Getting the Most Out of Your Charitable Gifts 

By Barbara Bombaci, J.D., CLU®, CFP®, AEP®
Director, Advanced Planning

Americans gave more than $298 billion to their favorite causes in 2011, despite challenging economic conditions. This was an increase of 3 percent from 2010.1 The motives behind these charitable gifts are as varied as the givers. However, one motive – the potential for an income tax deduction – requires careful attention. That's because the Internal Revenue Code requires more than just the giving to qualify for a charitable deduction; depending on the type of asset and the amount of your gift, various forms of substantiation may be required. Let's take a look at some of the general rules.2

Cash Gifts

Cash gifts can be made in cash, by check, credit card or payroll deduction. For any cash gift (regardless of the amount), you will need either a bank record (canceled check or statement), pay stub or Form W-2, or a written receipt from the charity, which shows the charity's name and the amount and date of the gift. In addition, for gifts of $250 or more, you will need a "contemporaneous written acknowledgment" from the charity describing the:

  • Amount of the gift; and
  • Whether you received any goods or services from the charity in exchange for the gift and, if so, its value.

The contemporaneous written acknowledgment and receipt are often combined in one document.  You must receive this document from the charity on or before the earlier of either your tax return due date, including extensions, for the tax year the contribution is made or the date you actually file your return.

Separate contributions of less than $250 to a charity aren't aggregated in determining whether you exceed the $250 threshold. So if you give $100 a month to a charitable organization, you don't have one gift of $1,200, which would require a contemporaneous written acknowledgment.  Rather, you have 12 separate gifts of $100, each of which you can substantiate with a cancelled check; no contemporaneous written acknowledgment is needed.3

Noncash Gifts

Here again, all donations of assets must be substantiated in order to be deductible. Once you know the amount you intend to claim, you can figure out what specifically you need to substantiate that deduction.  In addition to the requirements for a deduction of a particular amount, keep the following information for all gifts of assets:

  • Name and address of the charity;
  • Date, description and location of the gift;
  • Fair market value of the asset and how that value was determined;
  • If appraised, copy of the appraisal; and
  • Basis of the asset.

Now, on to the specific substantiation requirements for noncash gifts:

  • Deduction less than $250
    You will need a receipt from the charity showing:

    • Name of charity;
    • Date and location of gift; and
    • Description of property (not value).

  • Deduction of $250 or more
    In addition to the receipt mentioned above, you will need a contemporaneous written acknowledgment from the charity, which must include:

    • Description of property (not value); and
    • Whether you received any goods or services from the charity in exchange for the gift and, if so, its value.

  • Deduction more than $500
    In addition to the receipt and the contemporaneous written acknowledgment, you should keep a record of how (i.e., purchase, inheritance, gift) and when you acquired the property, and its basis. You must complete Form 8283.

  • Deduction more than $5,000
    You must obtain a qualified appraisal from a qualified appraiser and a complete Form 8283, signed by the appraiser and the charity. This means providing information about the manner in which the asset was acquired, the date it was acquired and the cost basis. If you need a qualified appraisal, make sure you are complying with all requirements. Sometimes the appraisal has to be filed with your return, sometimes not.

Special Rules

Certain types of property are subject to special rules, including donations of:

  • Household goods, used clothing & other personal items
    These items must be in good used condition or better in order to deduct the fair market value. This limitation does not apply for a single household or clothing item if the deduction is more than $500; in that case, you must attach a qualified appraisal and a completed Form 8283 to your tax return.

  • Fractional interest in tangible personal property
    In order for a fractional interest in tangible personal property to be deductible, the charity must receive your entire interest within ten years after the first gift or by your death, whichever is earlier. The deduction for any subsequent gifts is limited to the fair market value at the time of the initial gift, unless the later value is lower. Are you getting the idea that the I.R.S. does not like these gifts?

  • Art valued at $20,000 or more
    You must attach the qualified appraisal to your tax return. A photograph of any individual piece valued at $20,000 or more must be provided if requested, so hang on to a picture of the donated item.

  • Cars, boats and aircraft
    Generally, the deduction is fair market value, although it may be limited to basis in some instances. In addition, if the deduction is more than $500, it is limited to the amount that the charity receives for the sale of the item. In this case, Form 1098-C must be attached to your return. If you don't attach this form, you can't deduct your gift.

Reporting

You must report the charitable deduction on your income tax return to get the deduction. Sounds obvious, doesn't it? Let's look at the reporting requirements:

  • Schedule A
    Charitable deductions are itemized deductions. Needless to say, if you don't itemize, you don't get a charitable income tax deduction.

  • Form 8283
    This form is only required when your total non-cash deductions are more than $500. If you must get a qualified appraisal, a summary of the qualified appraisal must be provided on this form. If Form 8283 is not attached to your return when it should be, your charitable deduction will not be allowed unless your failure was due to reasonable cause.

What's Deductible

Some payments, while at first blush do not appear to be deductible, actually are.

  • Membership fees or dues
    You can deduct the amount of fees or dues paid to a qualified charity less the value of any benefits you receive. However, if your annual fees or dues are $75 or less, you can ignore the value of certain benefits, such as free or discounted admission and parking. Think museum or zoo memberships.

  • Athletic events
    Eighty percent of payments made to obtain the right to purchase tickets to a college or university's athletic event (not the payment for the tickets themselves) – sometimes referred to as "ransom money" – is deductible.

  • Out of pocket expenses
    These expenses are treated as cash contributions:

    • Uniform costs.
      If you are required to purchase a uniform while volunteering (i.e., Red Cross), the uniform costs are deductible.
    • Mileage.
      The cost of gas and oil incurred in getting to and from the place you volunteer is deductible. Instead of actual costs, you can use a standard rate (14¢ per mile in 2012).

What's Not

There are some items and costs associated with donating or volunteering that are not deductible. These include:

  • Payments for raffle or lottery tickets.
  • Value of your time or services.
  • Appraisal fees.
  • Contribution to a particular individual.
  • Contribution to a non-qualified organization.
  • Value of blood donations.
  • Personal expenses, such as babysitting expenses, you incur while you are volunteering.
  • Tuition payments.

While we have not looked at all the rules surrounding charitable donations, keeping adequate substantiation of the donations you make will help ensure that you're able to fully benefit from the tax incentives charitable contributions offer.

 1Giving USA 2012: The Annual Report on Philanthropy for 2011. Giving USA Foundation. www.aafrc.org

2This article discusses general rules on getting the charitable deduction; it does not delve into how to figure out the amount of your deduction or the limits that may apply.  For that information and the exceptions to these general rules discussed here, see I.R.S. Publications 526, Charitable Contributions, and 561, Determining the Value of Donated Property, available at  www.irs.gov and J. Lewis Perlson, Michael G. May and Elizabeth B. Taylor, Lifetime Charitable Giving, January 2003.

3Treas. Reg. § 1.170A-13(f)(1).

This publication is not intended as legal or tax advice; nonetheless, Treasury Regulations might require the following statements. This information was compiled by the Advanced Planning attorneys of The Northwestern Mutual Life Insurance Company. It is intended solely for the information and education of Northwestern Mutual representatives, their customers, and the legal and advisors to those customers.  It must not be used as a basis for legal or tax advice, and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice.  Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor.  Tax and other planning developments after the original date of publication may affect these discussions. – To comply with Circular 230