While many families typically get into the charitable giving spirit around the holidays, it’s never too early to start thinking about year-end and charitable contribution planning. There are many things to consider—not only to which organizations you want to give, but also what to give. The “where” and “what”—and even “when”—may result in varying tax deduction outcomes and may also result in additional documentation and disclosure requirements. For a summary of fundamental charitable giving reminders, see this BKD Thoughtware® article.
Where to Donate
Many charitable givers choose to donate to certain organizations for nontax reasons. However, it’s also important to understand which organizations are qualified charitable organizations to determine eligibility for a tax deduction. The IRS has provided a Tax Exempt Organization Search to help identify entities eligible to receive tax-deductible charitable contributions. The search also provides information about types of eligible entities that may not be included on the list. A common mistake a donor makes is donating to nonqualified recipients, including individuals, most foreign organizations, political and lobby groups, social or sports clubs and civic leagues.
For the tax deduction, there is an annual ceiling based on adjusted gross income (AGI) and based on what’s donated and to which charities, as discussed in further detail in an archived BKD webinar. Under the Tax Cuts and Jobs Act (TCJA), the 50 percent of AGI limit is increased to 60 percent for cash contributions made in taxable years beginning after December 31, 2017, and before January 1, 2026.
What to Donate
Cash often is the donation of choice for both donors and charities because of ease of transfer, documentation and known value. Donations of noncash items often can require additional documentation and provide differing tax effects. Here are some general guidelines to follow if you plan to make a noncash charitable contribution this year:
Appreciated Capital Gain Property
In general, contributions of appreciated capital gain property (such as marketable securities or noncreated artwork) can provide additional tax benefits over selling the property and donating the proceeds. By donating appreciated capital gain property, the donor doesn’t recognize any capital gain but a deduction of fair market value (FMV) is allowed. To qualify, the property would have to generate long-term capital gain if it were sold at FMV. The deduction is reduced dollar for dollar for any other unrealized gain, i.e., short-term capital gain or ordinary gain.
Charitable Fundraising Events
For admission to attend a charitable fundraiser, the deduction is limited to the amount paid in excess of the FMV of any benefit received. For example, if admission to a charitable gala is $1,000 but it includes a meal valued at $50, the deductible contribution would be $950. For items purchased from or donated to a charitable auction there are additional limitations to your tax deduction. The purchase of a raffle ticket is not tax-deductible.
Volunteer services performed for a charity or services donated to a charitable fundraiser, i.e., photography session to be sold at an auction, are not deductible. However, unreimbursed out-of-pocket expenses incurred during the performance of those services are deductible, such as travel expenses to attend board meetings as a charity board member.
The 80 percent charitable deduction allowed for donations to colleges or universities that include the right to purchase priority seating was repealed under the TCJA and is no longer available for contributions made in tax years beginning after December 31, 2017.
Charitable Giving Tax Planning Opportunities
Those who are charitably inclined during retirement years often run into the challenge of either bumping into the AGI ceiling or not having enough deductions to itemize. This is especially true considering the increase to the standard deduction and new limitations to common itemized deductions under the TCJA.
One possible workaround is to donate up to $100,000 annually directly from your IRA to a charitable organization. Taxpayers must be at least age 70½ to use this strategy, known as a qualified charitable distribution (QCD). A QCD counts toward a taxpayer’s required minimum distribution (RMD) and moves the charitable deduction above the line by excluding the amount of the QCD from AGI.
Another option taxpayers should consider is donating larger amounts to a donor advised fund during preretirement income earning years—when their income is higher—or in the year of a business liquidity event. In this scenario, taxpayers may benefit from a deduction in the current tax year; however, they would have flexibility in when and where funds are distributed. This “bunching” technique also can be useful for those who otherwise won’t itemize due to tax reform changes.
Taxpayers also may consider using a charitable remainder trust, which may help them take advantage of a tax-deductible contribution before retirement and receive an income stream during lifetime, while leaving the balance to charity upon death. This Thoughtware article provides more details on these charitable giving strategies with tax reform.
Documentation & Disclosure Requirements
Charitable contributions require substantiation. As demonstrated in a June 2016 court case, lack of documentation can result in the disallowance of a deduction plus assessment of penalties. Documentation must be in place before a deduction is taken on a tax return.
Donated property valued in excess of $5,000 requires a qualified appraisal. Marketable securities traded on a public exchange are excluded from this requirement. This threshold applies to groups of similar types of property, not just individual items. Making smaller donations throughout the year doesn’t avoid this limit. This limit can be easy to exceed when cleaning out before a move or refresh or after inheriting household property.
For smaller noncash donations, keep documentation of what was donated and the value of each item along with the receipt. Many thrift shop charities provide online FMV guides.
Disclosure of tax basis is required for all property that’s not a long-term capital gain marketable security. The tax court recently denied a multimillion dollar deduction where basis wasn’t disclosed on Form 8283 and a qualified appraisal wasn’t attached to the return.
For more information on tax planning through charitable giving, contact Brenda or your trusted BKD tax advisor.