On November 28, 2016, the Internal Revenue Service (IRS) published News Release IR-2016-154 to encourage tax payers to donate to qualified charities in order to reduce their personal federal income tax. The news release was published to coincide with #GivingTuesday, but the release contains some great tips that also apply to year-end charitable giving.
The news release addressed how a potential donor can confirm whether or not a not-for-profit entity qualifies as a charity for purposes of a charitable tax deduction. The IRS Select Check database, available free of charge on the IRS website, may be used to verify whether a not-for-profit is a qualified charity for federal tax purposes. A search on the IRS Select Check database can be made by using the organization’s name or EIN. Contributions to certain types of charitable organizations are eligible for a tax deduction even though the organization might not be listed in the IRS database. Specifically, churches, synagogues, temples, mosques and government agencies are generally qualified charitable organizations, but these organizations are not required to file an annual return with the IRS, and so they might not be listed on the Select Check database.
In the release, the IRS also reviewed the rules as to when a tax deduction may be taken for a qualified charitable contribution. For example, a taxpayer who files a Form 1040, U.S. Individual Income Tax Return, can only take a tax deduction for a contribution to a charitable organization if the individual itemizes his or her deductions, rather than taking the standard deduction.
Taxpayers can contribute cash, property, a quid pro quo contribution, or transfer money from an IRA to a qualified charity. It is important that a donor obtain the required records to properly substantiate the charitable contribution:
- Cash Donations – Donors are responsible for obtaining a written acknowledgement from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on their federal income tax return.
- Non-Cash Donations – The deduction amount is typically limited to the item’s fair market value. It is up to the donor to substantiate or prove the amount of the donation. The charity is not responsible for providing a donation amount to the donor. If the donation is greater than $250, a written acknowledgement letter must be obtained from a qualified charity and the acknowledgement must specifically state what the donor contributed in order for a taxpayer to take the deduction. Special rules apply to donations of cars and boats.
- Goods or Services Provided in Exchange for a Contribution - This type of contribution is referred to as a quid pro quo contribution. This contribution occurs when a donor receives a service or goods in exchange for a donation. A charity must furnish a disclosure statement to a donor when the sum of the service or good received by the donor and excess amount, or contribution, is greater than $75 even though the deductible amount may not be greater than $75. This disclosure informs the taxpayer that their deduction for federal tax purposes is limited to the excess of money contributed over the values of goods or services provided by the organization.
- IRA Donations – Individuals 70½ or older can transfer up to $100,000 per year to a qualified charity, tax free. The funds must be transferred directly by the IRA trustee.
We encourage donors to be proactive and knowledgeable concerning the IRS rules that address charitable giving. If the IRS challenges a charitable deduction and a taxpayer cannot substantiate the gift, the taxpayer will be denied a deduction.
It is the season for giving to great causes, and you may be eligible for a tax deduction for your charitable contribution. If you do not have monetary or tangible gifts to share with you favorite charity this year, volunteering your time can be just as important.
For more information on rules for charitable giving, please review IRS Publication 1771.