Stay compliant on charitable contributions
Back in the “old days” (about 10 years ago) the rules relating to deducting charitable contributions were fairly lax. I throw a few bucks into the Salvation Army’s Red Kettle, the bell rings in acknowledgment and I make a mental note to take a deduction on my tax return next spring. No receipt provided, no written acknowledgment given, no problem!
Alas, that era has ended and recordkeeping has become more stringent. No longer are those dollars deductible without proper substantiation. If done the right way, however, taxpayers can continue to support charities while also getting the benefit of a tax deduction.
Substantiation requirements vary based on the type of donation (cash or property) and the value of the property contributed. In general, for all cash contributions regardless of amount, no deduction is allowed unless the taxpayer retains either a bank receipt supporting the donation or a written receipt or communication from the charity showing its name, date and amount of the contribution. Emails qualify as a “written communication.”
Following are the rules relating to the proper substantiation of cash and property charitable contributions.
Property contributions of less than $250
Such donations must be substantiated by one of the following: (1) a written receipt or letter from the donee reflecting its name, date, place and description of property; or (2) in lieu of a receipt, reliable written records reflecting similar information as well cost basis of property and/or terms or conditions attached to the gift.
Cash and property contributions of $250 or more
Written acknowledgement is required from the charity; a cancelled check does not suffice. The written acknowledgement must be in the hands of the taxpayer when the return is filed, otherwise the deduction may be disallowed completely. The written acknowledgment also must address whether any goods or services were provided to the taxpayer in consideration for the donation. If so, the deduction is limited to the difference between the value of the property contributed less the value of the consideration received in return.
Property contributions of more than $500
When a taxpayer donates property greater than $500, Form 8283 (Noncash Charitable Contributions) must be attached to their personal return. In addition to reflecting the value of the property, it’s also required to include how and when the property was acquired, as well as its original cost basis. Failure to include this information may result in a complete disallowance of the deduction.
Property contributions of more than $5,000
Taxpayers must get a qualified appraisal for property valued at $5,000 or more unless the donation is publically traded securities. Signatures from the donee organization and the appraiser also are required on Form 8283. This is a trap for the unwary! Too often we’ve seen taxpayers forget to obtain an appraisal; the IRS will not permit a deduction without it.
The substantiation rules are more complicated now than they were in the “old days.” With proper planning and a general understanding of the rules, taxpayers still should be able to take full advantage of the tax law while also continuing to support their favorite charity.