More On Tax Planningfrom The Advisor's Professional Library
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
As individuals and businesses rush to make charitable contributions at this busy time of year, the IRS has issued several tips as reminders of tax law provisions that have taken effect in recent years.
These touch on transfers that older IRA owners can make, donations of clothing and household items, monetary donations and a grab bag of things to keep in mind for different kinds of giving.
Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option is available for distributions from IRAs, regardless of whether the owners itemize their deductions.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible, including donor-advised funds and supporting. Distributions from employer-sponsored retirement plans are not eligible.
Created in 2006, this provision expires at the end of 2011.
Further information is available in Publication 590, Individual Retirement Arrangements.
Rules for Clothing and Household Items
Clothing and household items donated to charity generally must be in good used condition or better in order to be deductible. A clothing or household item for which a taxpayer claims a deduction of more than $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct a charitable donation of money, of whatever amount, a taxpayer must have a bank record or a written communication from the nonprofit that shows the name of the charity and the date and amount of the contribution.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements do not change the requirement that a taxpayer obtain a charity’s acknowledgment for each deductible donation of $250 or more. However, one statement may meet both requirements.
The IRS also offered these reminders:
- Contributions are deductible in the year made. This includes donations charged to a credit card before the end of 2011 and checks mailed in 2011.
- Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
- Only individual taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction.
- For all donations of property, including clothing and household items, try to get from the charity a receipt that includes the name of the charity, date of the contribution and a reasonably-detailed description of the donated property. Keep a written record of a donation left at a charity’s unattended drop site that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.
- The deduction for a motor vehicle, boat or airplane donated to charity with a claimed value of more than $500 is usually limited to the gross proceeds from its sale. The organization must provide the donor Form 1098-C, or a similar statement, and this must be attached to the donor’s tax return.
- If the amount of a taxpayer’s deduction for all noncash contributions is more than $500, a properly-completed Form 8283 must be submitted with the tax return.