Nailing Down Charitable Deductions

We’re heading into the traditional charitable giving season. You should start your planning early this year to make sure you incorporate tax law changes for 2013, and a few changes from the last 10 years that many people still haven’t absorbed. Here’s a guide to securing 2013 write offs.

Higher income people should keep in mind two key tax code changes. First, the top tax rate was raised. A 39.6% rate now applies to married taxpayers filing jointly with taxable incomes of $450,000 or more and singles earning $400,000 or more.

On the negative side, the Pease limitation (named after a former congressman) on itemized deductions is reinstated. Most itemized deductions on Schedule A are reduced, including charitable contributions, by 3% of the amount by which adjusted gross income exceeds the income threshold. For married taxpayers filing jointly, the threshold is $300,000, and for singles it is $250,000. Itemized deductions can’t be reduced by more than 80% under the provision.

Example. Max and Rosie Profits have adjusted gross income of $340,000 and claim $50,000 in itemized deductions. Their AGI exceeds the threshold by $40,000. Their itemized deductions are reduced by 3% of that, or $1,200, for total deductions of $38,800.

Many people still overlook the rules for documenting contributions, though the rules were tightened several years ago. In many cases, you need to have the appropriate documentation in hand before you file the return for the deduction to be valid. It doesn’t matter if you later can prove the deduction or obtain the documentation. You need to show you had it when the deduction was taken.

– To deduct a cash gift of $250 or less, taxpayers must have in hand a “bank record.” Proper records are a canceled check, bank copy of a canceled check, or a bank or credit card statement. The record must have the name of the charity and the date and amount of the gift. Payroll deduction donations can be documented with a paycheck stub, W-2, or pledge card with the required information. 

– A single contribution of $250 or more, whether of cash or property, can be deducted only if you have a written acknowledgement from the charity before filing the tax return.

– Also, you can’t deduct the full amount if you received anything in return for your contribution, such as a gift or promotional item. You deduct only the difference between what you contributed and the value of what you received.  When you make a single payment to a charity in excess of $75 and receive goods or services in return, the charity must provide a written disclosure of how much of the payment is a deductible contribution and how much is for the goods or services.

– You can deduct unreimbursed expenses incurred on behalf of a charity, such as the cost of traveling to a location to perform donated services. But if a single contribution of this type is $250 or more, you must have a written acknowledgement from the charity with a description of the services you provided, whether or not the charity provided goods or services in return, and the value of such services. You also must keep adequate records of the expenses you deduct.

The rules for donations of property also were tightened to prevent people from taking large deductions for giving junk cars and other unusable items. To secure a deduction for a property donation, you need to comply with these rules. For most donations of property to public charities you deduct the current fair market value. You deduct a different amount if you donate to a nonprofit other than a public charity or if you donate ordinary income property, such as business inventory.

– Donations of used household property are deductible only if the property was in “good used condition or better” when donated. Most charities give receipts verifying the condition, though they won’t put a value on the property. Some tax advisors recommend keeping photographs or videos of the donated property to verify its condition.

If an item of household property is worth more than $500, it can be deducted regardless of its condition if a qualified appraisal is included with the return. Household items include furniture, furnishings, electronics, appliances, linens, and similar items. Not included are food, antiques, works of art and jewelry.

– When property worth $5,000 or more is donated, a qualified appraisal is required with the return. If you don’t have a qualified appraisal and attach it to your return, your deduction is zero regardless of the value you later can prove.

When property isn’t valuable enough for an appraisal to be required or justified, you have to estimate its value. For assistance there are various software programs and web sites, such as www.itsdeductible.com. You can use any reasonable method to estimate the value.

– When a deduction of more than $500 is claimed for contributing a car, boat, or plane, the allowed deduction is the smaller of (1) the gross proceeds of the vehicle’s sale by the organization or (2) the fair market value on the date of the contribution. A caveat: If the vehicle’s fair market value is more than your cost or other tax basis, the deduction might be reduced to your cost or basis.

There are two exceptions to these deduction limits. One exception is when the vehicle was used or improved by the charitable organization. The other exception is when the organization gives or sells the vehicle to a needy individual. In either case, the fair market value on the date of the contribution generally can be deducted.

– There are special rules for donations of appreciated tangible personal property, which are directed primarily at art and antiques. If the property is used for the charity’s exempt purpose, the donor may deduct the fair market value as of the date of the contribution. Otherwise, the donor deducts only the cost or other tax basis of the property.

Here is how to apply those rules. When a painting is donated to a museum, and the museum plans to display it, the property will be used in the charity’s exempt purpose and the fair market value can be deducted. If a painting is donated to a school, however, and the school auctions or sells it, the property is not used for the charity’s exempt purpose and only the cost or other basis is deductible.

– Some contributions are of fractional interests, or of less than full ownership. For example, a museum could be given a 33.33% interest in a painting. The museum displays the painting (or has the right to display it) four months of the year, and the original owner has possession of the painting the other eight months.

The rules for fractional gifts are complicated and have the effect of discouraging fractional gifts. Essentially to deduct even part of the value in the year of the partial contribution, the donor must transfer 100% ownership to the charity within 10 years.

After meeting all these requirements, your overall charitable contribution deduction is limited. For individuals, most contributions to public charities are capped at 50% of adjusted gross income. Gifts to private foundations, of long-term capital gains property, and in other situations have lower limits. For example, gifts of long-term capital gain property to public charities can’t exceed 30% of AGI and to nonpublic charities (such as private foundations) are limited to the lesser of 20% of AGI or 50% of AGI minus charitable contributions.

Excess contributions can be carried forward and deducted in future years.

If you have any questions about deducting a charitable contribution or need more details, check free IRS Publication 526, Charitable Contributions and Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements. They are free on the IRS web site at www.irs.gov.

RW September 2013.