As the holiday season approaches, not to mention the December 31 year-end deadline, many taxpayers increasingly direct their giving spirit toward charities and religious organizations. For a taxpayer hoping to reduce his taxable income through charitable donations, it is important to remember that only contributions to qualified organizations are tax-deductible, and only those taxpayers who itemize deductions should expect to receive any tax benefit. Examples of qualified organizations include churches, the American Red Cross (ARC), nonprofit colleges, and nonprofit hospitals. (You may view information to determine if an organization is considered a qualified organization here.)
Monetary contributions are easy to value and are deducted in the year donated. Generally, items such as clothing and linens are valued at prices that buyers of similar items would actually pay at consignment or thrift stores. Although IRC §170 gives guidance for charitable contributions, the rules for claiming certain noncash contributions can be complex. How are they valued, and in which taxable year are they deducted? What documentation is required?
Valuation
Household goods, such as furniture and appliances, are valued at fair market value (FMV), which is typically much lower than their initial purchase price. Often, these used goods have little or no value due to their worn condition, outdated style, or limited usefulness.
Taxpayers intending to donate larger items, however, should be aware that charities frequently sell donated cars, boats, and airplanes, and the sale price may be below fair market value. Because the contributed amount is limited to the lesser of FMV or gross proceeds, this will reduce the value of the charitable contribution. A charity also may hire a third party to sell the items and transfer the proceeds to the charity, in turn providing the required written acknowledgement. However, if the contribution is not sold by the organization, the amount is generally the FMV at the date of contribution.
Year of Inclusion
The year that charitable donations should be included on the taxpayer’s return is usually clear. However, if the taxpayer makes larger noncash donations late in the year, and the charity, or the charity’s third party, intends to sell the donated items, it may not be possible to claim a charitable contribution deduction for that taxable year. However, an extension may be filed if the sale will take place and acknowledgement is received before the extended due date. Alternatively, once the item is sold and the acknowledgement is received, a taxpayer may file an amended return.
Documentation
For a charitable contribution to be allowable, the taxpayer should obtain from the charity a receipt that includes:
- The name of the charity.
- The date of the contribution.
- A reasonably detailed description of the donated property.
Documentation and substantiation requirements increase for larger contributions, as deductions are not allowed for contributions of $250 or more unless the taxpayer substantiates it with a contemporaneous written acknowledgment from the organization. The acknowledgment must include:
- A description and good-faith estimate of the value of the property donated.
- Information about whether the organization provided any goods or services in consideration of the property contributed.
Failure to obtain this documentation may prevent a taxpayer from claiming charitable contributions on a tax return. For example, in Juanita Wright v. Commissioner (TC Memo 2013-129), the taxpayer did not provide any substantiation of noncash items donated to charity. The taxpayer merely claimed she dropped the items in a box designated for charity. Further, in Peter I. Basalyk, et ux. V. Commissioner (TC Memo 2009-100), married taxpayers were denied a charitable contribution deduction for the donation of a used automobile to the Salvation Army due to a lack of contemporaneous written acknowledgement of their charitable contribution.
To receive the deduction, be sure to attach Copy B of Form 1098-C to your tax return (if provided). For noncash gifts in excess of $500, taxpayers also will need to attach Form 8283 to their filed return.
Special Planning Consideration
Taxpayers, particularly those whose itemized deduction totals fall near the standard deduction threshold, with relatively consistent charitable giving goals, might have an opportunity to do a little tax planning around year-end giving. Charitable deduction bunching is the practice of timing charitable deductions to maximize the long-term tax benefit for taxpayers who otherwise might not have enough deductions to itemize. For a simplified example, imagine the following: in 2014 a taxpayer, filing status “single,” usually gives $6,000 a year to various charities— that is his only deduction. Since the threshold for itemizing deductions for single taxpayers is $6,200, the taxpayer does not get any tax benefit for the deduction—he is better off taking the standard deduction. However, if that same taxpayer had given his 2013 charitable donation January 15, and his 2014 charitable donation on December 25, he would maximize the tax benefit for making those donations in 2014 and still claim the standard deduction in 2013, all while fulfilling his charitable wishes. This bunching principle also can work using noncash giving alternatives.
If you have any questions about the possible tax benefits of charitable giving or to request a speaker on this topic, contact PYA at (800) 270-9629.
