It’s no secret that charitable donations can help reduce your tax bill.
But if you give something other than the typical cash, check or credit card donation, you’ll have some added tax considerations. In recent years, the IRS has toughened many of its deduction rules, especially when it comes to noncash gifts.
You’ll encounter these stricter statutes if you donate household goods, clothing or a vehicle.
A philanthropic option for older donors requires careful coordination to ensure neither giver nor recipient runs afoul of the IRS.
And even taxpayers who still give the always welcome gift of money now need to keep better records.
‘Good’ household goods
Each year, thousands of folks clear out closets to make room for new apparel. Much of this old clothing ends up going to charitable organizations.
But too many people were turning the ostensible benevolent act into an ad hoc dumping of items that more appropriately belonged in the trash. Under a provision of the Pension Protection Act, which became law Aug. 17, 2006, any clothing or household goods (defined by the IRS as furniture, furnishings, electronics, appliances and linens) you donate after that date must be in good or better condition.
If the IRS determines the items were of “minimal monetary value,” a tax examiner can now deny your deductions. That means those toeless socks are out, along with that sweater so threadbare you can literally see through it. The same goes for the old television that doesn’t work or the chair that has a broken seat.
When you file, you don’t have to document how you came up with the deduction amount. But if the IRS ever asks, photos of the donated goods should help bolster your claim that they were worth giving. And it never hurts to keep a detailed list of exactly what you gave (this work sheet will help), along with the receipts you got from the organizations.
Some items escape this good-or-better restriction, specifically any item that alone is worth $500 or more.
This could be, for example, a battered antique, such as a tattered first edition of a book or a Civil War uniform with moth or bullet holes. In these cases, if a qualified appraiser says it’s worth more than $500, you can claim the item’s full value even though it is in less-than-perfect shape. Just be sure to submit the appraisal with your return.
Donated auto deductions no longer automatic
The groundwork for the household goods limitation was laid in 2005 when the IRS instituted new rules on donated cars.
That year, vehicle donors lost the ability to automatically write off a donated auto’s generally accepted value, as determined by Kelley Blue Book or similar valuation services.
Now you must take into consideration what the charity does with your donated vehicle. If the organization uses it to conduct its primary services, such as delivering meals to shut-ins, then you’ll be able to claim its fair market value.
But if, as is often the case, the group sells your donated vehicle, you might not be able to claim its full market value. In this case, even if an auto you donate is worth $1,000, if it’s subsequently sold by the charity for just $800, then that lower amount is all you’re able to deduct.
Charities must tell you what they intend to do with your auto when you donate. If it is sold, the group must send you a statement with the sales amount for your tax filing purposes.
Go ahead and donate your car if you want. Just don’t presume that it will get you the largest possible tax break.
A new option for older donors
While the auto and noncash contribution rules have been tightened, federal lawmakers decided to make it easier for one group of taxpayers to give.
The Pension Protection Act, which in 2006 changed the clothing and household goods rules, also included a provision that allows IRA owners who are at least 70½ to transfer money directly from a retirement account to a charity. This option has been extended through 2009.
The age is a key one for traditional IRA owners. When they reach that age, they must start taking some money from the plan by at least April 1 of the following year, even if they don’t need it. The exact amount, referred to as a required minimum distribution, is based on a formula detailed in an IRS table. The reason: Uncle Sam is tired of waiting for his payment on the money and earnings that have been sitting, tax-deferred, in the account for years.
For 2009, however, a new law waived the RMD rule because many retired account holders have seen the value of their nest eggs decline during the recent market downturn. But the option to transfer some IRA money to a charity remains and some taxpayers still might want to take advantage of the opportunity.
You can shift up to $100,000 directly from your IRA or other tax-deferred retirement plan to your favorite charity. The transferred gift to the charity doesn’t count as taxable income because the IRA owner never took possession of it. However, neither can you deduct the donation on your tax return.
The IRS now demands additional documentation for every monetary charitable gift, regardless of how small or large, that you’ve made since Jan. 1. This includes donations of cash or by check, electronic funds transfers, credit card charges and payroll deductions.
Previously, taxpayers could substantiate donations of money using notations in personal bank registers, diaries or notes made around the time of the gift. Those types of records are no longer sufficient.
Now, the IRS requires you show an official bank record or a written statement from the charity showing the organization’s name and the date and amount of the contribution.
An acceptable bank record would be a canceled check, a bank or credit union statement that shows the name of the charity and the date and amount paid, or a credit card statement indicating the charity and the transaction posting date.
In the case of payroll deductions, you need to hang onto any pay stub,
You don’t have to file the receipts with your returns. But if the IRS ever questions your contributions, the deduction can be immediately disallowed without the required documentation.
And the existing law that demands you get an acknowledgement from a charity for each deductible donation, either money or property, of $250 or more will still be in effect in conjunction with the more stringent documentation rule. In these cases, though, you might be able to consolidate your record keeping by getting a statement that details all of the required information on all your donations.