Charitable Tax Deduction Peculiarities
Charitable contributions are deducted as part of a taxpayer’s itemized deductions on IRS Schedule A, except for the special 2020 and 2021 provisions that allow up to $300 ($600 for married taxpayers filing jointly for 2021) of cash donations as a deduction for non-itemizers.
Charitable contributions can take many forms, and some are unusual or misunderstood. The following includes issues that a taxpayer may encounter related to non-cash contributions.
Charity Auctions – It is not uncommon for charitable organizations to conduct charity auctions where individuals contribute items to be auctioned off that others bid on, with the proceeds going to the charity. Frequent questions arise related to the charitable income tax deduction for those contributing items for the auction and for those that were winning bidders who purchased items at the charitable auction. As with most things tax, the answers can be convoluted.
Donors – Generally a donor will be eligible for a charitable deduction equal to their basis in the item contributed, not its current fair market value (FMV).
Example 1: A donor purchased an antique vase several years ago for $400 and contributed it for a charity auction. The antique’s current fair market value is $2,000, and the high bid at the auction was $3,000. The donor is only entitled to a charity deduction of $400.
Sometimes a donor will contribute the use of property, such as use of the donor’s timeshare or vacation rental. Unfortunately, per IRS regulations, granting an individual use of property while retaining ownership does not constitute a charitable gift and no charitable deduction is permitted. Nevertheless, the donor may deduct the cost of maintaining a personally owned asset to the extent its use relates to providing services for the charity.
Purchaser – The winning bidder may claim a charitable contribution deduction only for the excess of the purchase price paid for the item over its fair market value.
Example 1 (continued): The purchaser of the antique vase would be allowed a charitable contribution deduction of $1,000, the difference between their winning bid of $3,000 and the FMV of $2,000.
Charity Volunteer – If individuals volunteer their time to a charitable organization, they probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:
Away-From-Home Travel Expenses – Away-from-home travel expenses while performing services for a charity include out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if the services for a charity do not involve lobbying activities.
Entertainment – The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed (but the costs of the volunteer’s own entertainment and meals are not deductible).
Vehicle Use – If the volunteer uses their car or other vehicle while performing services for a charitable organization, they may deduct their actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs but not repairs, or deduct a flat 14 cents per mile for the charitable use of their car. Parking fees and tolls are also deductible.
Uniforms – Volunteers can deduct the cost of a uniform they wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.
There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:
Depreciation – No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles and computers.
Example 2: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate the value of her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.
Use of an Asset – A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.
To verify volunteer charitable contributions:
- Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
- You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
- Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.
Donating a Vehicle to Charity – A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is several rules that, in some cases, limit the amount of the charitable deduction.
Although not as prevalent as in the past, there are still charities that solicit contributions of vehicles. For taxpayers that contribute to a charity a motor vehicle (or a boat or airplane), the deduction is limited for those vehicles with a claimed value exceeding $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.
If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals to the needy or elderly every day for a year or driving 10,000 miles during a one-year period while delivering meals.
The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the poor and distressed or the underprivileged who need a means of transportation. In this case, the fair market of the vehicle is used to determine the amount of the contribution.
Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee (charitable organization). To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.
Acknowledgment by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good-faith estimate of the value of any such goods or services or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all the required acknowledgment elements for the donee to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.
Valuing Non-cash Contributions – One of the most common and abused tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and, in some cases, requires the value to be established by a qualified appraiser.
Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items.
Documentation – The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”
The IRS requires the following documentation for noncash contributions based on the total value of the donation:
Deductions of Less Than $250 – A taxpayer claiming a noncash contribution with a value under $250 must keep a receipt from the charitable organization that shows:
- The name of the charitable organization,
- The date and location of the charitable contribution, and
- A reasonably detailed description of the property.
Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).
Deductions of At Least $250 But Not More Than $500 – If a taxpayer claims a deduction of at least $250 but not more than $500 for a noncash charitable contribution, he or she must keep an acknowledgment of the contribution from the qualified organization. If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution. The acknowledgment(s) must be written and must include:
- The name of the charitable organization,
- The date and location of the charitable contribution,
- A reasonably detailed description of any property contributed (but not necessarily its value), and
- Whether the qualified organization gave the taxpayer any goods or services because of the contribution (other than certain token items and membership benefits).
If the charitable organization provided goods and/or services to the taxpayer, the acknowledgment must include a description and a good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so, and in this case, the acknowledgment does not need to describe or estimate the value of the benefit.
Deductions Over $500 But Not Over $5,000 – If a taxpayer claims a deduction over $500 but not over $5,000 for a noncash charitable contribution, he or she must attach a completed Form 8283 to the income tax return and must provide the same acknowledgment and written records that are required for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:
- How the property was obtained. (For example, purchase, gift, bequest, inheritance, or exchange),
- The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
- The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more (this requirement, however, does not apply to publicly traded securities).
If the taxpayer has a reasonable case for not being able to provide information on either the date the property was obtained or the cost basis of the property, he or she can attach a statement of explanation to the return.
Deductions Over $5,000 – These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation. When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.
If you have questions related to deducting or documenting charitable contributions, please give our office a call.