If you make a donation to a charity this year, you may be able to take a deduction for it on your tax return. Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations:
- Make sure the organization qualifies. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations. An interactive version is available at https://apps.irs.gov/app/eos/. This is particularly important because thousands of organizations automatically lose their tax-exempt status each year for failing to file required annual reports for three consecutive years, as required by law. Donations made prior to an organization's automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list, that do not receive reinstatement, are no longer eligible to receive tax-deductible contributions.
- You must itemize. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
- What you can deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats. See below for records you must keep.
- When you receive something in return. If your contribution entitles you to receive merchandise, goods, or services in return - such as admission to a charity banquet or sporting event - you can deduct only the amount of your payment that exceeds the fair market value of the benefit received. The charity is required to provide you with written disclosure where the total you pay the charity exceeds $75 and the goods or services you receive exceed the standards for insubstantial value.
- Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution, the name of the organization and a statement of what, if any, goods or services were received in exchange for the contribution.
- Pledges and payments. Only contributions actually remitted during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by December 31, you may only deduct $200.
- Donations made near the end of the year. Include credit card charges made and payments by check that were issued in the year you give them to the charity, even though the check may not clear your account or you may not pay the credit card bill until after the first of the following year.
- Large donations. For any contribution of $250 or more, you need more than just a bank record. You must have a contemporaneous written acknowledgment from the organization. It must include the amount of the donation and must state whether the organization provided any goods or services in exchange for the gift.
- Donations of property. Household items and clothing contributed to charity must be in at least good used condition to be deductible. If you donated property, the acknowledgment must include a general description of the items. You must maintain detailed records and provide a good faith estimate of its value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.
- Charitable IRA rollover. A combination of estate taxes, income taxes, and generation skipping transfer taxes can consume nearly 80% of a retirement plan account. One way to avoid or significantly reduce these taxes is to make a Qualified Charitable distribution from your IRA. Congress made this provision permanent at the end of 2015 to permit taxpayers who are age 70-1/2 or older to transfer their required minimum distribution withdrawals directly from an IRA to a qualified charity. Transfers up to $100,000 for year are currently permitted, the distributions are excluded from federal taxable income, and the distributions count toward your minimum required distribution. Keep in mind all transfers under this rule must be made from the IRA directly to the charity, otherwise one would need to report the distribution as income.
For the list of organizations whose tax-exempt status was revoked, visit https://apps.irs.gov/app/eos/. For general information see IRS Publication 526, Charitable Contributions, which is accessible here – https://www.irs.gov/uac/about-publication-526, and for information on determining value of donated property, refer to Publication 561, Determining the Value of Donated Property, which is available here - https://www.irs.gov/uac/about-publication-561.
Donations. Write-offs. Limits. It can all be confusing. If you have questions about your year-end planning, charitable donations, or are ready to position yourself more favorably heading into the new year, contact me at hkass@zinnerco.com or any of the professionals at 216.831.0733. We're ready to start the conversation.