Charitable giving is a key factor in many taxpayers’ yearly planning. In general, taxpayers who opt to itemize their deductions rather than take the standard deduction can deduct the value of any property contributed to a qualified organization. Although this is the general rule, taxpayers should account for myriad pitfalls to leverage the tax potential of a charitable contribution, including:
- Establishing the proper deductible amount of the contribution
- Attributing the contribution to the intended year
- Making the contribution to a qualified recipient
There are two critical factors to consider when determining a contribution’s deductible amount: the item’s gross value and whether the taxpayer received any personal benefit from the exchange. While valuation tends to be the most subjective component of charitable giving, there are some general guidelines that can be used when making the determination:
- Cash contributions are fairly straightforward to value. One important caveat, however, is that each cash-based contribution must be supported by a bank record or other written acknowledgment.
- Contributions of publicly traded stock are valued using the “high-low method,” which takes the average of the stock’s high and low price on the contribution date.
- Contributions of used clothing and other household goods are valued at fair market value (FMV). When determining the FMV of these types of goods, “thrift-shop value” is the term most commonly used. Many organizations provide a reference guide for determining a good’s thrift-shop value, such as this one from The Salvation Army.
- Contributions made by a partnership or S corporation on your behalf are listed on the Schedule K-1 you received from the entity. No further substantiation or valuation is required at the owner level.
- Automobile, boat and airplane contributions are valued depending on how the receiving organization intends to use the item. Form 1098-C should be obtained from the receiving organization to properly substantiate the FMV of these items if the claimed value exceeds $500.
- Real estate contributions are valued in accordance with a qualified appraisal. Consult with your BKD advisor before making this type of contribution to assess whether the qualified appraisal and appraiser requirements are met.
- There’s no value assigned to time spent for services contributed to an organization.
Once the value of a contribution is determined, the next step in determining the deductible amount is to consider the value of any personal benefits received. The gross value of a charitable contribution must be reduced by the FMV of the benefits received to determine the net deductible amount reported on the tax return.
With the value of your contribution squared away, the next crucial consideration is to confirm your charitable gift is deductible in the current tax year. For most contributions made during a given tax year, there’s no question as to which year it relates; however, for contributions made close to December 31, this determination can get a bit tricky.
Keep the following deadlines in mind when making contributions close to year-end:
- Cash contributions made by check are included in the year in which the check was mailed or hand-delivered.
- Cash contributions made by credit card are included in the year the card was charged—this makes credit cards an ideal tool for facilitating last-minute giving.
- Securities such as stocks, bonds and mutual funds are considered contributed on the date the charitable organization becomes the legal owner of the security. Be sure to consult with your investment custodian for help attributing your gift to the intended tax year.
- Contributions of tangible property, e.g., clothing, household goods, collectibles and real estate, are included in the year in which ownership unconditionally transfers to the charitable organization.
The final consideration for charitable giving is whether the organization receiving the gift is a qualified recipient. While most charitable organizations are recognized as qualified recipients under Internal Revenue Code Section 501(c)(3) or other tax provisions, some organizations don’t qualify for this treatment. Political organizations, social clubs and most foreign organizations are considered ineligible, and contributions to these entities won’t be tax-deductible. Check out this guide from Director Gretchen Cliburn for tips on vetting charities to help improve the effect of your donation.
Remember, the overall effect of your charitable contributions may be limited due to your personal tax situation. Furthermore, the type of contribution and/or charitable organization you contribute to affects what adjusted gross income limitations may apply. Early planning and prudent record keeping are essential if your charitable giving is to provide the intended tax benefits.