations imposed based on the type of gift and the charity—it’s not all treated the same.
Complete Itemized Dedication Series
This series is intended to cover the most common deductions. Please keep in mind that there are always exceptions; what’s more, your situation or facts may be different from someone else. We recommend that you consult with your tax advisor before taking any action.
Part 1: The Basics
Part 2: Deductions and Medical Expenses
Part 3: Deduction for Taxes
Part 4: Deducting Mortgage Interest & Investment Interest
Part 5: Contributions & Charitable Giving
Part 6: Casualty & Theft Losses
