Protecting Your Charitable Deductions
Nearly 20 years ago, Congress put tough rules into the tax code that require donors to have specific receipts for most charitable contributions.
“We’re now seeing tax court cases where individuals are losing legitimate deductions,” observes Andy Biebl, a tax principal with CliftonLarsonAllen.
To assure that charitable deductions can withstand IRS scrutiny, taxpayers need to pay careful attention when assembling data for individual Form 1040 tax returns.
The $250 receipt rule
Any single contribution of $250 or more, whether by cash, check, or credit card, must be supported by a receipt that meets three requirements:
- The receipt must identify the amount of the contribution (or contain a description of the property, if not a monetary contribution).
- The receipt should include a statement indicating that no goods or services, other than intangible religious benefits, were given to the donor in exchange for the contribution (or identifies the value of any benefits provided to the donor that must be subtracted from the donation).
- The receipt must be in hand by the date the taxpayer files Form 1040.
Many donors give regularly to charities such as their church, and receive a single receipt that covers all donations for the calendar year.
“One receipt that wraps together all contributions, including some over the $250 threshold, is fine,” notes Biebl. “Just be sure that for every charity where there was at least one donation of $250 or more, there is a receipt in your tax file. The IRS won’t let taxpayers go back to the charity during an audit to secure a missing document.”
The “no-goods-or-services” statement is another key aspect of the charitable receipt. In the recent Durden Tax Court case, a $22,500 church contribution was disallowed because the receipt did not contain a no-goods-or-services statement.
“The no-goods-or-services legend can be hard to spot,” says Biebl. “Different nonprofits use different wording, and it may be in fine print at the bottom of the receipt — but it must be there or the IRS throws out the deduction.”
Often in the case of large donations, individuals receive a personalized thank you letter. But that may not be the document with the no-goods-or-services language. A thank you letter may have transmitted a separate receipt card containing the legend, and that card is the critical document to save in your tax file.
When completing a tax return organizer for 1040 preparation, Biebl advises that taxpayers continue to insert a single sum for their total charitable contributions for the year. “But be obsessive about your worksheet that tabulates the total,” he advises. “Make sure there is a backup receipt in your tax file for every instance where a single contribution tripped the $250 line.
Cash, property, and vehicle donation rules
Donations made in cash (i.e., greenbacks), regardless of amount, are not allowable unless supported by a receipt.
“That occasional $20 bill for the student fundraiser who knocks at the front door, or the coins dropped into the Salvation Army kettle can’t be claimed unless backed by a receipt” says Biebl.
If property is donated to a tax-exempt organization and the value is more than $5,000, the donor must secure an independent appraisal and include a special tax form as part of the donor’s tax return. The rules regarding who can perform the appraisal and the documentation are complex; your tax professional should be contacted for assistance. Fortunately, the appraisal rule does not apply to contributions of publicly-traded securities for which market quotations are readily available.
Appraisals are generally not required for vehicle donations. Special rules require the charity to inform the donor of the actual sale price of the vehicle by the charity and then limit the donor’s income tax deduction to that sale price. In limited circumstances, the donor may claim a market value deduction if the charity is retaining the vehicle for use in its exempt purpose. An exempt organization will issue Form 1098-C to identify which rules affect the donor of a vehicle and its sale price.
How we can help
Charitable contribution documentation rules are complex and present a hazard for donors who are noncompliant, even in small ways. If you have questions about how these rules affect deductions for your individual tax return, contact your tax professional.