Charitable Giving and Tax Deduction Requirements: Getting the Most from Giving
By Teri M. Kaye, CPA, P.A.
Donations to worthy organizations and causes can take many forms. For example, one might donate money, time, or property (e.g. car, stock, patents, art, etc.). Similarly, donations can be made through many different means. For example, one might utilize a trust, will, insurance policy as well as a number of other vehicles.
Likewise, donations can also offer more than one type of return. While giving is not typically motivated by a desire to receive, the act typically offers an emotional return. This type of return is different for every person but is virtually guaranteed when giving because of a strong connection.
Meanwhile, tax deductions are another valuable return, albeit less guaranteed. All too often, those who give are unaware of the documentation required to be eligible for this benefit of giving.
What records are needed for income tax savings depends on the type and value of the contribution made. Different substantiation requirements exist for gifts less than $250 and for those of more than $250. Property gifts of more than $500 and property gifts of more than $5,000 have different requirements as well. Furthermore, certain types of property have specific rules for determining the value of the donation.
A donation of less than $250 must be documented by a receipt or “thank you” letter from the charity that shows the name of the donee organization, date, and amount of the contribution. Cash donated without any receipt or thank you letter cannot be deducted.
No charitable deduction is allowed for a contribution of $250 or more unless the charitable organization provides the person making the donation with a written acknowledgment that includes the amount of cash given, a description of any property contributed, and whether anything was received in return for the contribution (other than the emotional fulfillment). This written acknowledgement should be in the possession of the donator before filing a tax return but no later than the due date (or extended due date if applicable).
The written acknowledgement must include the name of the person making the donation, the amount of money donated, and a description of any property donated; the charity does not have to value the property though. The acknowledgement must also state whether or not any good or services were received in consideration, in whole or in part, for any of the cash or other property given. If goods or services were provided in return for the donation, the acknowledgment must include a good faith estimate of their value (e.g. the value of a charity dinner dance or athletic event tickets) and a disclosure that only the net amount is deductible. If only intangible religious benefits (e.g. admission to a religious service) are received, the acknowledgment should indicate and no valuation of such benefits is required.
The requirements are stricter still for donations of property. If an item or a group of similar items (through a single or separate donations) are given and that property is worth more than $5,000, a qualified appraisal may be required depending on the type of property and whether the charity retained or sold it.
As property is subject to specific rules, that is beyond the scope of this article.
When considering a gift more than $250 of any type of property, whether outright or through a legal document, it is advisable to consult a tax professional to ensure a proper process is followed in order to receive all possible tax benefits. A simple conversation can make the difference between an emotional reward extending to the tax return and it turning to an emotional state of frustration at tax time.