December 11th, 2010 12:05 PM by Korene L Clopine-Seaman
The end of the year is closer than you think. With time running out to make important year-end tax moves, charitable giving is an important component of any sensible tax strategy.Although rules surrounding charitable giving have not changed much recently, they are very complex. The IRS is not forgiving of mistakes.When making donations, consider IRS gift criteria, IRS deduction limits, proof of the donation, and the complex issues involved with donating property. Taxpayers can deduct charitable donations only if they itemize deductions. Here is an overview of the regulations covering charitable giving in 2010, although you should consult a tax professional before making any final decisions.
Qualified CharitiesBefore donating, make sure that the organization is a qualified charity under IRS rules. These include corporations, trusts, community organizations, funds, or foundations organized and operated in the United States for religious, charitable, scientific, literary, or educational purposes.
Other qualified charities include cemetery companies, veterans' organizations, fraternal organizations, and organizations designed to prevent cruelty toward children or animals. Certain charities in Canada, Mexico, and Israel may also qualify. You can search for qualified charities using the IRS's online search tool. Be sure to check the addendum for listings not yet included in the electronic search version.
If you receive any consideration in exchange for the gift, there's a limit on how much of the gift you can deduct. For example, if you make a $200 donation to a qualified charity and receive a gift in return valued at $50, you can deduct $150. A major exception to this rule is athletic tickets purchased from colleges and universities, where the allowable deduction is 80% of the price paid for such tickets.
For donations of more than $250, there must be written substantiation of the gift, which can include a letter documenting the gift from the charity. If cash is contributed, a canceled check, a bank statement, or a credit card statement can serve as documentation, according to the IRS.For donations made via payroll deduction, a pay stub, Form W-2, or pledge card to a charitable organization suffices. For donations of less than $250, maintain a record that states the name of the charitable organization, the date of the donation, and what was donated.Deduction LimitsDeductions are limited to a certain percentage of adjustable gross income (AGI), depending on the type of property that is donated and what type of organization receives it. Below is a general rundown on donations, but you should check with a tax professional for confirmation on your client's specific situation. Charitable Deductions for Property Type of donated property Type of charity How contribution is valued General deduction limit Cash Public charities Canceled check, credit card receipt, or written communication from charity if under $250; substantiated by charity if over $250 50% of AGI Private non-operating foundation, veterans' organizations, fraternal societies, and nonprofit cemeteries Canceled check, credit card receipt, or written communication from charity if under $250; substantiated by charity if over $250 30% of AGI Capital gain property Public charities Fair market value 30% of AGI Private non-operating foundation Property basis, unless fair market value is less Whichever is less: 20% of AGI or 50% of AGI minus contributions to charities Ordinary income property Public charities Property basis, unless fair market value is less 50% of AGI Private non-operating foundation Property basis, unless fair market value is less 30% of AGI
Source: IRSCapital gain property is any property that long-term capital-gain tax rules apply to—such as stocks and real estate—when sold. Ordinary income property is any property that ordinary income tax rules apply to when sold. Fair market value is the current value of the property if sold; the property basis is the price it was purchased for. Any donations that exceed the limitations in the table can be carried forward for up to five years.
In most tax years, the IRS has limited the total amount of charitable deductions and itemized deductions for taxpayers with gross income over certain amounts, if the total amount of charitable deductions exceeds 20% of AGI in addition to the limits described in the table above. Those limits were repealed in 2010 but may resume in 2011. To see if any limits apply to your clients, consult IRS Publication 526. The alternative minimum tax also affects itemized deductions but does allow affected taxpayers to deduct qualified charitable contributions.
Donated-property rules
The rules surrounding donated property are particularly complex. Rules hinge on the fair market value of the donated goods, which is what that particular item would fetch on the open market in a transaction between a willing buyer and seller. Because fair market value isn't easily determined, there are no specific formulas that work in figuring it out. There are several different ways of determining fair market value, which include: The actual cost or selling price of donated property, especially if the purchase or sale happened recently and was at arm's length. Sales of comparable properties when the properties being compared are fairly similar and those sales occurred recently. Replacement cost when there is a reasonable relationship between the replacement cost and fair market value.In some cases, it can be difficult to determine fair market value, especially when there are unusual market conditions, such as liquidation, and there aren't many reasonable comparable sales.If you're donating property and claiming a deduction of $5,000, the IRS mandates an appraisal and filing of Form 8283, Section B. You can't take a charitable contribution deduction for the cost of the appraisal, but you can deduct it as a miscellaneous deduction, subject to the 2% limit. For more information, consult IRS Publication 561, "Determining the Value of Donated Property."
Here are some specific details that apply to certain items of donated property: Household goods, including used clothing. They must be in good, used condition or better, and the amount you can deduct depends on the item's fair market value. Both the Salvation Army and Goodwill offer pricing guidelines to help you figure out the fair market value of donated items. Cars, boats, and airplanes. If the donated value is more than $500, you must either claim the amount that the charity sold the property for, or the fair market value on the date of the contribution. The IRS suggests consulting a car, airplane, and boat resale blue book for data on what a particular vehicle is worth, using data for private party sales. Online resources include the Kelley Blue Book for cars, NADA Guides for boats and cars, and the Aircraft Bluebook for planes. Stocks and bonds. If you donate stocks and/or bonds that have appreciated to a qualified charity, you can take a deduction on the appreciated value of those assets rather than their basis. Use the price on the date of sale, averaging the high and low price to get the fair market value.
If the security is thinly traded or the price is unavailable, take such factors into consideration as the most recent price available, the financial soundness of the company issuing the security, and the value of securities issued by similar companies in the same industry. Sites that offer historical prices for securities include Big Charts for stock prices and BondsOnline for bond prices. Paintings and antiques. When donating painting, antiques, or objects of art that are worth $20,000 or more, a signed appraisal must be attached to your tax return. The IRS may request an 8" x 10" color photo of the donated item. If the object is valued at $50,000 or more, you can request a Statement of Value from the IRS before filing your return to support your deduction. That request must be made before filing your return, and you must complete Form 8283, Section B, and pay a $2,500 user fee. Collections. As with cars, boats, and airplanes, the IRS advises anyone considering donating a collection to consult a published guide such as a catalog, dealer's price list, or specialized hobby publication. Use the most current edition and consider other factors when determining the value of a deduction, such as dealers in the industry, prices of comparable items published on the Internet, or an official appraisal by an appraiser experienced with such items. Real estate. Donations of real estate require an appraisal from a qualified appraiser, which must be included with your tax return. You must include a photo of the property, legal description, address, physical features, and property condition. When selecting a fair market value for donation purposes, an appraisal should consider comparable sales, capitalization of income, and replacement cost new or reproduction cost minus observed depreciation.
What's not deductible
The IRS prohibits charitable contribution donations for money or property given to: Groups that lobby for legal changes Labor unions, civic leagues, social and sports clubs, and chambers of commerce Foreign organizations (except for certain organizations in Canada, Mexico, and Israel) For-profit organizations and groups Homeowners' associations Individuals Schools for payment of tuition Blood banks for donations of blood Organizations for raffle, bingo, or lottery tickets Political groups or candidates for public office Country clubs, lodges, and fraternal orders for payment of dues, fees, or billsIn determining possible deductions, also take into consideration any state limitations on charitable donations. New York recently passed legislation limiting tax deductions for people who earn more than $10 million annually. Other states are considering similar legislation. Again, check with a tax professional for rules specific to your situation.
If you have questions or believe you have deductions, please, consult a licensed and experienced professional tax advisor or CPA.
This blog is not to be used as legal or financial advice but as a tool to start you thinking of possibilities and to obtain more detailed professional advice.