Proving Charitable Contributions

Many taxpayers still don’t realize the charitable contribution deduction rules changed a few years ago. Now, you can’t take a deduction unless you have certain paperwork in hand when your tax return is filed. If you don’t have the paperwork, you can’t take the deduction.

Consider this recent case. A very successful real estate developer and certified real estate appraiser donated more than $18 million of real estate to a charitable trust. He prepared his tax returns and didn’t review the rules for proving noncash charitable contributions of over $5,000, which require a “qualified appraisal” to be filed with the return. An independent person, not the taxpayer or someone close to him, must do the appraisal. After being notified by the IRS, he submitted an independent qualified appraisal eight months after filing the return.

The IRS denied the deduction. He filed a case with the Tax Court. The court believed he contributed real estate worth more than $18 million. But since the qualified appraisal wasn’t included with his return, he couldn’t deduct the contribution. (Mohamed v. Commissioner, T.C. Memo. 2012-152)

Congress tightened the rules for most types of charitable contributions in the Pension Protection Act of 2006.

– It used to be permissible to keep a log of deductions. Or if someone regularly dropped cash into the church collection plate, for example, an estimate based on an established pattern was permissible. Those methods no longer are enough.

To deduct cash gifts of any amount, taxpayers must have in hand a “bank record” to deduct cash gifts. Proper records are a canceled check, bank copy of a canceled check, or a bank statement. The record must have the name of the charity and the date and amount of the gift. An alternative is a written communication from the charity with the information. Most charities now send a written communication at least annually verifying contributions.

– 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. When you make a single payment to a charity in excess of $75 and receive goods or services from a charity, the charity must provide a written disclosure listing how much of the payment is a deductible contribution and how much is for the goods or services.

– When a gift is made to a donor-advised charity, no deduction is allowed unless the donor receives a statement that the charity has complete control over the disposition of the gifts.

– 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, 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 incurred.

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

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, paintings, antiques, and other works of art and jewelry.

– When property is donated worth $5,000 or more, a qualified appraisal is required with the return, as in the case above.

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 or more than $500 for a contribution of a car, boat, or plane is claimed, 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. In addition, if the vehicle’s fair market value is more than your cost or other tax basis, the deduction might be reduced to the lower value.

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, 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.

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. 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.

– 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 were changed in 2006. They are complicated and have the effect of discouraging fractional gifts. Essentially to deduct any part of the contribution, the donor must transfer 100% ownership of the property to the charity within 10 years.

These changes are in addition to other longer-standing rules limiting charitable contributions. For individuals, most contributions to public charities are limited to 50% of adjusted gross income. Gifts to private foundations, of long-term capital gains property, in and other situations might have lower limits. Excess contributions can be deducted in futures years.

Taxpayers who plan to reduce their taxes through charitable deductions need to be up to date on the latest rules. If you have any questions about deducting a charitable contribution, check free IRS Publication 526, Charitable Contributions and Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements. They are available free on the IRS web site at www.irs.gov.

RW November 2012.