This being the holiday season, most folks are in a giving mood. As such, let’s take a moment to review some of the tax rules related to charitable giving.
Expiring in a matter of days at the end of 2011 is the provision which allows IRA owners to forego their required minimum distribution and instead have it sent directly to a qualified charity. The IRA owner does not get a charitable contribution deduction and they will not pay tax on the IRA distribution income.
To illustrate the tax savings, suppose an IRA owner in the 28% tax bracket is scheduled to receive a $50,000 IRA distribution; the tax due on the distribution is $14,000. If the IRA owner turns around and contributes the after-tax amount of $36,000 ($50,000 less $14,000 tax) in a subsequent year to a qualifying charity they will receive a contribution deduction of $10,080 ($36,000 times 28%). You can see then that the $36,000 charitable contribution actually costs the IRA owner $3,920 ($14,000 tax due on distribution less itemized deduction of $10,080). Not a very good deal for the charity or the IRA owner.
Suppose instead the IRA owner instructs the trustee of his IRA account to pay the $50,000 required minimum distribution directly to a qualified charity. The IRA owner saves $3,920 in tax on the distribution/deduction (see above) and the entire $50,000 is preserved for the charity; a much better result for all.
In order to deduct any monetary contribution (regardless of amount) taxpayers must have a bank record (cancelled check, bank or credit card statement) or written acknowledgement from the charity showing the name of the charity and the date and the amount of the contribution. Charities typically provide this acknowledgement for contributions of $250 or more.
Individuals are cash-basis taxpayers and thus their contributions are deductible in the year made. Donations charged to a credit card before the end of 2011 are deductible in 2011 even if the credit card bill isn’t paid until 2012. The same goes for checks. As long as checks are mailed in 2011 the deduction should be taken in the current year.
Noncash donations of clothing and household goods must be in good used condition or better to be deductible. For all property donations, taxpayers should get a receipt that includes the name of the charity, date of contribution and a detailed description of the donated property. If a taxpayer’s deduction for all noncash property is over $500, Form 8283 must be submitted with the tax return.
The deduction for automobiles given to charity is usually limited to the gross proceeds from its sale if the claimed amount is greater than $500. Charities must provide the donor with a Form 1098-C which evidences the deductible sale amount and that form must be attached to the taxpayer’s return.
All organizations qualified to receive charitable donations are listed in IRS Publication 78 which is searchable and available online. Churches, synagogues, temples, mosques and government agencies are also eligible to receive deductible contributions even if they are not listed in Publication 78.
If you need more information related to year-end charitable giving please feel free to contact your Schneider Downs Tax Professional.
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