By: Investor Solutions, Inc.
Each year, millions of taxpayers are digging deep into their pockets to pass a donation to their favorite charity or organization. Not only is it a way to support something that you believe in, but it might also allow you a tax deduction with Uncle Sam. Whether you’re donating some old clothes, replacing that 20-year old furniture, or dropping the Salvation Army a $20 bill, be sure to keep good records for everything that you donate. Trying to dig up all the receipts at year-end for such items can be a real drag, so setup a system each year to make things easier.
Criteria for a Gift
In order for the IRS to recognize your charitable contribution, three things must have occurred: there must have been an intent to donate, the consideration received from the charity does not exceed the gift, and acceptance of the gift by the donee.
It’s also important that you’re aware if your donation is deductible or non-deductible per IRS standards. The chart in Table 1 below shows some of the more common charitable groups and organizations and how the IRS views deductibility on a contribution to their organization:
Deductible Charitable Contributions
Religious (churches, synagogues, etc.)
Nonprofit schools and hospitals
Public parks and recreation facilities
Salvation Army, Red Cross, Goodwill
Federal, state,and local governments
War veterans groups
Prevention of cruelty to children/animals
Non-deductible Charitable Contributions
Political groups or candidates
Civic leagues and labor unions
Chambers of Commerce and Social Clubs
Country Clubs, lodges, fraternal orders
Donations to specific individuals
If you’re still unsure of the tax status of a philanthropy, ask the organization about its status, or check the IRS list of tax-exempt organizations (IRS Publication 78), available at www.irs.gov.
Once you’ve determined that your charity is a qualified organization, you’ll need to know if it’s classified as a public charity or private foundation. Public Charities are those that receive broad public support such as: churches, hospitals, educational institutions, and medical research organizations to name a few. Private Foundations (operating & non-operating) are not directly defined in the IRS Code, but they can be referenced against the list of organizations that are public foundations. Its best that you obtain some type of literature, visit their website, or speak with a representative from the foundation prior to gifting, they will specify their status as public or private.
Types of Donated Property
Cash – cash donations should be made in check form (if available) and a receipt should be obtained from the charity.
Securities – If long-term security (you have held for 1 year or more), the fair market value or cost basis is deductible (your choice). If you donated a short-term security (held for less than 1 year), then the deduction is limited to your cost basis in the security. Hint: Gift your highest appreciated securities.
Used Cars – The used-car pricing guide “blue book” should be used to determine the fair market value of the car. If the value is over $5,000, you must obtain a written independent appraisal to support the deduction, and report it on Form 8283.
Personal Property – Such as books, equipment, furniture, and jewelry are classified as tangible personal property they are treated a little more complex. For the extent of this article, the basic rule is FMV can be used if the item relates to the charity’s main purpose. If the item is sold by the charity for cash, then the donation is classified as “non-related use” and your deduction may be reduced by the long-term gain element.
Artwork – If you’re the artist, your deduction is limited to cost- regardless of actual market value, length of time held, or to what use the charity puts the item. For non-artist works used in the charity’s exempt purposes, the FMV can be used, but be prepared to have an appraisal done to support your deduction.
Real Estate – No deduction allowed for rental use “free-of-charge” on real estate property (vacation home, etc.). Deduction will be allowed for donation of residence or farm even though you reserve the use of the property for yourself for a term of years or life.
Life Insurance – On a donated policy, the value may be deducted if the charity is irrevocably named as beneficiary. Premiums may also be deducted on the same policy as long as you are paying them and not the charity (premiums deductions may be challenged in some states that say charities do not have an “insurable interest” in the donor’s life, check with your state first).
Less than $250 per charity– Keep your cancelled check or a receipt from the charity.
$250 or More per charity– Written acknowledgement from the charity, cancelled check will not suffice.
Total deductions for all property exceeds $500– You must report each of the contributions on Form 8283.
Deductions exceeding $5,000 per item– You need a written appraisal, which must be summarized in section B, Part I of Form 8283. (Appraiser must complete Part III on Form 8283) – Required for everything, except for publicly traded securities.
Unless you make a very substantial donation in relation to your Adjusted Gross Income (AGI), this section may not apply to you. This is a very complex area well beyond the scope of this article, so I’ll only cover the two most common contributions – cash and long-term publicly traded securities. For cash contributions to public charities, the deduction ceiling is generally 50% of AGI and reduced to 30% of AGI for those going to private non-operating foundations (Example: If your AGI is $100,000, you can donate up to $50,000 in cash to a qualified public charity for the full deduction, any excess can be carried forward). For long-term publicly traded securities, the Basis or FMV of the security can typically be used. If the basis is selected- a 50% AGI ceiling will apply, if FMV is used- a 30% AGI ceiling will apply (public charities). For private non-operating foundations, the ceiling is 20%. If you make donations that exceed the AGI ceiling amount, you may carry forward the excess over the next five years.
There’s really no advantage of donating property that has declined below your cost basis. The deduction is still limited to fair market value, and no deductible loss can be claimed for the gift. In most cases, the best asset to donate is highly appreciated long-term assets. Donating “vacation home use” is not advised, since the IRS will not only deny the charitable deduction for your generosity, but may also jeopardize your deduction for rental expenses. In cases where you’re donating something other than cash, it’s most advisable that you check with your accountant or financial advisor prior to making the contribution. Remember, the responsibility of proof doesn’t rest with the charity or the IRS, it’s up to you to keep track of all receipts.