Taxpayers should give as much consideration to the form in which they make charitable donations as they do to the amounts they give. By making some changes they might deliver more benefits to themselves and the charities.
Cash contributions, including donations made by checks and payment cards, are the most common and easiest way to donate.
The donor makes the transfer to the charity, and the gift is complete. The amount of the gift is clear and easy to prove to the IRS.
An alternative is to give property. Non-cash gifts might generate more tax benefits for you and the charity than cash donations.
Of course, one advantage of property gifts is your cash balances aren’t reduced. You benefit the charity and potentially receive a tax deduction without giving up cash.
One form of non-cash gift is used non-investment property, such as household goods, vehicles, and others.
Because of past abuses by some taxpayers, Congress and the IRS tightened the rules for deducting and substantiating such gifts.
Many taxpayers aren’t concerned about proving the amount of charitable gifts now, because they aren’t deducting the donations. Charitable contributions are deducted as itemized expenses on Schedule A. That can be done only when the total itemized expenses exceed the standard deduction.
Since the 2017 tax law doubled the standard deduction, the itemized expenses of most taxpayers don’t exceed their standard deductions. So, they don’t care about the limits on deductions for personal property or the higher level of proof required.
Donations of investment property or another form of non-cash gift and can generate significant benefits to the taxpayer and the charity.
When appreciated investment property is transferred to a charity, the donor doesn’t owe capital gains taxes on the appreciation that occurred during his or her holding period. In addition, the charity can sell the property at its current fair market value and, because it is a charity, owe no taxes on the sale.
Donating appreciated property allows the donor to give more value to the charity than if the property were sold, capital gains taxes paid, and the after-tax amount donated. It also doesn’t require the donor to come up with cash.
The donor qualifies for a charitable deduction equal to the fair market value of the property on the date of the gift. The deduction can be taken when total itemized expenses for the year exceed the standard deduction.
The downside of donating appreciated property and taking deductions for them is the taxpayer has to navigate limits on the deductions and the higher standard for proving them.
The tighter substantiation rules begin when any type of gift exceeds $250. You need to receive by the time your tax return is filed a written acknowledgement from the charity that contains the name of the organization and donation amount. It also should say that you received nothing of value in return for the donation.
For non-cash gifts, there must be a description of the property. Of course, for cash gifts you need a cancelled check or a financial account statement showing the payment was made.
Additional rules are triggered for non-cash gifts valued at more than $500. You have to file Form 8283 with your tax return. Section A of the form is completed when the gift was valued from $500 to $5,000. When the gift’s value exceeded $5,000, Section B of the form must be completed.
The rules usually aren’t burdensome when the donation was of publicly-traded property that is easily valued, such as a stock or mutual fund that’s listed on a public exchange.
But in other cases, the taxpayer might have to obtain and pay for a qualified appraisal of the property’s value before making the gift.
The taxpayer also should consider the different vehicles available for charitable giving.
The donor can transfer money or property to a donor-advised fund, as I’ve described in the past.
Or the donor might receive a stream of income through a charitable gift annuity or charitable remainder trust.
Private foundations are another option for wealthy people, though there are significant rules regulating them that have caused some wealthy people to favor DAFs.
The annual limits on charitable contribution deductions also should be considered.
The general rule is that deductions for cash contributions can’t exceed 60% of the year’s adjusted gross income. But the limit can be 50%, 30%, or 20% of AGI, depending on the type of property given and the type of organization it was given to.
The limits are explained in detail in free IRS Publication 526, available at www.irs.gov. Read IRS Publication 526 carefully or work with a tax expert before deciding to make a substantial contribution of property to a tax-exempt group.
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