There are many reasons why individuals donate to charitable organizations. Some people donate simply because they are passionate about the mission of the charity they are contributing to. Others like to show their gratitude while knowing that they are helping the community to be a better a place. While some enjoy establishing a legacy to be remembered by for the part they played in enhancing the lives of others. No matter the reasons for peoples’ generosity, individuals can personally benefit from their charitable acts by receiving a tax-deduction; however certain conditions must be met in order to receive the tax benefit.
To make sure their donation qualifies for the tax benefit, the donor must do some recordkeeping. This includes maintaining proper bank or credit card records of the contribution(s) and most importantly obtaining correspondence/receipt from the charity for any single contribution of $250 or more. The document from the charitable organization acknowledging the donation should be obtained by the donor before their 1040 tax return is filed. Donors will want to be sure that they read the document from the organization carefully since it will usually state what portion of the donation is tax deductible.
Donations are not always made in the form of cash, sometimes donors give property, publicly traded securities or other non-cash items. The documentation can vary depending on the type and amount of donation. For instance, some documents acknowledging a donation might state that “no goods or services were provided by the organization in return for the contribution,” if that is the case. If goods or services were provided by the charity in exchange for the contribution, the charity will state a good faith estimate of the value of the goods or services provided which reduces the amount of the donation that is tax deductible. .
Additionally, when non-cash contributions over $500 are made an additional tax form must be filed detailing the donation. Furthermore, for most non-cash contributions in excess of $5,000, a qualified appraisal needs to be obtained and submitted with the tax return. If communication does not include the required information, if the necessary support for the donation is not received and/or the necessary tax forms are not filed, it is unlikely that the tax deduction will hold up under audit or tax court and will be disallowed.
A recent tax court case proves that the IRS is strict about following the above requirements. For example, a $64.5 million contribution that was made to a charitable organization was disallowed in a recent tax court case simply because the correspondence/receipt did not include the words “no goods or services were provided in exchange for your contribution” on it. Yes a $64.5 million charitable contribution was disallowed because the donor did not make sure their documentation was sufficient pursuant to tax laws.
As a donor, it is always important to check with a CPA to ensure that the necessary support and documentation is obtained so you can claim and substantiate your charitable deduction.
Lenore C. Sanchez, CPA