The combination of the holiday spirit and the approaching calendar year end make now a popular and busy time for charitable solicitations and donation requests. Individual taxpayers seeking to support a cause close to their hearts can not only make a positive philanthropic impact, but also receive tax benefits for their donations. Here are some helpful reminders as you look to take advantage of charitable tax benefits this year.
Research organizations before donating
Make sure the organization soliciting support is legitimate by conducting online research. A good place to start is the Internal Revenue Service’s Exempt Organizations Select Check, the Pennsylvania Bureau of Corporations and Charitable Organizations Online Database or similar sites in other states. These tools allow potential donors to verify tax-exempt status, deductibility of charitable contributions and proper registration status before giving. Guidestar.org is another good resource that makes available copies of organizations’ tax returns and important information about the operations of the nonprofit and what percentage of donations are directed to its mission.
Properly document donations
Different types and amounts of giving trigger different documentation requirements for tax purposes. For cash donations, most charities will send a letter to the donor confirming the donation amount and specifying whether all or part of it is considered a charitable contribution. Retain that letter with tax records to substantiate the donation. These types of letters are required for donations of $75 or more. For donations under that threshold not supported by a letter, a copy of a cancelled check will suffice.
Noncash donations under $250 (think food given to the local soup kitchen or clothes donated to Goodwill) are legitimate charitable donations, but for tax purposes a receipt or letter from the organization is required. The receipt or letter must state the date of the donation and describe the property contributed. The determination of the donation value is up to the donor, not the organization. To determine the value of donated clothing and household goods, the Goodwill Valuation Guide is a useful tool. For food and perishable goods, original purchase receipts combined with the donation confirmation letter from the charity can be used for tax substantiation purposes.
In the case of noncash donations over $250, good faith estimates are required for gifts between $250 and $5,000, and appraisals are required for gifts of $5,000 or more. The receiving charity will likely be familiar with the valuation and substantiation requirements, but it is always best to consult with a professional tax advisor before the donation is made, so correct documentation can be gained in real time instead of scrambling back to the organization later to obtain the required proof for tax filings.
Donations of stock allow taxpayers to support causes important to them without affecting personal cash flow. Generally speaking, the most tax-advantaged approach is to donate stock held for more than one year that has appreciated in value. This provides for a larger charitable contribution and avoids tax on the capital gain. For losing stock, sell it first and then donate the cash. This approach allows you to report the benefit of the capital loss and the cash value of the contribution.
Publicly traded stocks do not require a valuation at any dollar value; however, non-publicly traded stock requires a qualified appraisal if the fair market value is greater than $10,000. Stock donations are more involved than cash or tangible items, so be sure to consult a tax or financial advisor before making this type of donation.
Consider making a qualified charitable distribution from an IRA
Making a direct transfer from an IRA allows individuals age 70½ or over to avoid a tax hit on the annual required minimum distribution from their accounts and support a cause important to them. In this case, the charitable contribution must go directly to the recipient organization, not the taxpayer first. This option requires some advance planning, so individuals considering it should consult with their tax or financial advisor.
Pledge or giving commitment does not equal a charitable donation
Individual taxpayers are permitted to take a deduction only for the actual amounts paid out to charities during a calendar year. Keep in mind that commitments made in December 2017 to make a donation in January 2018 cannot be claimed on a 2017 tax return.
Year-end charitable giving can make a big difference to community benefit organizations. Through proper research and documentation, it can also provide tax benefits to the donor. Individuals seeking more information or assistance with the best practices outlined above should contact their RKL advisor or one of our local offices.
Contributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.
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