Your charitable contributions include a wide variety of tax-saving opportunities, some you may not be aware of, and some that are frequently overlooked. And there are some contributions that you may believe are deductible that really are not. Being knowledgeable of what is and is not a qualified charity, a qualified charitable contribution, and charitable giving strategies can go a long way toward maximizing your charitable tax deduction.
To be deductible the contributions must be made to qualified charitable organizations, which generally only include U.S. nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose or that work to prevent cruelty to children or animals. You can ask any organization whether it is a qualified organization, and most will be able to tell you. You can also check by going to IRS.gov/TEOS. This online tool will enable you to search for qualified organizations.
Also, to be able to deduct charitable contributions, one must itemize their deductions. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction, which for example is $12,950 for those filing single, $19,400 filing head of household, and $25,900 for married individuals filing jointly for 2022. The standard deduction is adjusted annually for inflation.
If the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions. Congress did revise the law to allow limited amounts of cash contributions made in 2020 and 2021 to be deducted without itemizing, but this was only a temporary provision and doesn’t apply in other years.
Bunching – If your charitable deductions are not enough to bring your itemized deductions greater than your standard deduction, the bunching strategy may work for you. When employing the bunching strategy, a taxpayer essentially doubles up on as many deductions as possible in one year, with the goal of itemizing deductions in one year and then taking the standard deduction in the following year. Because charitable contributions are entirely payable at your discretion, they fit right into the bunching strategy.
For example, if you normally tithe at your church, you could make your normal contributions throughout the current year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution in one year and having no charitable deduction for the church in the next year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to decide whether to make contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows the year when the contribution was made.
As a rule, most taxpayers just wait until tax time to add up their potential deductions and then use the higher standard deduction or their itemized deductions. If you want to be more proactive, here are some strategies that might work for you.
Qualified Charitable Distribution – If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. The tax rules don’t set a minimum amount that needs to be transferred but your IRA trustee may do so. The maximum of all such transfers is $100,000 per year, per taxpayer. Also, note that distributions to private foundations and donor-advised funds don’t qualify for the QCD.
Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers.
Caution: Any IRA contributions made after reaching age 70.5 can diminish the tax benefits of this strategy. If any post-age 70.5 IRA contributions have been made, consult with this office before employing this strategy.
If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD and be sure to give the IRA custodian ample time to complete the process if you are making the request toward the end of the year. Always get a written acknowledgment from the charity, for tax-reporting purposes.
Donor-Advised Funds – Contributing to a donor-advised fund is a way to make a large (and generally deductible) charitable contribution in one year and put funds aside to satisfy the donor’s social obligations to make charitable contributions in future years, without incurring the expenses of setting up a private foundation and satisfying annual filing and other private foundation requirements.
While generally considered a tax strategy for those with an unusually high income for the year, donor-advised funds are available to everyone, although most such funds set up through brokerages have minimum donation requirements, often $5,000–$25,000. Although they may bear the donor’s name, donor-advised funds are not separate entities but are mere bookkeeping entries. They are components of a qualified charitable organization. A contribution to a charity’s donor-advised fund may be deductible in the year when it is made if it isn’t considered earmarked for a particular distributee. The charity must fully own the funds and have ultimate control over their distribution. To document the contribution, the taxpayer must get a written acknowledgment from the fund’s sponsoring organization that it has exclusive legal control over the contributed assets. Although the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are arm’s length and do not directly or indirectly benefit the donor.
Example: Don and Shirley donate $25,000 to a donor-advised fund in one year. The $25,000 can be in the form of cash or even appreciated stock. Don and Shirley get a deduction for the full $25,000 as a charitable contribution on their return for the year of the contribution and can suggest the amounts of distributions from the donor-advised fund that should be made to various charities over a number of years. Thus, Don and Shirley achieve a large charitable contribution in one year that can be used to fund their charitable obligations over several years and can claim the $25,000 as an itemized deduction on their return for the year when they made the donation. They do not get a charitable contribution deduction when the funds are paid out from the fund to the various charities.
Volunteer Expenses – If you volunteered your time for a charity or governmental entity, you probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:
Misconceptions – There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:
Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.
However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).
No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:
Household Goods and Used Clothing – One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser.
Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items. The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”
Documenting Charitable Contributions – The IRS provides requirements for documenting both cash and non-cash contributions.
Cash Contributions – Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:
Cash Contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization that includes the following details:
If the acknowledgment does not show the date of the contribution, then the taxpayer must have one of the bank records described above that does show the contribution date. If the acknowledgment includes the contribution date and meets the other tests, it is not necessary to also have other records.
The acknowledgment must be in the taxpayer’s hands before the earlier date the return for the year the contribution was made is filed, or the due date, including extensions, for filing the return.
Noncash Contributions Deductions of Less Than $250 – A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:
Noncash Contributions Deductions of At Least $250 But Not More Than $500 – If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:
Noncash Contributions Deductions Over $500 But Not Over $5,000 – If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgement and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:
If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return.
Deductions Over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.
Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, privately traded stock, land, and buildings. For example, say you donated $5,300 of used furniture to 3 different charitable organizations during the year (a bedroom set valued at $800, a dining set worth $1,000, and living room furniture worth $3,500). Because the value of the donations of similar property (furniture) exceeds $5,000, you would need to obtain an appraisal of the furniture to satisfy the substantiation requirements—even if you donated the furniture to different organizations and at different times during the year. The IRS has strict rules as to who is considered a qualified appraiser.
Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed.
Please give our office a call if you have questions or would like to develop a charitable contribution strategy.