Over the last few years, as the economy continues to recover from one of the biggest recessions in modern history, the charitable donation industry has become quite big. However, the donation industry has become so popular that it has attracted many crooks who are running scam charities, with the only interest to steal money by misleading honest, hard-working people to make donations that ultimately aren’t tax deductible.
Recent Changes Due to Tax Reform
The Tax Cuts and Jobs Act (TCJA) made significant changes to charitable contributions. First and foremost, the increased standard deduction for 2019 to $12,200 for singles, $18,350 for heads of household, and $24,400 for couples married filing jointly or surviving spouses makes it difficult to claim charitable donations. However, that shouldn’t stop a taxpayer from being philanthropic and donating to their favorite charity, church or synagogue.
For those who are high-income earners or have enough deductions to itemize, making charitable donations has become even more valuable. Under the TCJA, a taxpayer can take a deduction for cash charitable donations totaling up to 60 percent of your adjusted gross income. The prior law limited cash charitable contributions to 50 percent, so this change could be favorable for anyone who is a high-income earner, or can itemize and has cash contributions.
In addition, the Pease limitation that phased out the benefits of charitable and other itemized deductions for high-income taxpayers was repealed. A high-income earner no longer has a deduction limit on charitable donations. In addition, the Urban-Brookings Tax Policy Center estimates there will be 21 million households that will lose the opportunity to itemize.
Helping Clients Track Contributions
According to Giving USA, in 2015, there were $373 billion donated to charitable organizations, with $264.58 billion donated by individuals. Yes, 71 percent of all donations were donated by individuals to charitable organizations, of which 20.10 percent were donated by hard-working, middle-class families and individuals who had an adjusted gross income between $45,000 and $100,000. These are the hard-working people looking for a tax deduction, who oftentimes get scammed by fictitious charities. What is even more frightening is that 50.5 percent of the $373 billion was donated between October and December, the holiday season.
As a result, you can help your clients not only track their charitable donations – making sure they have all the necessary recordkeeping for their tax deduction – but also help protect them from donating to organizations that aren’t qualified. The IRS only allows tax deductions for donations made to approved 501(c)3 charitable organizations, churches, synagogues, nonprofit volunteer fire companies and war veteran organizations. If a donation is made to a charity that isn’t a qualified charitable organization, the taxpayer will lose their tax deduction, regardless how big or small the amount may be. A good option is to consult with your clients before they make any donations, including asset donations, and inform them that they should research the organization to make sure it’s on the IRS approved exempt organization list. The IRS Exempt Organization Select Check tool can be accessed on the IRS website. It takes just a few minutes, but that can make a big difference to your clients’ bottom line tax liability.
There are also a few tax regulations that taxpayers should be aware of before offering a contribution. First, recordkeeping is important, particularly when non-cash items are donated. A taxpayer generally takes a deduction for the fair market value of the item, so establishing the value is imperative, particularly when the donated item is worth more than $5,000. In such an instance, a written appraisal from an independent qualified appraiser is necessary to establish fair market value.
Whether the donated item is a car, diamond ring, home or any other item, an appraisal is a must. The only time an appraisal isn’t required is when a taxpayer donates stock in a publicly traded company. Here, the fair market value is established, usually with the closing price of the stock on the date that it is donated to the charitable organization. When a taxpayer donates appreciated property, such as stock, not only do they get to deduct the fair market value as the charitable donation, but they also avoid paying capital gains tax, as long as the donated property has been owned for a year.
Most people will donate non-cash items that are valued under $5,000, which doesn’t require a written appraisal. However, non-cash items that are valued over $500 require the taxpayer to file Form 8283, Noncash Charitable Contributions, with their federal tax return. This requires the donor to maintain good records of the items donated, the donation date, cost basis and the fair market value of each item. Contrary to what most people believe to be fair market value of an item, it is actually the price a buyer is willing to pay the seller. Don’t let your clients think that those three-year-old pair of worn jeans are worth $100 because that would never be sustainable in an IRS audit.
When a client’s company sponsors or underwrites an approved charitable organization’s event, that amount could be a deduction if the client enters the amount under “advertising,” as opposed to a charitable contribution. In this case, the name for the program or signage must be under the company name and not the individual. This is a perfectly acceptable IRS deduction.
As important as it is to have accurate records for non-cash donations, it is equally important to maintain records for all cash donations. Cash donations can be substantiated with a canceled check or credit card receipt, clearly noting the charity name and date of donation. Donations of $250 or more require a letter from the charitable organization, stating the organizations name, donation date, amount, and if any goods or services were received for the donation. Always remember that a donation is limited to the amount of the donation, less any value for goods or services received from the charity. For example, if one of your clients buys a $100 ticket to a charitable dinner, the organization will let the client know how much of that ticket is a “contribution,” versus how much the dinner actually costs per person. Furthermore, it is important to advise clients that donations to individuals are not considered charitable contributions. No matter how much help a struggling family may need, the IRS doesn’t allow any contributions to non-qualified charitable organizations.
Many people choose to volunteer and give a helping hand to charitable organizations. Unfortunately, volunteering and donating time doesn’t provide a tax deduction. The only deduction a taxpayer can receive is for any expenses incurred as a part of volunteering that are not reimbursed or paid by the charitable organization. Therefore, if a taxpayer spends $2,000 to fly to Alaska to volunteer at an animal rescue center, that is considered a qualified charitable organization, and the taxpayer can deduct the cost of the airfare and other expenses as a cash donation, as long as appropriate records are maintained. In addition, the taxpayer has to establish the trip was for volunteer purposes – not for personal reasons, or a vacation.
Finally, anyone who is philanthropic must understand that while they might donate to a charitable organization, and maintain accurate and sufficient records, they may not get a tax deduction. We must remind our clients that charitable donations are deductible as an itemized deduction, and if the client doesn’t have enough deductions to itemize, the client will not get a tax benefit from the donation. While the client may be doing something charitable by donating money, items or time to charity, it doesn’t always equate to a tax donation that affects bottom line tax liability.
Editor’s note: This article was originally published on Dec. 12, 2016, and republished with updates on Sept. 5, 2019.