CLAIMING DONATIONS MADE TO HAITI

Have you made a charitable donation to Haiti? Check out the following link to see if you can claim those donations on your 2009 Tax Return.

Ten Facts About Claiming Donations Made to Haiti

MORE ON CHARITABLE CONTRIBUTIONS

Thanks for the information on charitable contributions. My mother has been making some contributions to some weird supposedly child care organization.

How do I find out if this is a legitimate charity?

Opy

Opy, it is good to double check if you are not sure. Not only on the “weird” groups but also on groups that you think would qualify. I recently had a client give money to a local Children’s Workshop only to find that they had not done the paperwork to make them a legitimate tax exempt charity. Not checking cost them the deduction.

Here is how you can check to see if the organization is qualified. As you know, only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.

Larry Kopsa CPA

THE IRS IS GETTING TOUGH ON CHARITABLE CONTRIBUTIONS

One of the most popular tax deductions is the one allowed for donations to charitable organizations—from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, over the last several decades, this deduction has also been among the most abused. Thus, perhaps it is not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.

What we’re left with is a confusing array of rules that you have to comply with in order to claim a deduction, when a few years ago all you really needed in most cases was a cancelled check. A recent court case illustrates how easy it is to run afoul of the documentation requirements.

In the case, the taxpayers did nothing more than donate several thousand dollars to their church during the tax year. Although the donations were made by check, the IRS disallowed all but a few hundred dollars 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 list any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically state that the donor received no goods or services from the charity. In the case at hand, the taxpayers waited until their charitable deduction was challenged before trying to get a proper receipt. By then, of course, it was too late.

Why did the IRS only allow a few hundred dollars of the claimed deductions? The requirement to obtain a receipt only applies where a single donation (or a group of related ones) totals $250 or more. Eight of the taxpayers’ donations during the year (totally a little over $400) were for less than this amount. Thus, their cancelled checks were sufficient support for the deduction.

Separate from this court case, the IRS recently released new guidance on substantiating contributions. One area of focus is on the relatively new requirement that when donating cash, taxpayers can only obtain a deduction if they have a proper receipt from the charity. For taxpayers who incur unreimbursed out-of-pocket expenses while performing charitable work, this appeared to create a situation where such taxpayers might loose their deductions for these types of expenses since it is generally not practical to obtain receipts from charities for out-of-pocket expenses they know nothing about. Fortunately, the IRS has indicated they plan to adopt the common sense rule that if the out-of-pocket expenses for a charitable activity or event are less than $250, the donor can document the expenses simply by keeping appropriate purchase receipts or other reasonable written evidence.

This is just a glimpse at the documentation rules for charitable donations. I’d be happy to address any of the requirements for specific types of donations. Please feel free to email me.

Larry Kopsa CPA

CHARITABLE CONTRIBUTIONS

I remember in one of your prior postings you talked about charitable contributions. There were some new requirements this year but I can't find the article. Could you refresh my memory? Thanks again for all the information for all of us stylists.

BB

BB - You are correct - there are some new rules this year. Your charitables are in jeopardy if you don't follow the new rules. Here they are...

Under the latest rules, the IRS does not allow a deduction for a contribution of under $250 of cash, check or any other monetary gift unless you have maintained a record of the contribution or a written communication by the charity.

For contributions of $250 or more you need a qualified receipt from the charity.

I you need more information, check out the following guide from the IRS:
Charitable Contribution Deductions (Publication 78 Help, Part II)

It is a pleasure serving you.

Larry Kopsa CPA

SPECIAL RULE FOR CHARITABLE CONTRIBUTIONS TO AN IRA

I read your explanation about cash contributions. Thanks for the information. I bet the Salvation Army guys aren't too happy about this. Could you answer this question? My church is doing a building fund drive and I was thinking I saw that I could use my IRA money. Is that correct?

BR

BR, This all depends on your age. When the rules on charities changed, Congress did throw one bone to the charity lobby. Taxpayers age 70 1/2 or older can now contribute up to $100,000 directly from an IRA to a charity without paying tax on the money. This helps taxpayers who don't itemize or who have to exceed a percentage of their adjusted gross income (7.5% for medical expenses, 2% for miscellaneous itemized deductions) in order to claim a deduction. But Congress wasn't all that generous -- this provision is only good through 2007.

So, unless you are over age 70 1/2 this won't work for you. As with all of my answers, make sure you discuss with your tax adviser before you finalize your decisions.

It is a pleasure serving you!

Larry Kopsa CPA

NEW RULES FOR CHARITABLE CONTRIBUTIONS

Congress is looking everywhere to find more money to put in the government coffers. Now they are even squeezing money from charities. The record keeping that you need to do to substantiate charitable contributions starting in 2007 is a nightmare. Starting in 2007, to claim a deduction, things get more complicated and most likely, you will not be able to claim all of your charitable contributions. I know that in the past I estimated some of my cash contributions. For example, when I am traveling I put cash in the collection plate. I deducted this cash on my personal return. Starting in 2007, I will not be able to deduct the cash.

• As mentioned, you can no longer deduct cash contributions. When I say "cash" I don't mean checks, sometimes people get confused by this. This means that any cash that you drop in the the collection plate or give to the Salvation Army Santa Claus will not be deductible on your return.
• Checks are valid substantiation for gifts of $250 or less. For example, my wife just wrote a check for $400 to a charity. Unless we get written confirmation from the charity (see below), we will not be able to deduct this charitable contribution. On the other hand, if she would have written two $200 checks, we would have been under the $250 limit and the checks would have been sufficient. She now knows better!
• For donations over $250, you will need a written confirmation from the charity acknowledging the contribution and stating that you did not receive anything of value for the contribution. For example, last year I gave $1,000 at a silent auction for the right to be "cook for the day" at our local school. In 2007, in order to claim such a deduction I will need to have a written statement stating that there was no value in the contribution.

Remember the deduction for the contribution of old clothes or household items? Things will get trickier in 2007. Under the Pension Protection Act of 2006, you can't deduct charitable donations of clothes or household items (such as furnishings, electronics, appliances and linens) unless they're in "good" condition or better. Congress never defined "good," but I suspect my old socks and underwear are out. (Remember when Bill Clinton disclosed his tax return when he was president and he reported taking a donation for "used boxer shorts" at $4.50 per pair?)

Congress did give the IRS the power to issue regulations to deny a deduction for items with "minimal monetary value."

Even if an item is clearly "good," if you claim a value of more than $500, then you must include a qualified appraisal with your return. That's $500 for an item, not total.

Even if no item is valued at more than $500, if the sum of the non-cash contributions is more than $500, you will still have to file Form 8283 with the date of the contribution, the date acquired, your cost, the fair-market value, and the method used to determine the fair-market value. Special rules apply to contributions of cars, boats, and other items (such as art, jewelry, and collections) with a claimed value of more than $5,000.

NEW RULES FOR CHARITABLE CONTRIBUTIONS

In the past, for people itemizing deductions contributions to charities have provided a generous loophole. We have all heard people say that it is better to give than to receive, but receiving a tax deduction now requires a little more effort, in light of new substantiation rules introduced in the summer of 2006 (but not effective until 2007 for calendar taxpayers). To ensure that you can claim the charitable deductions to which you’re entitled, we want to make you aware of these new recordkeeping rules.

Cash Contributions of Less than $250 in Single Donation
For cash contributions, it’s not unusual to give small amounts without expecting a receipt, such as when you drop a $20 bill into the collection plate at church. These amounts may accumulate to a sizeable sum by year-end. Previously, if the donations were less than $250, you could either keep cancelled checks or reliable records, such as a list that you’ve prepared showing the dates, amounts donated, and charities. Under the new rules, however, it’s no longer sufficient to simply keep good records of these donations when you tally up the amount to claim as charitable contributions. Instead, cash contributions of less than $250 given in a single contribution are only deductible if you keep a bank record (most likely a cancelled check or credit card record) or written acknowledgement from the charity (donee) showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

If you are likely to itemize deductions on your income tax return and typically make cash contributions of less than $250, you should make donations by check rather than cash, because that will easily satisfy the documentation requirements. Simply keeping good records of the donations will no longer be enough to claim the deduction.

We have to wonder how this will impact organizations like the Salvation Army. I have never seen anyone write a check and give it to the Santa bell ringers that come out a Christmas time.

Cash and Property Contributions of More than $250 in Single Donation

Substantiation of larger contributions of cash or other property (those that are more than $250) were not changed by the new rules, but as a reminder, they require a little more effort to substantiate. A written acknowledgement from the charity must be obtained, showing the description of the property or amount of cash donated and a statement as to whether the donor received any goods or services (with a good faith estimate of value) for the property donated. A canceled check or other reliable records are not sufficient proof. (You can obtain one written acknowledgment for multiple gifts of $250 or more to the same charity.) The acknowledgment must be received contemporaneously; that is, it must be obtained no later than the due date (or extended due date, if applicable) of the tax return for the year the contribution was made.

Contributions of Used Clothing and Household Items

Because the law was somewhat fuzzy in the past, this is an area that we used to take a strong position on. The new law has taken away some of your aggressiveness.

If you donate used clothing or household items to charities, such as Goodwill, the items must be in “good condition or better” unless the items were worth more than $500 and a qualified appraisal report is attached to your tax return. The IRS has not yet defined what is meant by “good condition or better.” Thus, you might consider keeping a detailed list and photos of contributed items (unless the property is appraised). No new documentation is required, but to protect yourself in case of an IRS audit, you should, at a minimum, document that the donations were in good condition. Furthermore, the use of unattended drop-off sites should be reserved for items of minimal value. It may be difficult to substantiate the contributions without a receipt.

Vehicle Contributions

If you’re planning to donate a car, boat, or plane that’s valued over $500, you have to follow strict substantiation rules in order to claim the contribution deduction. Under these rules, you must receive, and attach to your tax return, a written acknowledgment from the charity within 30 days after the donated vehicle is sold (or within 30 days of the contribution if the charity uses the vehicle significantly in its exempt purpose, makes major improvements to the vehicle, sells it for a significantly discounted price, or gives it to a needy person in furtherance of the charity’s exempt purpose). The information needed in the written acknowledgement from the charity should include the (a) name and taxpayer identification number of the donor and (b) vehicle identification number (or similar number) of the vehicle.

The IRS has just issued new rules that require donors of vehicles valued at more than $500 to attach a special form (Form 1098-C—Contributions of Motor Vehicles, Boats and Airplanes), which is received from the charity and reports the necessary information about the vehicle donation. (The form is optional for vehicle donations of $500 or less.) To claim the deduction for the vehicle valued at more than $500, you should attach Copy B to your tax return.

Property Contributions of More Than $5,000

If you’re planning to contribute property (other than of publicly traded securities) valued at more than $5,000 ($10,000 for closely held stock), you need to get competent advice before you make the gift. We are well versed in this area so contact us to discuss your particular situation.

Although the rules for substantiating this type of property haven’t changed, there are now stricter rules for what is considered a “qualified appraisal” and who is considered a “qualified appraiser.” You must have the appraisal done not earlier than 60 days before the donation and received by the due date (including extensions) of your tax return.

To claim the deduction, it’s important to dot all the “i’s” and cross all the “t’s” in following the requirements of a qualified appraisal. Furthermore, stiffer penalties now apply to both appraisers and taxpayers for substantial valuation misstatements.

Summary
The rules have changed therefore it is important to follow these recordkeeping requirements if you hope to claim the deduction for your donations because the IRS can and will disallow charitable deductions if these requirements aren’t met. If you would like more details about these or any other aspect of the new rules, please don’t hesitate to call.