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Tighter Rules for Charitable Contribution

Last update on: Nov 13 2017
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As readers ready their year-end tax plans, they need to keep in mind recent changes in charitable contribution deduction rules. Congress tightened the rules in the Pension Protection Act of 2006, and the rules affect deductions for most types of charitable contributions on this year’s tax returns.

  • Cash donations. Proper documentation now is needed to deduct cash gifts of any amount. The new rules require a “bank record” to support a deduction. 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.Those who learned to substantiate deductions under the old rules must change their ways. 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. Donors need a proper record or they cannot deduct the contributions.
  • When a gift is made to a donor-advised charity, no deduction is allowed unless the donor receives a statement from the charity stating the charity has complete control over the disposition of gifts to it.
  • Household property. In the past, donors of household goods were safe as long as they did not deduct more than $500 of used property donations. They could make a good faith estimate of the value and deduct that amount. Now donations of used household property are deductible only if the property was in “good used condition or better” when donated. It isn’t clear how to establish the condition of the property, so tax advisors are recommending taking photographs or videos of the donated property.In addition, there still is the traditional issue of how to determine the value of donated property that is not valuable enough to pay for an appraisal. For assistance there are various software programs and web sites, such as www.itsdeductible.com.

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

  • Vehicle donations. Deductions for contributions of cars, boats, and planes were tightened in 2005. If a deduction of more than $500 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 the donor’s cost or other basis, the deduction might be reduced below fair market 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.
  • Appreciated art. There are special rules for donations of appreciated tangible personal property. The key is whether the charity keeps the property and use it in a way that is related to the charity’s exempt purpose or the charity sells the property. If the property is used in 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 though the cash proceeds from the sale are used for the school’s exempt purpose.
  • Fractional gifts. A tax planning strategy used to be to give a charity partial interest in a property. 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 owner would deduct one third of the painting’s value in the year the gift was made.

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 recent changes are in addition to other longer-standing rules limiting charitable contributions. Taxpayers who plan to reduce their taxes through charitable deductions need to be up to date on the latest rules. Details are in IRS Publication 526, available free on the web site www.irs.gov.

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