Not all charitable donations are created equal. Some donations are deductible on your income tax return, while others are not. The IRS also requires different supporting documentation for different types of contributions. We have separated this article into two parts, for easy reading:
Part I: general issues related to charitable giving including what type of receipts are required
Part II: specific types of gifts for minimizing taxes:
b.) Donation of Works of Art
c.) Use of Charitable Remainder Trust
Part I: Charitable Donations and Substantiation (receipts)
What is Deductible as a Charitable Contribution?
In general, gifts of money and property are deductible if they are made to the following organizations:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, and local governments
- Nonprofit schools and hospitals
- Public parks and recreation facilities
- War veteran groups
- Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America
- Charitable organizations listed in IRS Publication 78
- Out-of-pocket expenses you paid while serving as a volunteer for the above organizations
What is NOT Deductible?
Money or property given to the following entities are generally not deductible as charitable contributions on your income tax return:
- Civic leagues, social and sports clubs, labor unions, chambers of commerce
- Foreign organizations
- Lobbying groups
- Homeowners associations
- Individuals
- Political groups
- Dues, fees, or bills paid to country clubs, lodges, fraternal orders or similar groups
- Cost of raffle, bingo, or lottery tickets
- Auction bid that is less than the value of the bid item
Records You Must Keep
The type of records you are required to keep varies depending on the amount/value of the gift and whether you made a gift of cash or gift of property.
Cash Contributions Under $250
Any one of the following items is sufficient documentation:
- Cancelled check, bank statement, credit card statement, or payroll deduction record (paycheck stub or W2) showing the name of the organization, date of contribution and amount of contribution
- A receipt from the organization showing the name of the organization, date of contribution, and amount of contribution
Note that each contribution is considered a separate contribution. For example, if you make weekly donations to your church of $25 for 50 weeks, each $25 donation is considered a separate donation. So even if the total donation is $1,250, you can take income tax deductions for the donations as long as you have one of the above records.
Cash Contributions of $250 or More
You must have a written acknowledgement from the organization or certain payroll deduction records. You must obtain the acknowledgement by the due date (including extensions) for filing your income tax return. Charitable contributions are often disallowed if the acknowledgment is not received by this deadline. In addition, the IRS requires that the following information be included in the acknowledgment in order for it to be acceptable to the IRS:
- The amount of cash contribution
- Whether the qualified organization gave you any goods or services in exchange for the contribution
- A description and good faith estimate of the value of any goods or services provided by the charity
- A statement that the only benefit you received was an intangible religious benefit, if applicable
Out of Pocket Expenses
You must have a record supporting the expenses you claim. If you bought items for a toy drive, you must have a receipt. A record showing the name or the organization, the date, and the mileage for each volunteer activity is considered adequate documentation for mileage expenses.
You must also have a written acknowledgment from the organization. You must obtain the acknowledgement by the due date (including extensions) for filing your income tax return. The acknowledgment must contain the following information:
- Description of the services you provided
- Statement of whether or not the organization provided you any goods or services to reimburse you for the expenses you incurred
- A description and a good faith estimate of the value of any goods or services provided to reimburse you
- A statement that the only benefit you received was an intangible religious benefit, if applicable
Cars, Boats, and Airplanes
If the value is $500 or less, see section for non-cash gifts below.
If the value is more than $500, you must obtain Form 1098-C from the charity and attach it to your income tax return.
Non-Cash Gifts Valued Under $250
You must have a written record (preferably a receipt from the charity) showing:
- Name of the charity
- Date and location of the contribution
- Description of the donated items
- Fair market value of the donated items and how the value was determined
Note that each contribution is considered a separate contribution. For example, if you made 10 trips to drop off clothing and household goods at Goodwill and the donated value was $50 for each drop off, you made 10 contributions of $50 each. You DO NOT need a written acknowledgment from the charity
Non-Cash Valued Between $250 and $5,000
You must have a written acknowledgement from the charitable organization if you make donations of goods valued at $250 each. You must obtain the acknowledgement by the due date (including extensions) for filing your income tax return. The acknowledgment must contain the following information:
- Name of the charity
- Date and location of the contribution
- Description of the donated items
- Whether the qualified organization gave you any goods or services in exchange for the contribution
- A statement that the only benefit you received was an intangible religious benefit, if applicable
Your records must also include the following information:
- How you got the property
- Approximate date you got the property
- Cost of the property
A Non-Cash Gift or Group of Similar Non-Cash Gifts Valued Over $5,000
You must have a qualified appraisal AND the charity must sign IRS Form 8283 if you make a gift of an item or group of similar items and the value exceeds $5,000. The appraisal must be done by an independent party—neither you nor the charity can provide an appraisal of the donated property.
Note that an appraisal is NOT required if you are gifting publicly-traded stock.
The following resources can help you locate a qualified appraiser:
American Society of Appraisers www.appraisers.org
Antiquarian Booksellers Association of America www.abaa.org
Appraisers Association of America www.appraisersassoc.org
Society of American Archivists www.archivists.org
Part II: Specific Types of Giving, to Minimize Taxes
Donation of a Vehicle
One of the negative aspects of buying a new car is the annoyance involved with getting rid of your old car. Many individuals find the trade-in allowance offered by dealers (if any) to be well below the car’s true value. But the alternative of selling the car on your own involves the expense of advertising as well as the commitment of time needed to meet with potential buyers, accompany them on test drives, negotiate a fair price, etc.
For these reasons, some taxpayers consider a different option for their old cars: donating them to charity. An increasing number of charities have turned to car-donation programs. You may have seen ads from some of these organization in your local newspaper urging individuals to donate their old cars. The donation approach saves you the trouble of trying to sell the car. Many charities offer the added convenience of picking up the car at your home.
In taking this approach, however, bear in mind that the amount of the deduction you will be allowed to claim is subject to special limitations. In many cases, the deduction you can claim is less than your view of the car’s value. If you compare the tax savings from a donation with a dealer’s trade-in offer, the offer may not seem as small.
For cars worth over $500, the deduction will be the amount for which the charity actually sells the car, if it sells the car without materially improving it. This limit applies to any motor vehicle designed for road use, including vans and trucks, as well as to boats and airplanes.
Since most charities do sell the cars they receive, it’s likely that your donation will be limited to the actual sale price. Furthermore, these sales are often at auction or in bulk and typically result in sales below “Blue Book” value. Also, you won’t know the amount of your deduction until the charity has sold the car and reported the sale proceeds to you (see below).
Only if the charity uses the car in its operations or materially improves the car before selling it will your deduction 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. IRS will accept the value in the “Blue Book” or another established used car pricing guide if the guide lists a sales price for a car that is the same make, model, and year, sold in the same area, and in the same condition, as the car you donated. In some cases, this value will exceed the amount you could actually get on a sale.
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 won’t set the car’s value. Instead, you must establish the car’s true market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.
In any case, you must itemize your deductions to get the tax benefit; you can’t take a deduction for a car donation if you take the standard deduction.
Making sure the charity qualifies and is legitimate. You won’t be entitled to a charitable deduction unless you donate your car to an eligible charitable organization. In some cases, the transaction is more complex because private fund-raisers may be operating car donation programs on behalf of charities. This is legitimate as long as the private company is acting as the agent for a qualified charity. I can help if you have any doubts about the qualification of any donee you are considering.
Proving your right to the deduction. If you 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 will use (or materially improve) 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.
Donation of Works of Art
First of all, a charitable contribution of a work of art is subject to reduction if the charity’s use of the work of art is unrelated to the purpose or function that is the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity.
Example (1). You bought a painting five years ago for $10,000 and it’s now worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital’s use of the painting is unrelated to its charitable function and you would have had a $10,000 long-term capital gain had you sold it.
Example (2). Now assume you donate the painting to an art museum. Here, your deduction is $20,000.
Substantiation requirements. One or more substantiation rules may come into play when you donate a work of art. First, if you claim a deduction of less than $250, you must get and keep a receipt from the donee organization and you must also keep reliable written records for each item property you contributed.
If you claim a deduction of at least $250, but not more than $500, then you must get and keep an acknowledgment of your contribution from the donee organization. The acknowledgment must state whether the organization gave you any goods or services in return for your contribution and include a description and good-faith estimate of the value of any goods or services given.
If you claim a deduction in excess of $500, but not over $5,000, then in addition to getting an acknowledgment, you must maintain written records that include information about how and when you obtained the property and its cost basis. You must also complete section A of Form 8283 and attach it to your tax return.
Where the claimed value of the property exceeds $5,000, then, in addition to an acknowledgment, you must also have a qualified appraisal of the property. This is an appraisal that was done by a qualified appraiser no more than 60 days before the contribution date and that meets numerous other requirements. You include information about these donations on section B of Form 8283, which you file with your tax return.
If your total deduction for art is $20,000 or more, you must attach a complete copy of the signed appraisal. If an item of art is valued at $20,000 or more, IRS may request that you provide a photograph. If an item of art has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.
Percentage limitations. In addition, your deduction may be limited to 20%, 30% or 50% of your contribution base, which usually is your adjusted gross income. The percentage varies depending on the type of organization involved and whether or not the deduction of the work of art had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.
Partial interest gifts. Donors sometimes make gifts of partial interests in an art work. For example, a donor may contribute a 50% interest in a painting to a museum, with the understanding that the museum will exhibit it for six months of the year and the donor will keep possession of it for the other six months.
Special requirements apply to these donations. The donee charity must take complete ownership of the item within 10 years or at the donor’s death, whichever comes first. Failure to comply results in the donor’s recapture of all charitable deductions claimed, plus interest and a 10% penalty. Also, the fair market value used in determining the amount of each later contribution can’t exceed the property’s value at the time of the initial contribution.
Use of a Charitable Remainder Trust
There is a very powerful estate planning tool that may enable you to reduce your liability for income and estate taxes and diversify your assets in a tax-advantaged manner. It’s called a charitable remainder trust (CRT). Here’s how it works.
A CRT is an irrevocable trust that makes annual or more frequent payments to you, typically until you die. What remains in the trust then passes to a qualified charity of your choice. A number of advantages may flow from the CRT.
First, you will obtain a current income tax charitable contribution deduction for the value of the charity’s interest in the trust. The deduction is permitted when the trust is created even though the charity has to wait to receive anything.
Second, the CRT is a vehicle that can enhance your investment return. Because the CRT pays no income taxes, the CRT can generally sell an appreciated asset without recognizing any gain. This enables the trustee to reinvest the full amount of the proceeds and thus generate larger payments to you for your life.
The trust will be eligible for the estate tax charitable deduction if it passes to one or more qualified charities at your death. If you wish to replace the value of the contributed property for heirs who might otherwise have received it, you could use some of your cash savings from the charitable income tax deduction to purchase a life insurance policy on your life for the benefit of your heirs. Often, through the leveraging effect of life insurance, it is possible to pass on assets of greater value than those contributed to the CRT. In this way, your heirs are not deprived of property they had expected to inherit.
A CRT is a very complex arrangement, but it is also an invaluable planning tool in the right circumstances.
The following IRS resources are available for more information regarding charitable donations:
Publication 526 – Charitable Contributions www.irs.gov/pub/irs-pdf/p526.pdf
Form 8283 – Noncash Charitable Contributions www.irs.gov/pub/irs-pdf/f8283.pdf
Publication 561 – Determining the Value of Donated Property www.irs.gov/publications/p561/index.html
Publication 78 – Cumulative List of Organizations: https://www.irs.gov/charities-non-profits/search-for-charities.
If you are still asking yourself: How much do I need to donate to charity to get a tax deduction? How much can I write off for giving to specific organizations like Goodwill or Salvation Army? Or you just want to have a more in-depth conversation about all of the above, call expert Susan Matz at (714) 672-0022.
