Top Tips for Charitable Contributions on Tax Return

Charitable deductions can be a very useful tax saving tool for people in many different circumstances. If you are looking for a tax deduction, give to charity can be a “win and win.” It is good for them and for you. Here are eight things you need to know about deducting your charitable gifts:

 

Top Tips for Charitable Contributions on Tax Return

  1. Make a donation to a qualified charitable organization, if you want to deduct the gift. You can not deduct contributions made to either an individual, a political organization or a political candidate. No matter how charitable the purpose is, this kind of “donation” will not be viewed as charitable giving in the view of the IRS>
  2. You must file Form 1040 and itemize your deductions. Present on Schedule A , Itemized Deductions, to your federal tax return. This is a littler harder, but tax software programs can help you do it.
  3. If you receive a benefit of any kind in exchange for their contribution, the deduction is limited.You can only deduct the amount that exceeds the fair market value of the benefit received.Examples of benefits include merchandise, food, tickets to an event or other goods and services.
  4.  If you give tangible items instead of cash, the deduction is generally the fair market value of that item. The fair market value is generally the price if you sell the property on the open market.
  5. The used clothing and household items must generally be in good condition to be deductible.Special rules apply to vehicle donations.
  6. You must file Form 8283 , Noncash Charitable Contributions in English, if your deduction for all noncash gifts is more than $ 500 per year.
  7. You should keep a record of your donations made during the year how to test. The record type to keep depends on the amount and type of your donation. For example, you must have a written record of all cash donations regardless of amount in order to take the deduction. It can be a canceled check, a letter from the charity, a bank record or a record of payroll deduction. You must include the name of the charity, the date and amount of the contribution. Proof of wireless phone meets this requirement for donations through a text message if it shows the same information.
  8. To claim a charitable deduction of money or property valued at $ 250 or more, you must have a written statement from the organization. The statement must indicate the amount of cash or a description of any property donated. You should also indicate whether the organization provided goods or services in exchange for the gift.

 

Top Tips for Charitable Contributions on Tax Return

For more information, see Publication 526 Charitable Contributions and 561, Determining the Value of Donated Property (in English). Forms and publications are available at IRS.gov or by calling 800-829-3676.

 

Required Beginning Date of Minimum Required Distribution Rules for Retirement Accounts

What are minimum distribution rules for retirement accounts (IRA or 401k)?

In general, you must begin withdrawing money by April 1 of the year following the year that you turn 70½. In general, your age and account value determine the amount you must withdraw. Note that taxes may be due on distributions from a traditional IRA or 401(k). Do not include balances from a Roth IRA or 401(k). Taxpayers entering retirement with their savings in special retirement accounts should take care to learn some of the required minimum distribution rules for their accounts. The minimum distribution rules force individuals to begin taking distributions from tax-favored retirement plans (including traditional IRAs) by a specified time to prevent indefinite tax deferral.You generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 70½.

 

Required Beginning Date of Minimum Required Distribution Rules for Retirement Accounts

Taxpayers who do not comply with the minimum distribution rules are subject to a 50% penalty.ave to start taking withdrawals from your IRA or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

 

Beginning Minimum Distributions from IRA in Retirement

You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year. Under the minimum distribution rules, benefits must be distributed or commence being distributed by the required beginning date.

 

When do RMD’s begin?

The required beginning date is normally following the later of the calendar year the employee

  •  reaches age 701/2 o
  • retires (from the employer sponsoring the plan

 

When to take an RMD from an IRA

Distributions from IRAs (including those established in conjunction with a SEP or SIMPLE IRA plan) and distributions from qualified plans to more-than-5% owners must begin no later than April 1 of the year following the calendar year such individual turns age 701/2 (even if not retired). Remember,  minimum distributions must generally continue each year until the funds in the retirement account are exhausted.

 

What Retirement Plans Have Minimum Required Distributions?

After the initial year, minimum required distributions (MRDs) must be made by December 31 of each year. The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs.

 

Summary of IRA accounts:

  • Traditional IRAs
  • Rollover IRAs
  • SIMPLE IRAs
  • SEP IRAs
  • Most Keogh accounts
  • Most 401(k) and 403(b) plans

Inherited IRAs have special rules for MRDs and the required distributions are time-sensitive, usually beginning in the year after the year of death of the original owner.

 

For more IRS information on IRAs, including required withdrawals (RMDs)

 

50 Percent Charitable Contribution Limit on Deductions

What are the IRS Charitable Contribution Limits?

The amount of charitable contribution that can be deducted is limited by certain tax laws. The charitable contribution deduction allowed for any one year is based on the taxpayer’s adjusted gross income (AGI)  Also, the amount of charitable contributions an individual can deduct in any one tax year is limited depending on the types of organizations to which the contributions were made, the kinds of property contributed, and the amount or value of the donated property.

Charitable contributions are deductible as itemized deductions

Charitable contributions are deductible as itemized deductions. Thus, a taxpayer’s total itemized deductions must be greater than the standard deduction to generate tax savings from a gift to charity. The amount of charitable contributions an individual can deduct in any one tax year is limited depending on the types of organizations to which the contributions were made, the kinds of property contributed, and the amount or value of the donated property.

Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases.

 

What is the 50% limit imposed on certain types of charitable contributions?

The first 50% charitable contribution limitation provides that all deductible contributions cannot exceed 50% of AGI. Excess contributions are carried over to the next five tax years. All current-year contributions are deducted first.

The second 50% limitation refers to gifts to certain types of charitable organizations that are considered first in computing the overall 50% limit. The most common 50% charities include churches, schools, hospitals, governmental entities, private operating foundations, and other nonprofit agencies organized for charitable, religious, educational, scientific, or literary purposes.

 

What are Qualified Charities for IRS purposes?

You may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code:

  1. A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
  2. A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
  3. A church, synagogue, or other religious organization;
  4. A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
  5. A nonprofit volunteer fire company;
  6. A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
  7. A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
  8. A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

 

Most, but not all, charitable organizations qualify for a charitable contribution deduction.

You can deduct contributions only if they are made to or for the use of a qualified recipient. No charitable contribution deduction is allowed for gifts to certain other kinds of organizations, even if those organizations are exempt from income tax. Contributions to foreign governments, foreign charities, and certain private foundations similarly are not deductible. Below, you can view a list of organizations for which your donations can be deducted. All organizations rated by Charity Navigator qualify for charitable status, and you can deduct your donations, subject to certain limitations.

 

50 Percent Charitable Contribution Limit on Deductions

Tax laws and regulations could limit the deductibility of charitable gifts based on several factors, including the donor’s income, the type of gift made, and the type of organization to which the gift is made. Remember, you may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code. It is important to make sure you are making a donation to a charity that is qualified by the IRS or else you may not be able to make a deduction for your charitable contribution. If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property.  If the property has appreciated in value, however, some adjustments may have to be made.

 

Charitable Donation to Foreign Charity

The organizations listed in this publication with foreign addresses are generally not foreign organizations but are domestically formed organizations carrying on activities in foreign countries.  These organizations are treated the same as any other domestic organization with regard to deductibility limitations.

Certain organizations with Canadian addresses listed may be foreign organizations to which contributions are deductible only because of tax treaty.  For these organizations, in addition to the limitations on the amount of the deduction allowed by section 170 of the Code, the deduction may not exceed the amount allowed as a deduction under Canadian law computed as though the taxable income (in the case of a corporation) or adjusted gross income (in the case of an individual) from sources in Canada is the aggregate income.  A deduction for a contribution to a Canadian organization listed in this publication is unallowable if the contributor reports no taxable income from Canadian sources on the United States income tax return.

Except as indicated above, contributions to a foreign organization are not deductible.

Taxation of Employee Death Benefits

How are death benefits provided by an employer taxed upon an employees death?

It is getting to be common that an employer makes payments (death benefits) to a deceased employee’s surviving spouse, children, or other beneficiaries if an employee dies when they are employed by the company. These payments will help the family adjust to the loss of income caused by the employees death, but families must be aware of the tax consequences related to such payments. Once you receive your death benefit, you’ll need to be familiar with your state’s tax laws. In most cases, life insurance benefits are exempt from state and federal taxation but other benefits may be taxable.  This exemption applies to the death benefits on virtually all forms of traditional life insurance and most forms of life assurance.

 

What is a Taxable Death Benefit?

Generally, if the decedent had a non- forfeitable right to the payments received from the employer (e.g., the decedent’s accrued salary), the amounts are generally taxable to the recipient just the same as if the employee had lived and collected the payments. These amounts would not have any special tax treatment because they are just like receiving regular wages from working and will be reported on the deceased W-2 form when mailed in January.

 

IRS Death Benefit Tax Law

However, when the employer makes voluntary payments when an employee dies, the gift issue arises. Generally, the IRS considers such payments to be compensation for prior services rendered by the deceased employee. However, there are some interpretations of the death benefit tax law that indicate that payments to an employee’s surviving spouse or other beneficiaries are gifts if the following are true:

 

Taxation of Employee Death Benefits

  • The payments were made to the surviving spouse and children rather than to the employee or the employee’s estate.
  • The employer derived no benefit from the payments.
  • The surviving spouse and children performed no services for the employer.
  • The decedent had been fully compensated before death
  • Payments were made pursuant to a board of directors’ resolution that followed a general company policy of providing payments for families of deceased employees.

When all of the above conditions are satisfied, the payment is presumed to have been made as an act of affection or charity. These payments would not be treated as regular wage income and are a non-table death benefit. When one or more of these conditions is not satisfied, the surviving spouse and children may still be deemed the recipients of a gift if the payment is made in light of the survivors’ financial needs.

Tax Deductions for Performing Charity Work

Taxpayers who volunteer for a charity are entitled to some very beneficial tax deductions. The first major rule to remember is that a taxpayer cannot take a tax deduction for the value of services performed for a charitable organization. A deduction is not allowed for the value of services contributed to the charitable organization. However, if you are active in such organizations, you should be aware that out-of-pocket expenses incurred while performing volunteer services are deductible as a charitable contribution. If you use your auto, you may also be able to deduct the standard mileage allowance of 14 cents per mile.

 

Tax Deductions for Performing Charity Work

For example, a lawyer cannot deduct what he would normally bill when he is conducting work for  charitable organization. Allowing this type of deduction for valuing the services that taxpayers perform would be a mess for the IRS and most charities.

However, there are some very important tax deductions that are permitted for out-of-pocket costs incurred while performing charitable services. As always, these deduction amounts are subject to the deduction limit that generally applies to charitable contributions which is different depending on the charity and taxpayer.

 

Out-of-Pocket Costs Deductible for Charity Work

  • Away-from-home travel expenses while performing services for a charity. This could include out-of-pocket round-trip travel cost, taxi fares and other costs of transportation. Remember, that these expenses aren’t deductible if there’s a significant element of personal pleasure associated with the travel for charity work. A taxpayer cannot disguise a personal vacation as doing charity work.
  • Entertaining guests on behalf of a charity is deductible.
  • Actual unreimbursed expenses directly attributable to using your car for charitable services, such as gas and oil costs. Alternatively, it may be easier to deduct a flat 14¢ per mile for charitable use of your car. Parking and Tolls are always deductible
  • Special Uniforms that are worn for charitable work can be deducted.

 

Deducting Travel Expenses for Charity Work

Most common expenses related to travel are allowed. Here is what the IRS defines as deductible travel expenses:

  • Air, rail, and bus transportation,
  • Out-of-pocket expenses for your car,
  • Taxi fares or other costs of transportation between the airport or station and your hotel,
  • Lodging costs, and
  • The cost of meals.

 

Deducting Car Travel for Charity

When it comes to using your own car for travel you can do one of two things. You may deduct the actual cost of gas used to get to and from the volunteer site, or you can deduct the IRS standard rate of 14 cents per mile. Unlike using your personal car for business, you cannot deduct expenses such as insurance, maintenance, or depreciation.

 

Substantiate Charitable Expenses for Deduction

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution by a written acknowledgment from the charitable organization. The statement from the charity must include the amount of cash, a description of any property contributed, and whether you got anything in return for your contribution. It is absolutely necessary to get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. Receipts should always be saved and taxpayers must be prepared to back up why they incurred the expenses on behalf of the charity.

Non-Qualifying Charities for Charitable Tax Deduction

It is very important to check to see if a charity is a qualifying charity. If an organization is a non-qualifying charity, the donation will not be eligible for the charitable tax deduction.

 

The following list is a sample of charities that do not qualify for tax deductible donations:

  • Dues paid to country clubs, lodges, orders, and  other clubs even if there is a minor charitable purpose behind them.
  • Foreign charities are generally not eligible for tax deductible donation. However, a taxpayer can deduct contributions to a U.S. charity that transfers funds to a foreign charity. This will only be true if the U.S. charity controls the use of the funds. Furthermore, contributions to charities in Canada, Israel, and Mexico are deductible if the charity meets the same tests that qualify U.S. organizations to receive deductible contributions.
  • Lobbying Groups
  • Homeowners’ associations
  • Individuals are not allowed to receive charitable donations even if they are doing charitable activities with the funds. The donation must be made to a qualifying organization that then donates the money to the individuals.
  • Labor unions and union dues.
  • Members of the clergy who can spend the money as they want
  • Political groups or candidates running for public office
  •  Social and sport clubs
  • Tuition to attend private or parochial schools, including supplemental schools at your place of worship or cultural center.

 

Non-Qualifying Charitable Organizations for tax deductions

These types of organizations are non-qualifying and donations to these types of organizations would be non-deductible for tax purposes even if there was some charitable effect. It is better to donate money to qualifying charitable organizations if a taxpayer wishes to have a tax deduction.

On an IRS audit, they will investigate what type of charity the funds were going to and if they are not qualifying the deduction will be disallowed. Thus, giving to a non-qualifying charity can ultimately cause an increase in taxes and exposure to IRS fees and fines.

Types of Qualifying Charities Eligible to Receive Donations

What are types of qualifying charities eligible to receive donations that can be deducted for taxes?

Taxpayers are allowed to deduct contributions made to charities only if they are made to a qualified organization. To become a qualified organization for charitable tax deduction purposes, organizations (other than churches) must apply to the IRS and receive a special charitable status.

The easiest way to find out whether an organization qualifies for tax exempt donations is asking the organization for its tax- exemption certificate.

 

Making a charitable contribution to the following types of organizations are generally tax deductible:

  •  Nonprofit schools
  • Charitable Organizations such as Goodwill, the Red Cross, United Way, Boys and Girls Clubs, and Habitat for humanity
  • Religious organizations, including churches, synagogues, mosques, and other places of worship. It is essential to keep accurate records of what is donated and if there are any membership fees associated with being a part of these  religious organizations for purposes of the charitable contribution tax deduction.
  • Public park and recreational facilities
  • War veterans’ groups and police organizations
  • Federal, state, and local government — if your charitable contribution is only for public purposes. Donating to a political campaign would not be eligible for the a charitable donation deduction.

 

Types of Qualifying Charities Eligible to Receive Donations

For charitable donations of $250 or more, you must have a receipt from the charity that shows the date and amount of the gift, and a statement of the value of any goods or services you received in exchange for your donation. For contributions under $250, a cancelled check would be enough to substantiate any charitable deductions on IRS audit. The key thing is being able to back up what types of contributions that you made to a qualifying charity if asked by the IRS.

Because this is the case, it might be a better idea to donate a check that can be proven instead of cash with not receipt to maximize the possibilities that a charitable deduction to a qualifying charity is in fact a tax deduction.

What is a Charitable Remainder Trust and its Tax Benefits?

A charitable remainder trust (CRT) may enable you to reduce your liability for income and estate taxes and diversify your assets in a tax-advantaged manner.

A charitable remainder trust is a certain type of irrevocable trust that makes annual or more frequent payments to you, typically until you die and you remain in full.  However, you can set up this trust, so that when you die, the remaining amount of money in the trust will go to charity. A number of advantages may flow from the charitable remainder trust to the taxpayer that can be enjoyed during your life and at death.

 

What is a Charitable Remainder Trust and its Tax Benefits?

The first big benefit is that you will obtain a current income tax charitable contribution deduction for the value of the charity’s interest in the trust. The charitable deduction is permitted when the trust is created even though the charity has not yet received anything.

 

Using a Charitable Remainder Trust

In addition, the charitable remainder trust can enhance your investment return because the charitable remainder trust pays no income taxes and because the charitable remainder trust can generally sell an appreciated asset without recognizing any gain. This enables the trustee to reinvest the full amount of the proceeds from any gain and thus generate larger payments to you for your life while also preserving the amount that the trust will donate to charity.

 

Estate Tax Charitable Deduction

The charitable trust will also be eligible for the estate tax charitable deduction if it passes to one or more qualified charities at your death. If you wish to replace the value of the contributed property for heirs who might otherwise have received it, you could use some of your cash savings from the charitable income tax deduction to purchase a life insurance policy on your life for the benefit of your heirs.

It is possible to pass on assets of greater value than those contributed to the charitable remainder trust. In this way, your heirs are not deprived of property they had expected to inherit. A charitable remainder trust is a very complex arrangement, but it is also an invaluable planning tool in the right circumstances.

 

Does the wash sale rule apply to options, ETFs and mutual funds?

Yes. Keep in mind that if the security has a CUSIP number, then it’s subject to wash-sale rule reporting. Switching from one ETF to the identical index in another fund or ETF could trigger the wash-sale rule. There are ways around this problem. For example, investors holding the Schwab S&P 500 Index Fund at a loss might consider switching into the more diversified Schwab Total Stock Market Index Fund. The same idea could apply to similar, but not substantially identical ETFs.

Charitable donations of appreciated stock

Why Donate Appreciated Stock to a Charity?

There are many tax benefits that can be enjoyed by donating appreciated stock to a charity instead of selling the stock and then giving cash to the charity. If you are planning to make a relatively substantial contribution to a charity, it is essential to consider donating appreciated stock from your investment portfolio instead of cash. Gifting appreciated stock to a charity can have many tax benefits for you when you take the charitable contribution tax deduction.

 

Charitable donations of appreciated stock

As a starting point, remember that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property.

 

Charitable Deduction and Gift of Appreciated Stock

When you gift appreciated stock, you get a charitable deduction, plus avoiding tax on the appreciation in value of the donated property. In the end, taking advantage of these rules to gift appreciated stock to a charity can end up benefiting everyone involved.

There are some special restrictions to getting charitable donations of appreciated stock. This method will not work if the stock has not been held for more than a year. It would be treated as “ordinary income property” for these purposes and the charitable deduction would be limited to the stock’s original cost.

 

Ordinary Income Property

If the property is other ordinary income property, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).

 

Other issues with charitable donations of appreciated stock

If there are several large charitable contributions occurring in the tax year, it is important to remember that there could be some AMT tax concerns. It is also important to remember the general restrictions imposed on charitable giving by the IRS. Double checking these restrictions will ensure that your gift of appreciated stock creates the biggest tax benefit. Securities held long-term: In general, if an individual donates securities held long-term to a “public” charity, such as a church, educational institution, health care organization, or other cause, the amount he or she can claim as a charitable gift for federal income tax purposes is the securities’ fair market value on the date of the gift.

Donating Art to Charity for Tax Deduction on Charitable Contribution

Can you take a tax deduction for donating a piece of art that you won to a charity?

Generally, a charitable contribution of a work of art is subject to reduction if the charity’s use of the work of art is unrelated to the purpose or function that is the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you would have realized had you sold the property instead of giving it to charity.

Most of the time, if you are not donating the piece of art to an art museum or similar place, you will have to reduce the amount of charitable deduction that you may take on the piece of art.

 

Donating Art to Charity for Tax Deduction on Charitable Contribution

The IRS is very strict about reporting rules in this area of charitable contributions because there is currently many instances of fraud occurring when people donate art to charity. For example, when you donate a piece of art, if you claim a deduction of $250 or more, you must get and keep an acknowledgement of the contribution from the donee organization. This illustrates that it is always a good idea to keep excellent records when making a large donation or claiming any deductions with the IRS.

 

Donating Art to Charity Valued More Than $500

Next, if you claim a deduction in excess of $500, you generally must maintain written records that include information about the donee:

  • a description of the donated property;
  • the fair market value at the time of contribution, the method of determining it and a copy of the signed appraisal, if any
  • a description of how and when you acquired the propert
  • and the cost or other basis of the property.

If the art is valued at over $500, the taxpayer must complete section A of Form 8283 and attach it to your tax return. This requires more work and increases the chance for an audit on the charitable contribution of art work.

 

Donating Art to Charity Valued More than $5,000

As the value of the art increases, so do the compliance hurdles associated with taking a charitable tax deduction on the value of the donated art. Where the claimed value of the property exceeds $5,000, you must have a qualified appraisal of the property. This means an appraisal done by a qualified appraisal not earlier than 60 days before the contribution date and that meets numerous other requirements. You include information about these donations on section B of Form 8283, which you file with your tax return.

 

Donating Art to Charity Valued More than $20,000

When the art is valued at $20,000 or more, you must attach a complete copy of the signed appraisal. If an item of art is valued at $20,000 or more, IRS may request that you provide a photograph. If an item of art has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.

Remember, that in addition to the special IRS rules related to donated art, the normal charitable deduction rules and limits still apply in these circumstances.  A charitable deduction may be limited to 20%, 30% or 50% of your contribution base or an even lesser amount. This base, which usually is your adjusted gross income, varies depending on the type of organization involved and whether or not the deduction of the work of art had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.

 

IRS Art Appraisal Services for Charitable Donations

All taxpayer cases selected for examination that include an item of art with a claimed value of $50,000 or more must be referred to Art Appraisal Services for possible review by the Commissioner’s Art Advisory Panel (See IRM 4.48.2 and IRM 8.18.1.3). Please review thephotographic requirements for referrals, and also our preferred individual appraisal item format(PDF) for works of art valued at over $50,000.

For general inquiries, contact Director, Art Appraisal Services at 202-317-8975.

Internal Revenue Service/Art Appraisal Services
1111 Constitution Ave., Suite 700
C:AP:SO:ART
Washington, DC 20004
ATT: AAS