Can You Back Up Your Charitable Contribution Deduction?

Do you have adequate substantiation for a charitable contribution deduction?

Donations to qualified charities are tax-deductible expenses that can reduce your taxable income and lower your tax bill. However, you must itemize your tax deductions to claim them, and this is typically only in your best interest if the total of all your itemized deductions exceeds the amount of the standard deduction you would receive for your filing status.

As part of the 2017 Tax Cuts and Jobs Act (TCJA), cash contributions deduction limit to public charities, IRC Section 501(c)(3) organizations, have increased from 50% to 60%of adjusted gross income for the tax years beginning after December 31, 2017 and before January 1, 2026. However, you must adhere to the more challenging substantiation rules to qualify for the deduction.

To claim a charitable contribution deduction, you must actually donate the cash or property - a pledge to donate is not deductible until you actually pay – and you must contribute to a qualified tax-exempt organization. You must also meet several record-keeping requirements

CASH CONTRIBUTIONS

A cash contribution of less than $250 includes charitable contribution paid by cash, check, electronic fund transfer, debit card, credit card, or payroll deduction.

A donor must obtain the appropriate documentation to substantiate the charitable gifts on or before the earlier of the date the donor files the original tax return, or the due date for filing the original tax return for the year in which the contribution was made, including any extensions. This deadline applies to substantiation in all forms, including receipts, records, and Contemporaneous Written Acknowledgements (CWA).

The donor is responsible for requesting and obtaining the written acknowledgement from the donee. A donor cannot claim a deduction for any contribution of cash, a check, or other monetary gift, made on or after January 1, 2007, unless the donor maintains a written record of the contribution. For a cash contribution of $250 or more, the donor must have CWA of the contribution from the donee organization.

To satisfy the CWA requirements, the charity's receipt must contain a description of the property. The writing must state whether any goods or services were provided in consideration of the property. If goods or services were provided, the document must provide a good faith estimated value of the goods or services.

NON-CASH CONTRIBUTIONS

You must be able to substantiate the fair market value of goods or property you donate, and obtain a written acknowledgment from the charity for this donation, if it is under $500.

You would, generally, measure the charitable deduction for gifts or property by the fair market value of the property on the date of the contribution. Limitations apply, however, to the contribution of appreciated property, and the amount of the deduction may be subject to reduction. Whether there is a reduction, and how much of a reduction there is, depends on the type of property donated.

For a contribution not made in cash, the records you must keep depend on the value of property donated to any charitable organization during the year. For amounts of less than $250, you must obtain a receipt, letter, or other written acknowledgment from the charity, showing the name, location, and address of the charity, and a description in sufficient detail of the property contributed – including its condition.

A donor claiming a noncash contribution of at least $250, but not more than $500, need only obtain a CWA. Added substantiation is required for property donation values exceeding $500, but not over $5,000. The donor must substantiate the contribution, with a CWA of the gift from the charitable organization, and meet the requirement of Section A of IRS Form 8283.

For noncash contributions over $5,000, in addition to all of the above, the donor must obtain a qualified written appraisal of the donated property, except publicly traded stocks, from a qualified appraiser and meet the requirement of Section B of IRS Form 8283.

Charitable deductions may not be claimed for the value of personal services rendered. However, volunteers performing gratuitous services for a charitable organization can claim various out-of-pocket expenses as charitable contributions.

STRATEGIES

In order to take the benefit of the deduction, taxpayers need to be strategic about their charitable contribution.  

TCJA tax reform nearly doubled the standard deduction for tax years beginning January 1, 2018. As a result, many taxpayers who have itemized in the past may no longer find itemizing to be advantageous. Since the charitable contribution deduction is only available as an itemized deduction, many more taxpayers will get no tax benefit for making a charitable contribution.

'Bunching’

One of the strategies is bunching the charitable contribution, which is paying two years' worth of one or more itemized deduction items in one year and skip paying it the next year. Because the bunching strategy is designed to increase all itemized deductions so that they exceed the standard deduction, that strategy should be considered on all itemized deductions, not just charitable deductions.

Donor-advised funds

Donor-advised funds is another way to bunch the donations. A donor-advised fund is an investment account held for charitable purposes. Donors take tax deductions when they put money in, then recommend grants to charities over time.

Donate through corporation

Making charitable contributions through your corporation is another way to get more tax benefit, other than making the contribution personally. However, the deduction for corporate charitable contributions is limited to 10% of modified taxable income. Like individuals, any excess contributions over the limit may be carried forward for up to five years.

Individuals over 70 1/2 

For Individuals who have reached 70 1/2, they get an annual exclusion from gross income of up to $100,000 for the distribution made directly by the IRA trustee to a charitable organization. Such distributions from an IRA are not subject to any adjusted gross income limitations, since they will neither be included in gross income nor claimed as a deduction on the taxpayer's return.

There are contributions that are still not tax deductible (i,e, political campaigns, labor unions, individuals, etc.), but there are enough to shave off some tax liabilities for taxpayers who want to itemize.

Penalties may be imposed on taxpayers who falsely claim a charitable contribution deduction, or who overstate the value of charitable contributions. In addition, charitable donees are subject to a penalty if they fail to comply with the disclosure requirements. It is important that you consult with a tax advisor before making any contribution to assess the tax benefit and the substantiation requirements.

For questions, please reach out to tax partner, Anand Madhusudanan at amadhusudanan@citrincooperman.com or 973-218-0500, or reach out to a member of our Tax Services team.