Charitable Deduction AGI Limitations
Special Hurricane Relief Contribution Provisions
Donations of Unused Employer Time Off
Contributions of Appreciated Assets
IRA to Charity Contributions
Avoiding Fraudulent Charities
The end of the year and holiday season is the time of the year when everyone is feeling charitable, and a time when you are likely flooded with solicitations for charitable contributions. Before deciding about your charitable giving for the year, you may benefit from this article on ways to contribute that will help you tax-wise.
Some recent special tax deduction changes make 2017 a unique year for charitable giving. This article provides you a guide to these special provisions in addition to those that have historically provided tax benefits.
Normally, deductible charitable contributions are limited by a percentage of your income, more specifically your adjusted gross income (AGI), which is the number on your tax return before your deductions and exemptions are subtracted. For most charitable contributions the tax deduction limit is 50% of your AGI, but it can drop to 30% or even 20% in certain situations. Additionally, overall itemized deductions, including those for charitable contributions, are phased out for high-income taxpayers.
2017 Hurricane Relief - After the devastation inflicted by Hurricanes Harvey, Irma and Maria, Congress passed a provision that allows taxpayers to donate money to hurricane relief charities without any percentage-of-AGI limitation. Further, the phaseout of itemized deductions for high-income taxpayers will also not apply to hurricane relief contributions. So, for example, if your AGI is $100,000 and you contribute $70,000 to a qualified hurricane relief charity in 2017, the full $70,000 will be deductible instead of being limited to $50,000. However, if you made other contributions during the year, they will be subject to the normal percentage-of-AGI limitations, and then the hurricane relief donation will be deductible for the balance of your AGI.
To qualify, the contributions must have been made in cash between August 23 and December 31, 2017, and the donation documentation must verify that the donation is for Hurricane Harvey, Irma or Maria relief. If you contribute more than is deductible for 2017, the excess will carry forward to your tax returns for up to the next five years.
Donate Unused Employee Time Off - As it has done before in the wake of disasters, including Hurricane Katrina and Superstorm Sandy, the Internal Revenue Service is providing special relief that allows employees to donate their unused paid vacation, sick leave and personal leave time to Hurricane Harvey, Irma and Maria relief efforts.
Here is how it works: If your employer is participating, you can relinquish any unused and paid vacation time, sick leave and personal leave, and your employer will then donate the cash equivalent to Hurricane Harvey, Irma and Maria relief charities. Your employer can deduct the amount donated as a business expense. You don’t get a deduction for a charitable contribution, but better yet, you won’t have to report the income, which is beneficial for both individuals who itemize deductions and those who use the standard deduction. This special relief applies to all leave-based donations made before January 1, 2019, giving individuals over a year to forgo their unused paid vacation, sick and leave time and have the cash value donated to a worthy cause.
If your employer is unaware of this program, refer them to IRS Notice 2017-48 (related to Hurricane Harvey) for further details. Note: Notices 2017-52 and 2017-62 were later released, adding Irma and Maria, respectively, to the list. Your employer will also benefit from not being liable for payroll taxes on the money contributed.
Contributions of Appreciated Assets – Although this is not a new strategy, taxpayers can donate appreciated long-term capital gain assets to a charity and deduct the fair market value (FMV) of the assets as a charitable deduction. For example, suppose you donate to your church’s building fund a stock that is worth $10,000 but that only cost you $2,000. Your charitable contribution would be $10,000, and you do not have to pay tax on the $8,000 appreciation in the stock. This strategy can also apply to land, homes, rentals, equipment, etc. Determining the FMV for listed stock is easy since the value of the stock can be determined from quoted stock prices on the day of the contribution. For other capital assets, a certified appraisal is generally required. It would be good practice to contact this office before making a gift of appreciated property to make sure that it is appropriate for your tax bracket and that the appraisal is properly performed and documented.
IRA to Charity Contributions – For some time this unique method of making charitable contributions was a temporary provision of the tax law, but Congress made it permanent in 2016. This charitable contribution provision is limited to taxpayers age 70.5 and older. They can directly transfer up to $100,000 a year from their IRA to a qualified charity. So if you are 70.5 or older and make an IRA-to-charity transfer you won’t get a charity deduction, but instead and even better, you will not have to pay taxes on the distribution, and because your AGI will be lower, you can benefit from other tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers. As an additional bonus, the transfer also counts toward your annual required minimum distribution.
Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer, or credit card. To claim a cash contribution, you must be able to document that contribution with a bank record, receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization, the date of the contribution, and the amount of the contribution. Valid types of bank records include canceled checks, bank or credit union statements, and credit card statements. In addition, to deduct a contribution of $250 or more, you must have certain payroll deduction records or an acknowledgment of your contribution from the qualified organization.
Non-cash Contributions – This is a type of contribution with which you can easily run afoul of the IRS because the contribution deduction is based on the FMV of the item being contributed, not the item’s original cost, and most used items such as clothing and household goods depreciate substantially.
Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they are specifically not allowed. It is not uncommon to see taxpayers over-valuate their contributions. That is why the IRS has four levels of verification and documentation requirements for non-cash contributions, with each becoming more stringent as the valuation increases:
Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as clothing, household goods, coin collections, paintings, books, jewelry, privately traded stock, land and buildings.
A. Deductions of Less Than $250 – You must obtain and keep a receipt from the charitable organization that shows:
1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property.
Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). This exception only applies if all the non-cash contributions for the year are less than $250.
B. Deductions of At Least $250 But Not More Than $500 – You must provide the same information as in the previous category and add:
4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits).
If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution.
C. Deductions Over $500 But Not Over $5,000 – You must provide the same acknowledgment and written records that are required for the two previous categories plus:
5. Attach a completed IRS Form 8283 to the income tax return that reports:
a. How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
b. The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
c. The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more.
D. Deductions Over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation (this requirement, however, does not apply to publicly traded securities). When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.
To help you document some of these noncash contributions, you can download a fillable Noncash Charitable Contribution statement. The statement includes an area for the charity’s agent to verify the contribution and a check box denoting whether the qualified organization provided any goods or services as a result of the contribution. Although not specifically endorsed by the IRS, this statement includes everything needed for noncash contributions of up to $500—provided, of course, that you and the charitable organization’s representative accurately complete the form.
Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid swindlers who are trying to take advantage of your generosity. They show up in droves after disasters like the hurricanes and the California firestorms. Here are tips to help make sure that your charitable contributions actually go to the cause that you support:
Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don’t get clear answers—or if you don’t like the answers you get—consider donating to a different organization.
Don’t give out personal or financial information—such as your credit card or bank account number—unless you know for sure that the charity is reputable.
Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: Once you send it, you can’t get it back.
If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
Don’t make a contribution if it is solicited in an email claiming to be from the IRS. The IRS does not send emails to individuals and does not ask for donations to organizations related to natural disasters. Scammers are using this ploy to extract money from taxpayers who think their contributions will go for hurricane relief or to wildfire victims.
Check out the charity’s reputation using the Better Business Bureau’s Give.org or Charity Watch.
Remember that if you want to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state or local government, qualifying veterans’ or fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs and homeowner’s associations, as well as gifts to individuals, cannot be deducted.
Be aware that, to claim a charitable contribution, you must also itemize your deductions. If you only marginally itemize your deductions, it may be beneficial for you to group your deductions in a single year and then to skip deductions in the next year.
Please contact our office if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.