The Internal Revenue Service has again issued guidelines for year-end contributions to charitable organizations. Several important tax law provisions have taken effect in the last several years that provide both clarity and rules in order to maximize and adequately substantiate your deductible contributions.
Special Charitable Contributions for Certain IRA Owners
An interesting provision offers older owners of individual retirement accounts (IRAs) a different avenue for making charitable contributions. An IRA owner, age 70 1/2 or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This provision was recently extended through 2009 and is available regardless of whether IRA owners itemize their deductions. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Certain charities are ineligible, such as donor-advised funds and supporting organizations. Amounts transferred are not taxable, and no deduction is available for the amount given to the charity, as the contribution offsets the otherwise taxable income. Amounts transferred are counted in determining whether the owner has met the IRA's required minimum distribution rules.
The provision can save taxes for those who itemize their deductions to the extent that adjusted gross income (AGI) limitations would have otherwise reduced the amount of charitable contributions currently deductible. In addition, excluding the IRA distributions from AGI also results in a lower AGI, which may make deductions affected by AGI (such as medical deductions and miscellaneous itemized deductions) more valuable and may also reduce the amount of Social Security benefits that are subject to tax.
A word of caution: To be excludible from gross income under the IRA qualified charitable distribution rules, a distribution to a charitable organization must otherwise be entirely deductible as a charitable contribution deduction. For example, if the deductible amount is reduced because of a benefit received in exchange (e.g., membership to organization, dinner, goods, etc.) or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available for any part of the IRA distribution.
Guidelines for Monetary Donations
The following guidelines should be considered when planning year-end charitable giving:
- Contributions are deductible in the year of contribution. This includes donations charged to a credit card before year-end, even if the bill is not paid until the following year.
- Be sure that the organization receiving the donation is qualified. Only donations to qualified organizations are tax-deductible.
- Only taxpayers who itemize deductions can claim deductions for charitable contributions. Taxpayers who do not itemize are not eligible for a charitable deduction unless the charitable deduction plus all other itemized deductions exceed the standard deduction.
- The deduction for a motor vehicle, boat or airplane donated to a charity is usually limited to the gross proceeds from its sale. Form 1098-C must be provided to the donor by the organization and attached to the donor's tax return.
To deduct cash donations, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity, the date and the amount paid. Credit card statements should show the name of the charity, the date and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. Additionally, a taxpayer must obtain an acknowledgment from the charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
Special Rules for Contributions of Clothing, Household Items and Art
To be deductible, clothing and household items donated to charity must be in good used condition or better. Household items include furniture, furnishings, electronics, appliances and linens. If the amount of a taxpayer's deduction for all noncash contributions exceeds $500, the taxpayer must provide information consisting of the name and address of the donee organization, a complete description of the property, information on how and when the contributed property was acquired, and the donor's cost basis in and the fair market value of the property. Additional reporting requirements apply if a taxpayer claims a deduction of more than $5,000, including a declaration by a qualified appraiser. If a donation is left at a charity's unattended drop site, you may want to keep a written record of the donation that includes information on the fair market value of the property at the time of the donation and the method used to determine that value.
Similar substantiation rules apply to contributions of art; however, the contribution of a work of art is subject to reduction if the charity's use of the artwork is not related to the exempt purpose of the organization. The reduction will be the amount of gain the taxpayer would have realized had the taxpayer sold the property instead of donating it to charity. In addition to the requirement that the taxpayer obtain a declaration from a qualified appraiser when claiming a deduction of $5,000 or more, a complete copy of the signed appraisal must be attached to the tax return if the taxpayer claims a deduction of $20,000 or more.
For Further Information
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
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