NEW YORK (
) -- People donate to church and charity for a variety of reasons. But, I would hope, not just to get a tax deduction.
The tax benefit from donating to a religious organization or charity is not a dollar for dollar benefit. If you give $1,000 to charity you do not save $1,000 in taxes. If you are able to itemize, you get a tax deduction based on your tax bracket: if you give $1,000 to charity, can itemize deductions on Schedule A, and are in the 25% tax bracket, Uncle Sam will "reimburse" you for $250 of your contributions. You must have a hard-copy receipt for every single dollar you contribute to a church or charity in order to claim a tax deduction on Schedule A!
The best advice that I can provide as a tax professional, when it comes to charitable donations, is to never do something just because it is tax deductible. It does not make sense to spend $1,000 to save $250. You are still $750 "out of pocket."
As long as you are going to donate money or property to charity you might as well take advantage of the available tax benefit. It is very important to follow the rules and regulations established by Congress and the IRS when making charitable contributions, as recent Tax Court decisions have proven.
First of all, make sure the organization to whom you are contributing qualifies for a tax deduction. You can claim a deduction for cash or property given to a qualified tax-exempt organization created or organized in the United States or any possession under the laws of the United States or any state or possession.
To find out if a charity is a "qualified tax-exempt organization"
click here and enter the information for the organization.
You CANNOT deduct:
1. Contributions made directly to an individual or family, regardless of the recipient's financial situation or health status
2. Contributions to an organization created to lobby for changes to federal, state or local laws
3. Contributions to political organizations or election campaigns
4. Contributions to non-profit homeowner or condo associations, or social or sports clubs
5. Contributions to foreign organizations
6. Raffle or 50-50 tickets purchased from a church or charity
Charitable contribution deductions will not be allowed for any monetary contributions by cash or check unless the donor maintains a record of the contribution. The record must be in the form of:
an actual cancelled check
a bank record (i.e. a copy of the front of the check included on your monthly bank statement)
an entry on a bank or credit card statement indicating a credit or debit card charge
a written communication from the charity showing the name of the organization, the date of the contribution, and the amount contributed
In the case of a payroll deduction for United Way or any other charity, the IRS instructs:
"For a charitable contribution made by payroll deduction, a pay stub, Form W-2, or other employer furnished document that sets forth the amount withheld for a payment to a donee organization, along with a pledge card prepared by or at the direction of the donee organization, will be deemed to be a 'written communication from the donee organization' that satisfies the requirements."
You can no longer tell the IRS that you put a five or ten dollar bill in the collection plate each week. You must write a check to the church for the $5 or $10 each week or you must take advantage of the church's "envelope" system, which will provide you with a written receipt at the end of the year.
The law does not say that all contributions of more than $50 or more than $100 must be documented. It says that all cash contributions must be documented. Again, you must get a receipt!
For a contribution of $250 or more made in any one day to a charity, in addition to a cancelled check or other record of contribution you must also have a "contemporaneous" written acknowledgement from the donee organization with the name and address of the charity and the date and amount of the contribution. And, very important, the acknowledgement must indicate whether the organization provided any goods or services by the charity in exchange for the donation.
A written acknowledgment is considered to be "contemporaneous" by the IRS if it's obtained on or before the earlier of (1) the date the taxpayer files the original return for the tax year of the contribution or (2) the due date (including extensions) for filing the original return for the year.
In a recent Tax Court case a couple was denied a $25,171 charitable deduction, mostly for contributions to their church, an organization eligible to receive tax-deductible contributions.
In audit, the couple produced cancelled checks for all of their donations. With a very few exceptions the checks were all for amounts greater than $250. They also produced a letter of acknowledgment from the church, which was dated prior to the date the couple filed the return in question.
The IRS did not accept this letter of acknowledgment from the church because it didn't include the required statement on whether any goods or services were provided in consideration for the contributions. The couple got a second letter from the church after the initial audit that contained the missing statement, but this was also not accepted because the revised letter of acknowledgment, dated over a year after the filing of the tax return, was not "contemporaneous."
The Tax Court upheld the decision of the IRS to disallow the deduction, concluding that the couple had failed, strictly or substantially, to comply with the clear substantiation requirements of the Tax Code.
The fair value of used goods
You can also claim a deduction for the "fair market value" of used items donated to a church or charity. According to the IRS, fair market value is the price a "willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell." IRS Publication 561, "Determining the Value of Donated Property" provides guidance in determining fair market value for all types of property.
You are responsible for determining the fair market value of the items you are donating. The charity to which you make the donation is not required to, and in most cases will not, provide you with a value. Click
here for online valuation guides.
You cannot deduct the contribution of a used item of clothing or household item unless it is in at least "good" condition (except for a single such item with a documented appraised value of more than $500). Donations of clothing and household items with a "minimal monetary value", such as used socks or underwear, are also not deductible.
If the total of all your contributions of property is more than $500 you must file Form 8283 Noncash Charitable Contributions. In most cases you only need to complete Section A. You must list:
1. the name and address of the charity(ies) to whom you made the donation(s)
2. the date of the contribution(s)
3. the fair market value of the items donated
4. how you determined the fair market value -- i.e. "thrift shop value" "estimate", "Salvation Army valuation guide"
If any one individual item has a value of more than $500 you must also list:
1. the date you acquired the property
2. how you acquired the property -- i.e. purchase, gift, inheritance, exchange
3. the cost or adjusted basis of the property
The $250 rule discussed above also applies to non-cash donations.
Whenever you contribute used books, clothing, furniture or household items to a church or charity be sure to make and keep a detailed listing of the items donated with the condition and value of each set of items (i.e. 6 pairs of men's pants, good condition = $60.00, 5 pairs of men's shoes, good condition = $75.00). You may want to attach a copy of this list to the Form 8283.
The Tax Court has also upheld the IRS disallowance of deductions for non-cash contributions because of inadequate documentation. In one case where a taxpayer simply provided copies of receipts received from Goodwill, the Court denied the deduction because the receipts from Goodwill did not provide "anything more than vague descriptions of the items donated."
Bottom line: if you want to claim a tax deduction for contributions of cash or used items to a qualified church or charity make sure you receive and maintain proper acknowledgement and documentation, with all the required information and statements included.
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--By Robert Flach
Robert Flach has more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.