While charitable donations are one of the most common itemized deductions on an individual’s tax return and, in many cases, straightforward and easy to determine, there are circumstances that our clients should be aware of in order to maximize their write off and stay compliant.
The last thing that we want for our clients or ourselves is to fall victim to that old saying, “No good deed goes unpunished,” especially when it involves the IRS.
With that in mind, here are five tips to keep everyone on the right track.
1. The IRS has specific rules and requirements for charitable donations.
It’s not unusual for our clients to come to us with blank receipts from charities for goods donated or cash estimates of their annual donations with the caveat that their donations may be worth more on paper than their actual cash value. The IRS has grown more and more unforgiving when it comes to compliance with the rules regarding charitable contributions Publication 526, Charitable Contributions spells this all out in detail. In general, any cash or in-kind contribution require a bank record, payroll deduction record or a written acknowledgment from the charitable organization with a description of any property donated, as well as whether the organization provided any goods or services in exchange for the donation.
I see many cases come across my desk in which clients complied with very few of these requirements and still expected a deduction.
2. Make sure the organization is a charity, and not just a non-profit organization.
Many people use the terms “nonprofit” and “charity” interchangeably, but they are definitely not the same. Only nonprofits organized under IRS Sec. 501(c)(3) are eligible as a charitable donation on Schedule A of Form 1040. The safest way to determine if the organization you want to donate to is eligible is to check this page on the IRS website. This is a very basic, yet often overlooked step that can save lots of headaches down the road.
3. Be aware of requirements at $250, $500 and $5,000 thresholds.
Many of the specific requirements I refer to above are required for individual contributions, starting at $250. In addition, for non-cash contributions, if the total for the year exceeds $500, then additional disclosure is required by completing IRS Form 8283, Noncash Charitable Contributions on your client’s returns. Finally, if a donation or group of similar donations exceeds $5,000, the IRS requires a valuation that’s done by a qualified appraiser.
4. Be careful with non-cash donations.
When it comes to non-cash contributions, we all have seen those blank receipts or ambiguous descriptions for “two bags of household goods and clothing.” When I receive those from new clients, I ask that they detail the contents to the best of their ability in order to give me a starting point to determine their deduction. There are even programs, such as Intuit’s Its Deductible, that will help assign values to the donations. I also tell them to take pictures of everything going into their bags so that we would be able to identify the quantity and condition of the items. In today’s world, it is easy to snap pictures with a date/time stamp on them to validate these donations.
5. Beware of charity auctions and dinners.
This is still the most common area of confusion with taxpayers. Any time they receive a benefit from the contribution they make, such as merchandise at a charity auction or dinner at a charity event, they can only deduct the amount in excess of the fair market value of the benefit they received. Many charities even spell out the value of those benefits when possible, but the values seem to go unnoticed by many taxpayers when preparing to file their returns. Make sure to remind your clients to include this information, along with the paperwork support, for their donations.
While these tips are by no means all inclusive, they are some of the most common I see with the information clients present to me. These areas are as much an educational opportunity with our clients as they are a tax compliance issue!