By: Michael L. Green
One of the most popular tax deductions for individuals is the allowance for donations to charitable organizations – from the local church or synagogue to the American Cancer Society and various other national organizations. But according to the IRS this deduction has also been among the most abused. Congress has responded to the problem by enacting more rules around documenting donations.
Pay careful attention, because without complying with the rules and regulations of charitable giving you will not be able to claim that charitable tax donation at all.
For example, donors must obtain a written acknowledgment from the charity if the value of the contribution (cash or other property) is $250 or more – a canceled check is not sufficient proof. A recent court case illustrates how easy it is to run afoul of the documentation requirements.
In the case, the taxpayers donated $22,517 to their church during the tax year. Several individual donations were made by check, each of which was in excess of $250. Although the donations were made by check and the taxpayer provided canceled checks to document the gift, the IRS disallowed the deduction because the taxpayers failed to obtain a timely receipt from their church to support the donations. Such receipt (or receipts) must be received by the time you file your return for the year of the donation (or, if earlier, by when the return is due). In addition, it must include all of the following: The name and address of the charity; the date of the contribution; the amount of cash or a description (but not an estimate of value) of any property contributed; and a list of any significant goods or services received in return for the donation (other than intangible religious benefits) or a specific statement that the donor received no goods or services from the charity.
In the case at hand, the taxpayers had a receipt from their church, but it did not contain the required statement regarding whether goods or services were provided. They tried to correct this omission by getting a new receipt from their church after the IRS challenged the deduction. By then, of course, it was too late.
While this gives you a glimpse at the substantiation requirements for charitable donations, the rules can get much more complicated, especially when you make charitable donations of property rather than cash.
Let’s say you want to make a charitable gift to a relative (who may be hurting financially) and/or favorite charities. You can make gifts in conjunction with an overall revamping of your stock and equity mutual fund portfolio. Here’s how to get the best tax results from your generosity:
Gifts to Relatives (nondeductible). Do not give away loser shares. Instead sell the shares, and take ad-vantage of the resulting capital losses. Then give the cash sales proceeds to the relative. Do give away winner shares to relatives. Most likely, they will pay less tax than you would pay if you sold the same shares. In fact, relatives who are in the 10% or 15% federal income tax brackets will generally pay a 0% federal tax rate on long-term gains from shares that were held for over a year before being sold in 2012. (For purposes of meeting the more-than-one-year rule for gifted shares, you get to count your ownership period plus the recipient relative’s ownership period, however brief.) Even if the shares are held for one year or less before being sold, your relative will probably pay a lower tax rate than you would (typically only 10% or 15%). However, be aware that gains recognized by a relative who is under age 24 may be taxed at his or her parents’ higher rates under the so-called Kiddie Tax rules.
Gifts to Charities (deductible). The strategies for gifts to relatives work equally well for gifts to IRS-approved charities. Sell loser shares and claim the resulting tax-saving capital loss on your return. Then, give the sales proceeds to the charity and claim the resulting charitable write-off (assuming you itemize deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction). Give away winner shares to charity instead of giving cash. Here’s why. For publicly traded shares that you’ve owned over a year, your charitable deduction equals the full current market value at the time of the gift. Plus, when you give winner shares away, you walk away from the related capital gains tax. This idea is another double tax-saver (you avoid capital gains tax on the winner shares, and you get a tax-saving charitable contribution write-off). Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS.
Don’t forget all charitable donations must be made before December 31, 2012.
Michael Green of Michael L. Green Tax and Financial is an Enrolled Agent and Certified Financial Planner in Valencia. He can be reached by calling (661) 257-4111.