CHARITABLE CONTRIBUTIONS
An Overview of the Deduction
As a group,
Americans apparently take to heart the old adage that "it is better to
give than to receive." In 1993, more than 73 percent of U.S.
households made donations to charity for an average annual contribution of
nearly $650 per American household.
According
to a recent survey, more than 70% of the households in the country make
over $650 in donations to charities each year. In addition, approximately
90 million adult Americans volunteered an average of 4.2 hours per week to
charitable causes. That's a total of 19.5 billion hours, or more than 2.2
million years worth of volunteer time!
If you
are part of this generous majority, you most likely donate time, services,
or expertise; money; property; or some combination of these commodities
because of the personal satisfaction it brings you. But Uncle Sam, who
believes virtue does not have to be its own reward, provides you with a tax
incentive as well. As long as you itemize on your tax return and contribute
to a qualified charity, you are entitled to deductions for your generosity.
This
article discusses the tax breaks for which you may qualify and the
guidelines you need to observe.
First,
let me stress that charitable gifts are deductible only if they are donated
to an organization qualified by the Internal Revenue Service to receive
tax-deductible contributions. Not all tax-exempt organizations meet this
standard.
Generally
speaking, your gift must go to a domestic nonprofit organization, trust,
community chest, fund, or foundation operated exclusively for one of
several purposes.
Religious
organizations. The first of these is entities operated for
religious purposes. Payments for pew rents, assessments, and dues to your
church or synagogue, for example, are eligible for a charitable deduction.
Charitable
organizations. Contributions to groups that exist for charitable
purposes, such as the American Red Cross, Boy Scouts and Girl Scouts of
America, cancer societies, United
Way, Salvation Army, and YM or YWCA, also
qualify.
If you are unsure of an
organization's status, you can check with the IRS, who maintains a listing
of all organizations that are currently qualified as charitable
organizations. The list is available on the Web at the IRS
site. You may also want to find out some financial information about the organization
before you donate. There are a couple of sites on the Web that have
this information. The charity is also required to make its US Form
990 available to you in a reasonable manner.
Educational
organizations. Another category of eligible organizations comprises groups
organized for scientific, literary, and educational purposes. These include
hospitals, research organizations, colleges, and universities.
Other
qualified organizations. There are many other types of qualified
organizations, as well. For example, associations established to promote
education, combat crime, and aid public welfare are qualified. Groups
dedicated to the prevention of cruelty to children or animals, such as the
ASPCA, and corporations established to provide legal services to the needy
in noncriminal proceedings are also eligible.
Still other examples
include nonprofit cemetery and burial companies -- provided your voluntary
contribution benefits the entire cemetery – and organizations that
foster amateur sports competition, such as the U.S. Olympics Team. Domestic
nonprofit veterans' organizations or auxiliary units also qualify as
eligible organizations for a charitable deduction.
Governmental
organizations. In addition, you may make deductible contributions to many
federal, state, and local governmental agencies if the gift is for public
purposes. Examples of allowable deductions in this category include gifts
to the Social Security system, your local fire department or civil defense
group, or a committee formed to raise funds for developing a public park.
You may even take a deduction for a contribution to help reduce the
national debt!
General
non-profits are not qualified. Although many different types of tax-exempt
organizations are eligible to receive deductible charitable contributions,
many more are not. Political campaign organizations, political action
committees (PACs), and other lobbying groups, for example, do not qualify.
Most contributions to fraternal and professional groups, civic leagues,
chambers of commerce, country and other social clubs, homeowners
associations, and foreign charitable organizations are not deductible
either. Also, gifts to needy or worthy individuals, scholarships for
specific students, or contributions to organizations to benefit only certain
groups may not be claimed as deductions in most cases.
If you are in doubt
about a potential recipient, ask your CPA or tax adviser about its tax
status before making a contribution. Or, refer to IRS Publication 78,
Cumulative List of Organizations, also known as the "IRS Blue
Book." The IRS has a section at its web site for you to use to see if
the name of the charity that you are donating to is on the list.
Now let's take a look at the different kinds of
donations -
Time, Cash, and Property.
Your
time
Roughly half of
Americans over the age of 18 believe, as a Middle-Eastern poet said earlier
this century, "It is when you give of yourself that you truly
give."
If you are among this
group, you may already know that the value of your personal time, services,
or expertise does not qualify for a charitable deduction. You may, however,
deduct out-of-pocket expenses related to your volunteer work, such as phone
calls, postage, and transportation costs.
For instance, when you
use your car to travel to and from your volunteer commitments, you have the
option of deducting a flat rate of 12 cents per mile or your actual
operating costs, whichever is greater. Note that operating costs include
gas and oil but exclude any depreciation, insurance fees, or repair costs.
In addition, you may deduct parking and tolls. When you use a cab or public
transportation to travel to and from your volunteer activity, the fares are
also deductible.
If your volunteer
activities require you to travel away from home overnight, you may be able
to deduct 100 percent of your unreimbursed transportation and lodging
costs. Under new provisions of the tax law, the amount you may deduct for
meals has been decreased from 80 percent to 50 percent. The IRS will allow
these deductions as long as there is no "significant element of
personal pleasure, recreation, or vacation" to your trip.
For example, if you are
chosen to represent your chapter of a charity at the organization's
national convention, your unreimbursed travel and transportation expenses
are deductible. This includes reasonable costs for meals and lodging. It
excludes expenses for sightseeing, entertainment, and the travel, meal, and
lodging expenses of your spouse or children.
And don't forget
incidental expenses incurred as part of your volunteer work. These include
unreimbursed postage, the cost of stationery and other business supplies,
and telephone charges. You might think these are too small to bother
with, but they can add up quickly. Other examples include the purchase price
and cleaning bills for a uniform you are required to wear when you
volunteer, provided that you wear the uniform only for that purpose. Even
such expenses as the ingredients used to make something for a bake sale may
qualify!
You should be aware
that your unreimbursed out-of-pocket expenses related to volunteer work are
considered to be cash contributions and are subject to the same rules as
cash contributions, which I'll discuss shortly. Make sure you keep a
record, or diary, of your volunteer activities and expenses as they occur,
and save all related receipts and canceled checks. Also be sure to record
these payments on the appropriate part of your tax return.
Cash
contributions
Although monetary
donations may not seem as personal as the gift of time, cash contributions
are the mainstay of most charitable organizations. To encourage such
contributions, federal tax law generally allows taxpayers to make
deductible cash contributions of up to 50 percent of adjusted grossed
income.
You've probably all had
the experience of making a cash contribution to a charitable group and
receiving something of value in return for your gift. For example, you
donate $50 to your local public broadcast station and receive a tote bag,
or a book. The IRS refers to this as a quid pro quo contribution, which
means "something for something." In these cases, you may not
deduct the full amount of your cash gift. Rather, you must reduce from your
contribution the fair market value of whatever you receive.
For example, let's
assume you buy a $100 concert ticket for a charity fund-raiser and the
equivalent ticket normally costs $40. In this case, you are entitled to
deduct only $60. If, for some reason, you aren't able to use the ticket,
returning it to the charitable organization for resale will entitle you to
deduct the full $100.
You should be aware
that as of January 1, 1994, if you make a quid pro quo contribution of more
than $75, as in the concert-ticket example, the charitable organization is
required to give you a written disclosure statement that includes a
good-faith estimate of the value of the goods or services you received.
This disclosure may be part of the charity's solicitation -- for example, the
invitation to a fund-raiser -- or of its acknowledgment of your
contribution.
When you donate $75 or
less, as in the example of the PBS contribution, it's up to you to
determine the fair market value of whatever you receive from the charitable
organization. Also, regardless of the amount of the contribution, no
disclosure statement is required if you receive an item that has
"insubstantial," or token, value under the IRS guidelines.
Examples of token items might include calendars and posters. The same is
true if you receive intangible religious benefits, such as admission to a
religious ceremony, in exchange for your donation. The IRS guidelines for
determining token value are adjusted each year for inflation, so check with
your CPA.
Since they are such common
forms of fund-raising, I must mention that the following are do not qualify
as deductible contributions:
- raffle tickets
- bingo games or other
lotteries organized by charities
Documentation of your cash
contribution
In order to claim a
deduction for a cash contribution, you need proper documentation. According
to a new provision in the tax law, as of January 1, 1994, you may no longer
rely on canceled checks but must obtain written substantiation for every
separate cash donation of $250 or more. Separate payments are regarded as
independent contributions and are not totaled for purposes of determining
the $250 threshold.
Be aware that if you
write several checks to one organization on the same day and the checks
total $250 or more, the payments will count as one contribution unless each
is for an entirely different purpose. For donations that are made through
payroll deductions, each deduction is regarded as a separate contribution.
Again, the charity's
acknowledgment must also include a good-faith valuation of anything you
received in exchange for your donation, or it must state that you received
nothing of value in return. You are required to have this documentation
before filing your return for the tax year in which you made the
contribution.
For gifts of less than
$250, a canceled check, receipt, or some other type of reliable written
record from the charitable organization is still acceptable proof. The
receipt should show the name of the organization and the amount and date of
the contribution.
If you made a quid pro
quo contribution of more than $75 and received consideration, the charity
must provide a disclosure statement with a valuation of the goods or
services given to you.
Giving
Property
There are other ways,
besides giving cash, to make a useful donation to your favorite charitable
organization. Take a look at that desk, bookcase, computer, or appliance
gathering dust in your attic or basement. Such items can make an ideal
donation -- and deduction. Other personal property, such as books, or old
clothing that is in good condition, can be donated as well. So can artwork,
collectibles, and financial assets such as real estate, stocks, and bonds.
When you donate
property, there are several important points to keep in mind. First,
deductible contributions of property generally may not exceed 30 percent of
your adjusted gross income. Second, the amount of the deduction you are
entitled to claim will depend on a variety of factors. These include the
type of property you are donating, how long you owned it, the nature of the
charitable organization, and its intended use of the donated property.
Third, when you donate
tangible personal property worth more than $500, you must complete Form
8283, titled "Noncash Charitable Contributions," and attach it to
your tax return. To determine your deduction, you have to establish the
fair market value of the donated item at the time you contributed it. For
example, you may want to check how much thrift shops charge for similar
items.
Fourth, property gifts
with a value in excess of $5,000 -- perhaps antiques, artwork, or
collectibles -- generally require even greater substantiation. Generally,
if you claim a deduction of more than $5,000, you are required to obtain a
written appraisal. The appraisal must be performed within 60 days preceding
the date of the contribution. And the appraiser must be a qualified
professional who is not related to you or the recipient organization.
The appraisal should
list the appraiser's qualifications, a description of the property, and a
statement of the appraiser's opinion of its value. Form 8283 and the
appraisal itself both must be signed and dated by the appraiser. In most
cases, it's not necessary to include the appraisal with your tax return.
You should, however, keep it with your tax records. If you are ever
challenged on your contribution, this document will help support your
deduction.
One way to maximize
your tax savings from charitable contributions is to donate long-term
assets that have appreciated in value -- such as securities, artwork, or
real estate -- instead of cash. By long-term asset, the IRS means assets
you have held for more than one year. In many cases, you may take a
deduction for the fair market value of the asset at the time it was donated
without having to pay income tax on the appreciation -- a double gift from
Uncle Sam!
The rules governing
contributions of appreciated property have swung back and forth like a
pendulum. The 1986 tax law placed such severe restrictions on deductions
for appreciated property that many nonprofit institutions suffered. Art
museums, for example, stopped receiving donations of artwork that had
appreciated in value because the owners benefited more by selling at
auction. The Omnibus Budget Reconciliation Act of 1993, however, eased up
on the restrictions -- to the loud acclaim of donors and recipients alike.
If you do plan to
donate property, particularly an appreciated asset, carefully consider the
type of organization that will best benefit from your gift. You can usually
deduct the fair market value of the property only if the gift will be put
to a use that is directly related to the charity's purpose or function.
When you donate
ordinary-income property -- property that wouldn't produce a long-term gain
if sold on the open market -- or assets you've held for a year or less, the
deduction is limited to your basis in the property -- in most cases, what
it cost you. If your gift of property is not put to a use related to the
charity's purpose or function, your deduction may be limited to the
property's fair market value minus the amount of any unrealized long-term
capital gains. So, if you're thinking of donating that Picasso you
inherited from your grandmother, give it to your favorite art museum instead
of the ASPCA!
For investment property
that has declined in value, I recommend that you sell the property and then
donate the cash proceeds. This way, you can take advantage of both the
capital-loss and charitable-donation deductions.
With regard to proving
your property donations, the same rules apply as for cash and quid pro quo
donations. A receipt is required if you are claiming a deduction of $250 or
more. Again, the charity must furnish a disclosure statement if the
donation is worth more than $75 and you received something of value in
exchange for your donation. And don't forget the appraisal requirements.
All of the deductions
mentioned here are available to individuals who itemize on their tax
returns. But some of you might not have enough deductions to itemize each
year. If so, consider "bunching" your contributions into
alternate years. Donate more than usual in the years when you think you'll
be able to itemize and less in the preceding or following years. This may
help you save money on your taxes.
The rules for deducting
some types of contributions are complicated, and this presentation does not
address such issues as charitable trusts, which apply to a minority of
donors. If you have questions concerning specific charitable deductions or
need advice on determining a strategy for charitable giving, please drop me
a line or e-mail.
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