This article is the second in a series focusing on year end giving and is written by Greg Whitehead, a CPA at Melvin, Bibb, Pinson & Segars, P.C..
As this holiday season comes to a close, many of us wonder what we can do to make 2013 better than 2012. We set goals for 2013, hear lofty expectations that will make us better people. What our resolutions often overlook are ways we can make our community and the people in it better. How many of us focus on the world outside of ourselves versus satisfying our wants and wishes? We should all strive this year to actually, physically volunteer with a project or group that would make other lives happier and more meaningful.
The Nonprofit Reality
In the Tennessee Valley, we are fortunate so many nonprofit groups helping with everything from animals to housing to continuing education. While they would all love to have a grand budgets and fulfill every request and need they see, these organizations have to live in reality.
And the reality is that their donations are down compared to previous years while requests are up. Demand is exceeding the supply of funds available to deliver their needs. Which is where you, the donor, can help.
What You Can Do
Making a financial contribution to a nonprofit is the most generous way you can help them; it allows them to fulfill their mission. Nonprofits know how to stretch every dollar they receive. Congress even wants you to do this by allowing the charitable deduction as a way to reduce your overall tax liability.
Before making a contribution to any organization, here are some things to consider.
For Household Items
To be deductible, clothing and household items donated to charity generally must be:
- In good used condition or better
- A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
For donations less than $250, Internal Revenue Code Section 170, allows for somewhat lax documentation requirements. They only require that you maintain a bank record (cancelled check, credit card transaction, or debit card transaction) or written communication from the nonprofit organization stating the name, date, and amount of donation.
For donations more than $250, the IRS requires more detail. The donor must obtain contemporaneous written acknowledgement from the organization. This receipt must state whether the organization provided any goods or services for the donation and a good-faith estimate of the value of the donation. For religious organizations, the documentation must contain a statement that the only services received by the donor are intangible religious benefits.
Don’t forget to look for this commonly overlooked deduction, payroll deductions. These are automatically drafted out of an employees checks and, oftentimes, the recipient is not able to acknowledge the employees particular contribution. Be sure to review your paystub at the end of the year for this amount. Also, your employer is not required to list this amount on your annual W-2 statement.
Earlier I mentioned contemporaneous written acknowledgement. I’d like to specifically emphasized how important contemporaneous receipt is. This summer, the U.S. Tax Court ruled on a case (Durden vs. Commissioner) in which a taxpayer did not receive a contemporaneous receipt of cash donations of $22,517 to their local church. The taxpayer received the documentation only after the IRS began their audit and requested the proof. The IRS disallowed the charitable deduction for the taxpayer stating that it did not meet the contemporaneous requirement.
For your knowledge, they defined the contemporaneous requirement as having the acknowledgement receipt as of the earlier of the date of filing or the due date, including extensions, of the return.
Reminders from the friendly folks at the IRS:
- Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2012 count for 2012. This is true even if the credit card bill isn’t paid until 2013. Also, checks count for 2012 as long as they are mailed in 2012.
- Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
- For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction.
- The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
- If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
Not sure what local organizations need your help? Visit part of our year end giving series here.
Photos curtesy of Flickr users Tax Credits and JD Handcock.
About the Author
Greg Whitehead is a CPA with Melvin, Bibb, Pinson, & Segars, P.C. specializing in the preparation of individual tax returns, business tax returns, tax planning, and financial planning. Greg currently serves on the Committee of 100 YP and the Board of Directors for the National Children’s Advocacy Center. He is a graduate of Leadership Huntsville/Madison County’s Connect Class 8.