Charitable Donations Revisited
Posted August 11, 2019
Some say that the best nation is a “donation!” While that might make you laugh (and hopefully this blog post does too), people donate to charities for a variety of reasons. Whether you are actively involved in the charity, or it has a special meaning in your heart, we are here to help you understand the tax implications of your charitable donation… ’cause the best deduction is a tax deduction.
Why Make Charitable Donations
Many people give to charities for a wide range of reasons- help those in need, makes people feel good, because of personal experience, gives people a sense of pride, and yes, for the tax deduction. Here are some examples of charities and their missions.
The United Way, founded in Denver in 1887, focuses on improving education, achieving financial stability and promoting healthy lives. In 2011, Goodwill Industries whose mission is to help people find employment, helped 189,000 people obtain a job and spent over 82% of its revenue (or $3.5 billion) directly on employment and job training programs. Susan G. Komen spends 93% of its revenues on education, research, screening and treatment (only 7% is spent on administration, which is super efficient).
Of course there are thousands of other charities, organizations and foundations performing broad services as well as providing very narrow and local community outreach activities. Regardless of the mission or objectives, not every organization qualifies as a charity.
While it might seem like a charitable bequest to feed your teenage son, and an impossible task to keep him full, your charitable donations generally have to be made to 501(c)(3) organizations. Contributions to social clubs, political groups, individuals, and for-profit entities are not tax deductible. Churches and other religious organizations are usually considered tax exempt, and are the charities that usually come to mind including Goodwill Industries, Salvation Army, etc. Don’t forget educational and certain theatrical organizations.
Since the IRS issues the 501(c)(3) designation, it also naturally contains a database of all recognized charitable organizations and non-profits. Click here to conduct a search to see if your charitable donation is going to be a tax deduction. Foreign charities also do not qualify. The only exception is Canadian, Mexican and Israeli charities, but you generally must have foreign income in order to qualify for the deduction of these contributions.
So that’s one half of the coin… the recipient. Let’s flip the coin and talk about what is being donated.
Earmarking a Charitable Donation
Yes you can apply preferences, but be very careful. To deduct a contribution made to a qualified organization, the donation must not be earmarked or directed by the donor. However, and this is a big however, if you notify the organization that you prefer the donation to go to a certain person, and you state that you understand it might not, then the contribution may be deducted.
For example, your son goes on a charitable trip with a local church. If you donate money and you earmark it specifically for your son’s expenses, etc., that contribution is not allowed. But if you say that you prefer the donation to go to your son but you understand that the charity has full authority to use the money as they wish, the contribution can be deducted. Most organizations understand this arrangement, and they further understand that future donations will probably cease if they don’t “make the right choice.”
There are other situations where this preference arrangement can be applied. Sounds like Guido threatening to break your legs.
Tax Deductible Charitable Donations
You must also consider what you are donating. Time is one of your most valuable possessions, but you are unable to take a tax deduction for your time donated. IRS publications also prohibit taking a deduction for giving blood and buying raffle or lottery tickets.
The most common charitable donations include clothing, household items, food, automobiles and cash. Other items that qualify include an interest in real property, business inventory and taxidermy property (we have seen stranger deductions). Each category of donations has different rules:
Clothing and Household Items. Clothing and household items must be in good condition or better to qualify as a charitable contribution. The 10-year-old beanie bag that your kids “needed” from your neighbor’s garage sale will probably not make the list, but the shag rug from your mother-in law is likely fair game.
A picture is worth a 1,000 words! Or more specifically, a picture is worth a $1,000! What do we mean? One of the safest ways to prove your charitable donation is to take a picture of the items. Receipts from Goodwill Industries and others are nice, but a picture can help seal the deal. As a side note, Goodwill is a wonderful organization… who takes your unwanted things and turns them into opportunities for people to work (and Yes, for people to pick some nice things at a reduced price).
Planes, Trains and Automobiles. Most items that fall into this category are auctioned off and you receive a document for the proceeds of the sale. If the proceeds from your donation exceed $500, then you will need to send in a Form 1098-C with your tax return. We can usually send the 1098-C to the IRS as an attachment when we E-file your return.
Speaking of automobiles, you should consider the proceeds from the auction. Your 2005 Honda might only sell for $300 at the auction, but you could sell this vehicle to a private party for $1,000 and then make a cash contribution to your desired organization. This way, your tax deduction increases by $700, and you do not have to research if the salvage or junk yard is a charity.
Food. You can donate food to a tax exempt organization, as long as it is used to help further the organization’s purpose or feed the less fortunate. The food must meet quality and labeling standards to be eligible as a contribution. The jury is still out on donating muffin bottoms…
Cash. Cash contributions include cash, check, electronic funds transfer, credit card payments, payroll deductions and text messages (Red Cross, United Way, etc.). Keep in mind that if you receive anything of value in exchange for your donation, the value of the donation will be reduced by the value received. For example, you contribute $500 to a school, but they provide tickets to a play valued at $100. Your deduction is limited to $400 but the since your charitable donation exceeds $75, the organization is required to furnish a disclosure statement.
Also, you can take your cash and buy a bunch of school supplies at Wal-Mart, and deduct the money spent provided the school qualifies. This is super cool since the school needs supplies and you just saved a teacher the hassles of taking your cash, driving a car and buying the supplies directly.
Time. As mentioned before, while you may contribute your time to a charity it is not tax deductible for two reasons. First, the IRS doesn’t want to argue about what your time is worth. Yeah, sure, you bill at $125 per hour to your clients but the IRS doesn’t want to hear it. Secondly, and this is fairly important, you don’t have tax basis in your time. Huh?! All the things including cash that are donated were charged an income tax along the way.
Example time! You earned $500. Paid taxes on $500. Took your remaining money and bought a TV… with after-tax dollars. Five years later you turn the TV into a charitable donation. You have tax-basis in the TV since the money you used to purchase it was taxed. Make sense? Good! Your time does not have tax basis.
How to Value Charitable Donations
For cash, this is easy. But for those property donations where a receipt or written statement did not reflect the amount or value, there are several ways to assign the fair market value.
First, the IRS Publication 561 Determining the Value of Donated Property provides some general information about household items and clothing, and provides more specific information on cars, boats, airplanes, jewelry, art, real estate, patents, etc. Second, and more practically, there are several online sources to help you piece together the value of your college freshman’s unneeded high school clothes.
Intuit / TurboTax created a site called ItsDeductible. Much to our chagrin to give a nod to a competitor, TurboTax did a wonderful job with the creation of this online tool. Good stuff.
Goodwill Industries has a Donation Valuation Guide which illustrates general pricing for the items they sell in their stores.
Salvation Army also lists several items and their associated Donation Value Guide. Remember, since 2007 the IRS, as directed by Congress, now requires that household items and clothing be in good used condition or better. What the heck does that mean? It’s subjective for sure.
eBay / craigslist can also be a good resource to show the fair market value of items that perhaps aren’t easily valued. For example, if you donate a washing machine you demonstrate or prove the fair market value by finding one or two listings of the same item on eBay or craigslist. While these sites aren’t listed as authoritative by the IRS per se, they do offer a sound basis for fair market values in our opinion.
As mentioned earlier, another suggestion is take pictures as proof or evidence of the quantity and condition of the items donated. If you are donating a bag of clothes, this is perhaps unnecessary. But if you are donating more expensive items such as appliances, books, furniture, etc., pictures might tell a thousand words. This can also prove invaluable for large estate donations as well.
Other Tax Deductible Charitable Donations
Students Living With You. You may be able deduct qualifying expenses for a foreign or American student who lives in your home under a qualified exchange agreement, is not your relative and is a full-time student in the twelfth or lower grade.
Out of Pocket Expenses. Some of your expenses associated with volunteer work and other contributions to charities may be deductible. Your expenses must be unreimbursed and directly connected with the services provided. They cannot be personal, living or family expenses. Some out of pocket expenses include donations made to underprivileged youth (such as tickets to a baseball game or a movie), required uniforms (think hospital volunteers), foster parent costs, expenses associated with being a church deacon,
Tax Deduction Limits and Documentation
You will need receipts for your donations, but in typical IRS fashion, there is an exception! Noncash donations of less than $250 do not need a receipt if it is impractical to acquire (now is your chance to get rid of that rug!). Donations above this amount will need a receipt, in addition to a written appraisal for items over $5,000.
Cash donations cannot be deducted unless you have one of the following:
- A financial record showing the name of the organization, date and amount
- A receipt or written statement from the organization
The days of saying you donate $20 each week in church are over since 2009. $20, $200, or $2… you need to satisfy either #1 or #2.
The limits for charitable contributions, along with the standard deduction, were increased with the Tax Cuts and Jobs Act. The limits for your charitable contributions for 2019 are:
- Cash contributions are typically limited to 60% of your adjusted gross income (AGI).
- Property contributions are typically limited to 30% of your AGI.
- Contributions of capital gain assets are generally limited to 20% of your AGI.
Whatever is “leftover” after the applied limit is carried forward to next year but it is not indefinite… there are some time limits on the carry forwards as well.
Increased Standard Deduction
In an effort to make taxes simpler, the standard deduction increased to $12,200 for single filers and $24,400 for married filing joint for the 2019 tax year. Unfortunately, charitable contributions are only deductible if you itemize your deductions on your tax return. Before you go digging through your receipts drawer, or risk having an argument about donating that awful rug, ask the Watson CPA Group how it will affect your taxes.
Another thing to keep in mind is your state tax deduction; while you might not be able to deduct a charitable donation on your federal tax return because you are unable to itemize your deductions, many states will still give you a tax deduction on your state tax return.
Joseph Bassett is a tax professional for the Watson CPA Group, a business consultation and tax preparation firm, and is part of the business development team.