Charitable donations

Donations of money or non-cash items to a charity (church or non-profit organization) are tax deductible if you itemize deductions on your tax returns and you comply with acknowledgement/substantiation rules to claim your deduction. Those who do not itemize and use the standard deduction, $300 for single filers and $600 for married filing jointly filers, of qualified charitable cash contributions are deductible on line 12b of Form 1040. As many of you will be filing tax returns shortly to claim charitable deductions, we will provide a short summary of the charitable deduction rules.

If your contribution is an outright donation of $250 or more made in cash, or by check, the organization must indicate the amount you gave, and state that you received nothing in return or designate the amount of the benefit you received. For example, if you sent a $50 donation to public television, but you received a gift worth $17 your donation deduction would only be $33. For cash donations of less than $250 a donor must retain records to prove the donation was made to support the donation deduction. The first are bank records showing (a) electronic transfers, the name of the recipient, the transfer date and amount transferred, or (b) images of the paid check showing the same information. The second option is a receipt, letter or other written communication from the donee (person receiving the donation) indicating the name of the donee organization, the date the donation was made, and the amount of the donation.

All donations of clothing and household goods are subject to the same rules as cash donations, plus you must be able to prove that the donated items were in good or better condition to qualify for a deduction (a good way to meet this test is to take pictures of the donated items listed on the receipt from the charity – if the picture is dated to tie to the donation date, all the better). If a donation for more than $500 is claimed for a single item, the IRS will want a qualified appraisal to substantiate the deduction. The value of non-cash items donated is generally the fair market value of the item at the time it is donated, which is usually much lower than the price which was paid for the item. Exceptions to this rule follow.

If the item donated is a vehicle, boat or airplane, special rules apply. The tax deduction for such an item donated to a charity, which is not used by the charity for its exempt purpose, is limited to the amount received by the charity when it sold the item. For example, a car donated to a charity with a blue book value of $3,000 at the date of contribution, but sold for $2,200 would generate a deduction of $2,200. The charity is required to give the donor an IRS Form 1098C (Contributions of Motor Vehicles, Boats or Airplanes) to report the receipt and sale of the item which should be attached to your tax return (keep a copy of the form for your records in case the IRS loses the original).

If the donated item is worth more at the date of donation than you paid for it, the cost of a gift you received, or the value of inherited property it is "appreciated property" and has its own set of rules for a donation deduction. If you bought stock for $4,000 six months ago and it is worth $7,000 when you donate it, your donation deduction is $4,000. If you bought the same stock more than one year ago, your donation deduction would be $7,000 because you held the donated item longer than one year (and hence avoided paying tax on the $3,000 appreciation but still got to deduct the full amount). The rules are more complicated if you donated a painting worth $10,000 ($5,000 cost to you) to a hospital who used it for display. Since the hospital's use of the painting was unrelated to the hospital's charitable purpose, your contribution is limited to your $5,000 cost. If you donated the same painting to a museum, who displayed it, your donation deduction would be $10,000 since there was no unrelated use of your donation.

One can also make a non-taxable gift to another individual. This gift can come in the form of cash, property or transfer to a charity in exchange for an annuity. If you find yourself with this type of tax deductible opportunity, it is highly advisable to consult a tax professional. If you have questions about any of these matters, please contact our office.

The office of Moats & Hebebrand CPAs makes a concerted effort to stay on top of the changes in the tax laws so you don't have to. Let us prepare your 2021 tax returns so you know they are done right! We are also open all year to assist with tax planning and to take care of our clients.