March 29, 2019
This year’s IRS Dirty Dozen list includes overstatement of deductions. IRS puts out a list every year of the top 12 tax scams. One of those deductions includes charitable contributions. Making charitable contributions is not a scam, after all, it is a deductible expense; but, inflating the amount donated is considered falsely padding deductions and IRS is on the look-out.
Under the Tax Cuts and Jobs Act (TCJA), the standard deduction has been increased commencing with tax year 2018. Single and married filing joint filers are able to deduct $12,000, and married taxpayers filing jointly can deduct up to $24,000. This is up from 2017’s standard amounts of $6,350 and $12,700, respectively. This increase means that many who used to itemize their deductions may simply take the standard deduction as it may be more financially beneficial. Many however, will still itemized their deductions and charitable contributions is an area that has some changes and an area the IRS will eyeball.Good News
Commencing with 2018 tax returns, TCJA increased the total amount of cash contributions that can be deducted to 60%, up from 50% in prior years. Cash contributions exceeding the 60% limitation can be carried forward and deducted for up to five years. No longer is there an overall limit on the total amount of certain itemized deductions based on your adjusted gross income. Before the tax reform, you may have had to reduce your donation deduction if your adjusted gross income exceeded the pre-set limits according to filing status. There are other limits that may apply, but this really depends on the type of property you are donating and the category of qualified organization you give it to, learn more here. You must of course, make your donations to qualified organizations in order take the deduction. Taxpayers who are 70 ½ and older who contribute from their IRA (up to $100,000) directly to a qualified charitable organization do not need to include this distribution as income on their return – so essentially, it’s a 100% donation deduction.Record Keeping
This is an important detail since one of the requirements for claiming a charitable tax deduction to a qualified organization is that you be able to prove it if the IRS sniffs around later. The rules for the kinds of records you should keep depend on the kind of donation made. Keep in mind, handouts to the homeless or donations to GoFundMe accounts – no matter how deserving these individuals are, cannot be deducted as a charitable contribution.Cash Contributions
Cash, check, debit or credit card, payroll deduction or other electronic funds transfers are considered cash contributions.
You must obtain and keep the contribution receipt showing the date and amount donated. A bank record showing the date, amount and the name of the charitable organization is acceptable, or the front and back copy of the canceled check. For donations exceeding $250, you must have a written acknowledgement from the qualified organization of the donation showing the amount donated and whether the organization gave you any goods or services as a result of the donation. The IRS now requires you obtain this verification either by the date you file your return for that year or by the due date, including extension for filing the return. This is critical to retain, particularly if you come under audit or receive a tax notice, as no deduction will be allowed without it.
For payroll donations, you must keep the pay-stub, W-2, or other verification from your employer of the date and contribution amount. Additionally, you must retain a document from the charitable organization that verifies the donation(s) made.
For any property other than cash, record-keeping varies depending on certain contribution thresholds.
Deductions of less than $250 requires a receipt from the charitable organization showing (1) their name and address and (2) the date of the donation with (3) a sufficiently detailed description of the property. A letter from the organization listing all three will be accepted as a receipt. If you leave property at an unattended drop off site and cannot obtain a receipt, you must document the name and address of the charity, the date donated, and record each item donated and their fair market value, as well as the method you used to arrive at the value you’ve placed on each donated item.
Contributions of $250 but not more than $500, will only be allowed if you obtain a contemporaneous written acknowledgment from the charitable organization that includes a description of the property donated. If you make more than one donation of $250 or more, you must obtain a separate acknowledgement for each or one acknowledgement that shows your total contribution (including descriptions).
When claiming a contribution of over $500 but not more than $5,000, not only will you need the contemporaneous acknowledgement from the charity, you will need to document how you got the property (gift, purchase, inheritance, etc.), the date you received or created it, and the cost basis. Be prepared to prove cost basis in the event of an IRS notice or audit.
Any donation over $5,000 (not including cars) will require the above stated items along with a qualified written appraisal.
These are a summary of the most common types of contributions and requirements. Other rules apply to volunteer out-of-pocket expenses, vehicle donations and easements, to name a few.
The IRS regulations implementing these requirements have been adjusted over the years but were recently finalized under TCJA and apply to tax years 2018 through 2025.Nutshell
While careful record-keeping can take patience, you’ll be glad you’ve taken these steps if Uncle Sam decides (or the computer) to send you a letter questioning your charitable contributions. For more information on how to protect yourself from an IRS income tax notice or audit, visit www.taxauditdefense.com and see IRS Audit Protection.