Authored By: Jared Ripplinger, CPA, MBA, CFP®. Jared is currently a manager over tax and estate planning work in the Logan office. He works primarily with individuals and small business owners in a variety of industries. Jared is also a member of the board of directors of some of the local non-profit organizations.
With the rapidly approaching end of the year and the holiday season upon us, a lot of individuals assess their charitable giving for the year, and consider making additional charitable contributions before year-end. We will discuss some of the key factors to consider in making charitable gifts:
Qualified Charitable (Non-Profit) Organization:
First of all, it is important to note that only donations made to qualified charitable organizations (under IRC §170). While it may be charitable to donate funds or property to a struggling family member or neighbor, these donations do not qualify for a tax deduction because that person is not a qualified charitable organization under IRC §170.
In general, in order to receive a tax benefit from making charitable contributions, you will need to itemize your deductions on Schedule A. For most types of charitable contributions you are limited to deducting an amount not to exceed 50% of your Adjusted Gross Income (AGI), however certain types of contributions are limited to a lower percentage of AGI . For example, cash contributions made to a private foundation are limited to 30% of AGI. There are some other limitations that may come into effect, as discussed below, under non-cash contributions.
To the extent that a charitable contribution deduction is limited by AGI, the deduction may be carried forward as many as 5 years, or until it is used up in a future year.
In general, the charitable contribution must be made no later than December 31 of the year of contribution. This can be done by writing out a check and dropping it in the mail on or before December 31st, or by delivering the payment to an authorized agent of the charitable or religious organization on or before December 31st. There have also been occasional global disasters, for which congress has granted additional time to make charitable donations beyond year-end (ie: Tsunami in the Pacific, earthquake in Haiti), but those contributions have been few and unanticipated.
Charitable contributions are reported on Schedule A as an itemized deduction. If there is more than $500 in non-cash charitable contributions during the year then Form 8283 must be completed, and additional information is required to be disclosed. For non-cash gifts of greater than $5,000 a qualified appraisal is required, and the qualified appraiser must sign Form 8283, which is then filed as part of the tax return.
An exception to the appraisal requirement is a gift a marketable security. For a marketable security, the average of the high and the low trading price for the security on the date of gift is used as the fair market value of the gift.
Also, depending on the year, taxpayers aged 70½ or older, are allowed to make a direct contribution from an IRA to a qualified charitable organization. This direct IRA transfer is not included in the taxpayer’s taxable income, and the deduction is not allowed for the donation. This is a great tax break for those who are charitably inclined, but who don’t benefit from itemizing their deductions. This direct transfer to charity also counts toward the Required Minimum Distributions (RMD’s) that a taxpayer must begin taking from retirement accounts at age 70½.
A potential benefit for making non-cash contributions of a highly appreciated asset is that the charitable deduction is based on the fair market value on the date of the gift, not on what was originally paid for the asset. The only catch to this is that the deduction is limited to 30% of AGI for most charitable organizations, and 20% of AGI if the gift is to a private foundation.
There are special rules for gifts of motor vehicles. The deduction of a donated vehicle is generally limited to the actual sales proceeds of the vehicle for the charitable organization. However, if the organization uses the vehicle as part of their tax-exempt activities, the deduction will then be the actual fair market value of the vehicle.
Remember, for any type of charitable donation for which you wish to claim a tax deduction, it is crucial that you obtain a receipt from the charitable organization to document the donation. This receipt should be received prior to claiming the deduction on your tax return, otherwise it may be denied by the IRS.
Donated Time and Service:
There is currently no provision for tax deduction of donated time and energy spent for charitable organizations. However, to the extent that you incur expenses directly related to your service for charitable organizations, you may be allowed a deduction for your “volunteer out-of-pocket” expenses. In order to qualify for this deduction you must keep all applicable receipts, and if your total volunteer out-of-pocket expenses exceed $250 during the year, you will need to receive contemporaneous written documentation from the non-profit organization stating what you provided (the type of service) for the organization. For service provided to religious organizations, the letter should state that you received nothing in return for your service other than “intangible religious benefits”.
Other Information of note:
There are special deduction rules for businesses who donate inventory.
There are several funding mechanisms for making charitable donations, including as Donor Advised Funds, Charitable Remainder Trusts, and other tools which can add flexibility to the timing and the amounts involved in the charitable donation process.
The charitable deduction is available to corporations and trusts, with different limitations than individual taxpayers. Also, aside from the income tax side of charitable giving, there is a charitable deduction allowed for charitable bequests made from an estate to qualified charitable organizations.
Charitable giving can be a rich and rewarding experience, and there may be significant tax benefits in doing so. I recommend that you contact your tax advisor for additional details and planning opportunities associated with charitable giving.