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If You’re Claiming a Charitable Deduction, Make Sure You Follow the Rules

claiming a charitable deductionTax season is over for most individual taxpayers. But it is not too early to start planning your 2014 deductions.

One way to lower your tax liability is to deduct charitable contributions made during 2014. However, to defend your charitable deduction before the IRS, you must retain documentation that supports it.

The Basics

Before addressing some of the more detailed rules and regulations concerning substantiation, let’s start with some basics:

  • Only donations made to a qualified charity can be deducted. Generally, this means that the charity must qualify as a tax exempt organization under Section 501(c)(3) of the Internal Revenue Code. The IRS maintains a list of qualifying organizations on its website. Gifts to individuals or political donations are not deductible.
  • To claim a deduction, one must itemize deductions and file a tax return (Form 1040).
  • The deduction is reduced by the value received in exchange for the donation. For example, the value of a charity auction item or the value of dinner and drinks at a charity benefit event reduce the amount of your deduction.

The Substantiation Rules

Here’s where things get a bit more complex. The recordkeeping and form filing requirements for deductions vary depending on whether the charitable contribution is cash or property, and the amount or value of the contribution.

  • Contributions of less than $250:
    • Regardless of the amount, a cash deduction will not be allowed without a written record. For a cash contribution of less than $250, the record can be a cancelled check, a letter from the organization, or a bank or payroll statement.
    • A contribution of non-cash property with a value less than $250 has similar (somewhat informal) rules. A taxpayer should obtain a document or receipt from the organization stating the date and location of the contribution, as well as a description of the property contributed
  • Payroll Deductions
    • For charitable contributions made by payroll deduction, the donor may use a pledge card prepared by or at the direction of the charitable organization, along with one of the following documents:
      • a pay stub
      • Form W-2, Wage and Tax Statement, or
      • other employer-furnished document that shows the amount withheld and paid to a charitable organization
    • If a donor makes a single contribution of $250 or more by payroll deduction, the pledge card or other document from the organization must also include a statement to the effect that the organization does not provide goods or services in whole or in partial consideration for any contributions made to the organization by payroll deduction
    • Each payroll deduction amount of $250 or more is treated as a separate contribution for purposes of the $250 threshold requirement for written acknowledgments
  • Contributions of $250 or more:
    • Contributions of cash or other property of $250 or more require more thorough substantiation. Specifically, to take a deduction for a contribution of $250 or more, a taxpayer must substantiate the contribution with a contemporaneous written acknowledgement from the charity. An acknowledgement is “contemporaneous” only if it is obtained by the taxpayer on or before the earlier of (i) the date the taxpayer files his or her return for the tax year in which the contribution was made, or (ii) the due date, including extensions, for filing the return. The acknowledgment must list the amount of cash donated, a description of any non-cash property donated, and whether the donee provided any goods or services in return for the donation (and a description and estimate of the value of those goods or services). A separate acknowledgment may be provided for each single contribution of $250 or more. Alternatively, a single acknowledgment such as an annual summary may be used to substantiate multiple contributions of $250 or more
  • Contributions of non-cash property of $500, but not more than $5,000:
    • If a deduction is claimed for a donation of property valued over $500, but not more than $5,000, a taxpayer must maintain substantiation records as described above, and must also file IRS Form 8283. That form requires disclosure of how and when the property was acquired and its basis or cost
  • Contributions of non-cash property of $5,000 or more:
    • In addition to all of the requirements stated above, a deduction claimed for a non-cash property contribution of $5,000 or more must be supported by a qualified appraisal of the property contributed. Fully completed appraisal summaries signed by the appraiser and donee must be attached to the taxpayer’s return.

While we’ve covered many of the applicable rules relating to the deduction of charitable donations, there are others that apply in specific circumstances. For example, the donation of vehicles, artwork, and other gifts all have additional rules. It’s important that the substantiation rules be followed closely, as failure to do so can lead to disallowance of the deduction. If you have any questions about the rules concerning charitable deductions, please contact a Foster Swift tax attorney.

Categories: Tax

Photo of John W. Mashni

John brings a unique perspective to Foster Swift with his practical experience as an entrepreneur, business owner, and manager.  He focuses in the areas of business, tax, intellectual property and entertainment.

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