With the holiday season approaching, and with the great need for aid in the wake of the recent hurricanes and wildfires, you no doubt are being solicited for donations. However, do not be fooled by the scammers who come out from hiding whenever there is a disaster and during the holiday season. The last thing you want to do is get ripped off; not only will your charitable dollars go to waste, but you will also lose your tax deduction, as contributions are only tax-deductible if they are to qualified charities.
Soon, your physical and electronic mailboxes – not to mention your voicemail box – will be filled with charitable solicitations. Before you break out your checkbook, however, be sure to do your homework, especially if you are contemplating a donation to an organization that you are not already familiar with. The Federal Trade Commission suggests avoiding any charity or fundraiser that:
- refuses to provide detailed information about its identity, mission, and costs, as well as how your donation will be used;
- will not provide proof that your contribution would be tax-deductible;
- uses a name that closely resembles that of a better-known (more reputable) organization;
- thanks you for a pledge that you do not remember making;
- uses high-pressure tactics to get you to donate immediately;
- asks for donations in cash or asks you to wire money; or
- offers to send a courier or overnight delivery service to collect a donation immediately.
Numerous websites can help you to check the validity of a charity. The IRS provides one, but it is rather cumbersome to use. Charity Navigator allows you to search for a charity name and provides details about that charity’s function. When in doubt, take the time to verify a charity’s legitimacy.
If you plan to itemize your deductions – after you have determined that you are not contributing to a scam operation – ensure that your charitable donations meet the requirements for being tax-deductible. The recipient organization must be one or more of the following:
- a church, synagogue, mosque, or other place of worship;
- a tax-exempt educational institution or hospital;
- a federal, state, or local governmental unit, if the contribution is used for public purposes;
- a publicly supported corporation, trust, fund, foundation, or community chest that is organized and operated only for charitable, religious, educational, scientific, or literary purposes; to prevent cruelty to children or animals; or to foster certain national or international amateur sports competitions; or
- a certain type of private operating foundation or agricultural research organization.
Substantiation – First and foremost, you must receive substantiation of your cash gift in order to deduct it on your tax return; you also must itemize your deductions rather than use the standard deduction. Cash contributions include those paid by cash, check, electronic fund transfer, and credit card. However, you cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways:
- A bank record that shows the qualified organization’s name, as well as the date and amount of the contribution. Eligible bank records include a. a canceled check, b. a bank or credit union statement, or c. a credit card statement.
- A receipt (or a letter or other written communication) from the qualified organization showing the organization’s name, as well as the date and amount of the contribution.
Cash contributions of $250 or more – To claim a deduction for a contribution of $250 or more, you must provide a written acknowledgment of the contribution from the qualified organization. This acknowledgment must include the following details:
- The amount of cash contributed
- Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, including a description and good-faith estimate of the value of those goods or services (not counting intangible religious benefits)
- A statement that you received no benefit (other than an intangible religious benefit)
The value of any goods or services received in exchange for a donation must be subtracted from the amount claimed as a contribution. If the acknowledgment does not show the date of the contribution, then you must also supply one of the bank records described above to verify the contribution date. If this acknowledgement includes the contribution date and meets the other requirements, it is not necessary to provide other records.
The acknowledgment must be in your hands before the date you file your tax return but not later than the April due date for return (or the extended due date of October if you filed an extension).
Christmas Kettles – It is quite common for charitable organizations to collect cash donations at malls during the holiday shopping season. Consider writing a check to place in these kettles rather than using cash so that you will have the substantiation required for a tax-deductible contribution.
Needy Individuals – You may wish to help out a needy family; although that is a very kind thing to do, no charitable deduction is allowed for such gifts to private individuals (either directly or as through a charitable organization).
GoFundMe – Through this website (and others like it), people raise funds for good causes such as starting a business, paying medical bills or funeral costs, replacing damaged or destroyed homes. However, these websites are not qualified charities for the purposes of claiming a charitable contribution on your tax return.
Special Contribution Rule for Taxpayers Age 70½ and Over – The tax code includes a special provision that allows taxpayers who are at least 70½ years old to directly transfer up to $100,000 from an IRA account to a qualified charity. Instead of receiving a charitable deduction, that person instead gets the benefit of the IRA distribution being nontaxable and counting toward the required minimum distribution for the year. This is especially beneficial for people who receive Social Security benefits and those who take the standard deduction. Although this is generally considered a good tax-saving strategy for those who can afford to make large donations, there is actually no minimum for this rule, so it will likely even benefit individuals in lower tax brackets.
Bunching – When taxpayers’ itemized deductions are only marginally different from the standard deduction, they can consider the method known as bunching. In this technique, the taxpayer make two years’ worth of donations in a single year and then skips making donations in the next year. For example, if you annually contribute $5,000 to a house of worship but have total itemized deductions that are consistently a few hundred dollars less than the standard deduction, you can instead double up by donating $10,000 in a single year. That way, you will be able to claim itemized deductions for the year when you make the donation and can then take the standard deduction in the following year.
For large donations, there are limitations based on adjusted gross income, and there are other available techniques, such as donor-advised funds. This article also did not covered donations of noncash items, such as used furniture or household goods; these have additional substantiation requirements. Please call us if you have questions, or if you would like to set up an appointment to strategize about maximizing the tax benefits of your charitable contributions.