You are charitably minded. You regularly give to your favorite charities. You are doing your taxes and you are trying to figure out what you can deduct and what you cannot. You may have given clothing to the local shelter or stock to your church. How much is your charitable contribution deduction and what sort of records do you need to keep?
In order to be deductible, any contribution has to be to a qualified charitable organization. The most common are organizations which have an IRS determination letter which states that they are exempt under Section 501(c)(3) of the Internal Revenue Code and churches. A non-exhaustive list is in IRS Publication 78 which is available on the IRS’s website.
In order to be able to put it on your return, you have to be able to prove your right to the deduction. To do so, you have to keep certain records and documentation. For cash gifts, it is pretty straight forward. For cash gifts under $250 a cancelled check is enough. But if you do not have a cancelled check or the cash gift is $250 or more, you are going to need a written acknowledgment from the from the charity.
Today, we are going to cover some of the more common property contributions that we have seen over the years. The general rule for noncash charitable gifts of property is that unless there are specific rules regarding the gift, the contribution deduction is equal to the fair market value of the property on the date of gift. For these gifts, if the property has appreciated in value, you deduct the fair market value, not what you paid for it and you do not have to recognize the gain on the property.
For example, let’s say you have pledged $40 per week to your church, which is about $2,000 for the year. You also own some stock or a mutual fund that has just skyrocketed in the current market and has doubled in value since you bought it. Instead of writing a $40 check every week to your church, you could donate $2,000 of your stock or mutual fund. You get the full $2,000 charitable contribution deduction even though the stock or mutual fund only cost you $1,000. And you do not have to recognize the $1,000 capital gain; it escapes taxation. It’s a win-win for everyone, except the IRS.
Similarly with property that has gone down in value since you owned it. If you donate that property to the charity, you only get a charitable deduction for the current value of the property. You get no deduction for the loss that you have sustained on the property. In that instance, it may make more sense to sell that property first, recognize the loss and then gift the cash.
Continuing with the previous example, let’s say that $2,000 in stock or mutual fund you want to donate, cost you originally $3,500. When you donate the stock or mutual fund to the church, you still only get a $2,000 charitable deduction, but you lose and cannot deduct the $1,500 loss. In that instance, it is better to sell the stock or mutual fund and recognize the $1,500 capital loss that you can offset against other income. You then donate the $2,000 cash. You get the $2,000 charitable contribution deduction and the $1,500 capital loss.
You may give away boxes of clothing and household items to a local charity, such as Salvation Army, Goodwill or St. Vincent de Paul. To be deductible, make a list of every item that you give and get a receipt. If you just drop the stuff off in the donation box in the local supermarket parking lot, you do not get a deduction because you do not have substantiated documentation from a qualified charity. Drop off your stuff at the thrift store or donation center and get a written receipt.
Just like the stock or mutual fund, the charitable deduction is equal to the fair market value of the property donated, but only if the donated property is in good used or better condition. None of these charities will place a value of the donated clothing or household items on the receipt they give you. However, all three – Salvation Army, Goodwill and St. Vincent de Paul – have valuation guides on their websites.
There are special rules for donations of motor vehicles, boats and planes. If the claimed value of the donation is $500 or less, you can just use the “blue book” or similar value and get a receipt from the qualified charity for the donation. If the claimed value is more than $500, you still need a receipt from the charity, but you can only get a deduction for the gross proceeds from the charity’s sale of the item unless the donation meets one of three exceptions.
You can still get a deduction for the “blue book” or similar value if the vehicle has significant use to substantially further the charities regularly conducted activities, such as a donation of a car to the Red Cross and the car is used to transport blood to area hospitals or other Red Cross facilities. You can also get a deduction for the “blue book” or similar value if the charity materially improves the vehicle which significantly increases its value.
Similarly, you can get a deduction for the “blue book” or similar value if the charity gives the vehicle to a needy individual or sells the vehicle at a price significantly below fair market value to a needy individual, in furtherance of the organization’s charitable purpose. In order for you to get the deduction for the “blue book” or similar value of the vehicle, the charity must document one of the three exceptions on a Form 1098-C or similar contemporaneous written acknowledgment of the contribution.
If you make a noncash donation of property with a value in excess of $500, you have to describe the donation in your tax return on form 8283. And if the property donated is valued over $5,000, you need a qualified appraisal that meets the specified IRS requirements.
There are lots of special rules for certain noncash contributions, such as for art, antiques, collectibles, patents and copyrights. The rules for contributing property to charities are complex and following the IRS rules can be daunting. If you have given or are contemplating giving noncash donations of property to a charity, consult with your tax advisor to make sure you do it properly and have adequate documentation.
By Matthew M. Wallace, CPA, JD
Published edited March 5, 2017 in The Times Herald newspaper Port Huron, Michigan as: Tax deductions for giving away stuff