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Case Study for St. Patrick’s Day: Save Some Green on Gifts of Long-Term Capital Assets

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four leaf clover

In the spirit of St. Patrick’s Day, pour yourself a pint and read up on some simple, yet smart, charitable giving strategies. Whether you want to support the great work of an Oscar Wilde literary foundation or an Irish heritage association, tools and benefits that align with your charitable giving goals can help to stretch your green and make a difference in the causes you care about.

Top O’ the Morning Giving: Now Rather than Later

It’s been said, “you should be giving while you are living, so you’re knowing where it’s going,” so let’s explore a few options in the case of a hypothetical Irish Iowan, Sinead O’Sullivan.

Sinead O’Sullivan intends to donate to charity eventually, at death through her will and estate plan. But why not give now? Sinead can have more say about the use of gifts while she’s alive, and also feel the joy that comes with helping worthy causes. There are also positive tax benefits for Sinead to give now rather than later. Let’s look at these potential positive tax benefits.

green beer

Faith and Begorrah: Double Federal Tax Benefit!

Gifts of long-term capital assets, such as stock, real estate, and farmland (where leprechauns may live!), can receive a double federal tax benefit.

First, Sinead can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland. Even with the increased standard deduction under the Tax Cuts and Jobs Act, this is still a valuable consideration give the value of charitable donation would exceed the standard deduction. (It would be especially beneficial if Sinead is considering “bunching” as a tax-saving strategy.)

Second, assuming Sinead owned the asset for more than one year when the asset is donated, Sinead can avoid the long-term capital gain taxes which would have been owed if the asset was sold.

Guinness door

Let’s look at a concrete example to make this clearer. Sinead owns shares of publicly-traded stock in Diageo (Guinness‘ parent producer and distributor company), with a fair market value of $100,000. She wants her stock to help her favorite causes. Which would be better for Sinead (a single taxpayer) to do—sell the stock and donate the cash, or give the stock directly to her favorite charities? Assume the stock was originally purchased at $20,000 (basis), Sinead’s federal income tax rate is 37%, and her capital gains tax rate is 16%.

Donating cash versus donating long-term capital gain assets  Donating cash proceeds after sale of stock Donating stock
Value of gift $100,000 $100,000
Federal income tax charitable deduction ($37,000) ($37,000)
Federal capital gains tax savings $0 ($16,000)
Out-of-pocket cost of gift $63,000 $47,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Sinead can receive a federal income tax charitable deduction equal to the fair market value of the asset and also avoid capital gains tax.

In Iowa, however, there is an even more potential tax benefit.

Saints Preserve Us: 25% Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts made during a lifetime can be eligible for a 25% tax credit. There are only three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you).
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed – that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year – the rest is held by, and invested by, your local community foundation.

Let’s look again at the case of Sinead, who is donating stock per the table above. If Sinead makes an Endow Iowa qualifying gift, the tax savings are very dramatic. There are potentially huge tax benefits of donating long-term capital gain assets, such as stocks, real estate, and farmland while claiming the Endow Iowa Tax Credit:

Value of gift $100,000
Federal income tax charitable deduction ($37,000)
Federal capital gains tax savings ($16,000)
Endow Iowa Tax Credit ($25,000)
Out-of-pocket cost of gift $22,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Put another way, Sinead made a gift of $100,000 to her favorite charity, but the out-of-pocket cost of the gift to her was less than $25,000.

This is a great deal for Sinead and a great deal for Sinead’s favorite tax-exempt organizations. But, to be a smart donor you must also, of course, consider the potential areas of caution as well as the benefits.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

Cautionary Ballads

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of stock, real estate, and farmland is limited to 30% of adjusted gross income. A taxpayer may, however, carry forward any unused deduction amount for an additional five years.

Additionally, records are required to obtain a federal income tax charitable deduction. The more the charitable deduction, the more detailed the recording requirements. For example, to receive a charitable deduction for certain gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. It’s a wise idea to engage the right financial and legal professionals to be sure all requirements are met.

25 Days of Giving: IRS requirements for non-cash gifts greater than $5,000

Endow Iowa Tax Credits are also capped – both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits, and it’s available on a first-come, first-serve basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. In fact, this year approximately $6 million in tax credits were awarded and there are no more available credits to be granted. However, you can submit your application to be placed on the waitlist for 2020 tax credits.

Endow Iowa also has a cap per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million.

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues.  This article is presented for informational purposes only, not as tax advice or legal advice. Consult your own professional for personal advice.

Sláinte!

rainbow

Our case study subject, Sinead, found the pot o’ gold at the end of the charitable giving rainbow by working with a qualified attorney who specializes in complex donations. You may not be in the same tax bracket as Sinead or have stocks valued at the same rate, but regardless, I would recommend to all donors with large gifts (especially assets of the non-cash variety). Want to discuss your giving goals and options for long-term capital assets? I offer a free consultation to all, so don’t hesitate to contact me.

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25 Days of Giving: Quick Rule-of-Thumb on Charitable Deduction Limits

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charitable gift tax limits - hand holding christmas gift

If you choose to itemize your taxes, charitable contributions can reduce your tax bill. Generally you would choose to itemize when the combined total of your anticipated deductions (like charitable gifts) add up to more than the standard deduction. For 2019 taxes the standard deductions are:

  • $12,200 for single individuals
  • $12,200 for married, filing separately
  • $24,400 for married filing jointly
  • $18,350 for head of household

If you do choose to itemize, limits on federal income tax charitable deductions are quite high, but they do exist. Keep this in mind as you make any year-end donations. The specific limitations are complicated, and there are numerous exceptions. The limits are based on your AGI (adjusted gross income). AGI is an individual’s total gross income minus specific deductions.

A quick rule-of-thumb for different types of donated assets to public charities:

  • Appreciated capital gains assets (such as stock) up to 20% of AGI
  • Non-cash assets up to 30% of AGI
  • Cash contributions, up to 60% of AGI
  • You can deduct transportation costs and other expenses related to volunteering

Note that these rates are for public tax-exempt organization and private operating foundations. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30% adjusted gross income. (Check out these IRS status codes and deductible limits if you’re unsure of an organization’s limit.)

As I mentioned, most people won’t exceed these limits indicated above, but it can happen. For instance, if Jane Donor is a retiree living off of savings and donates more than her investments yield over the year, her limit could be exceeded. The good news is that in this case the IRS allows you carry over excess contributions for up to five following tax years.

Don’t forget to take these steps if you plan to itemize your charitable deductions:

  • Make sure the nonprofit organization is a 501(c)(3) public charity or private foundation
  • Keep a record of the contribution (usually the tax receipt from the charity)
  • Depending on the donation amount/type, you may need to obtain a qualified appraisal to substantiate the claimed value of the deduction
  • Subtract the value of any benefits you received for your charitable contribution before you deduct it

I’m happy to advise on your situation and help you maximize your charitable giving for this tax year. I can be reached by phone at 515-371-6077 and by email at gordon@gordonfischerlawfirm.com.

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25 Days of Giving: The Deal with Quid Pro Quo Donations

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woman holding ornament

Thanks for reading the 25 Days of Giving series. Each day through December 25, I’m covering different aspects of charitable giving for both donors and nonprofit leaders. Have a topic you want to be covered or questions you want to be answered regarding charitable giving? Contact me.

I’ve covered the term quid pro quo in a previous legal word-of-the-day blog post and much of that applies to understanding quid pro quo donations. In short, quid pro quo (now you know Latin!) translates to “something for something” and means an exchange of goods or services, where one transfer is contingent upon the other. In the case of nonprofit organizations, sometimes a good or service is offered in exchange for a donation. When the donor makes a charitable donation more than $75 and the nonprofit offers a good or service in exchange for said donation, the tax-exempt charity must provide a written statement to the donor disclosing the following:

  • Statement of the good(s) or service(s) received in exchange for the donation.
  • A fair market value (FMV) of the good(s) or service(s) received.
  • Information for the donor that only a portion of the total contribution (the portion that exceeds the FMV) is eligible for a federal income tax charitable contribution deduction.

What Nonprofits Need to Know

merry christmas event menu

As a nonprofit organization offering a quid pro quo donation situation, there’s a penalty for not making the required disclosure of contributions greater than $75. The penalty is $10 per contribution up to $5,000 per fundraising mailer or event. If your nonprofit fails to disclose, but can prove the failure was due to a reasonable cause, the penalty may be avoided.

Offering a good or service as an incentive for a donation can be a great way to spark donor interest, but you’ll definitely want to determine the FMV and have a reasonable method, applied in good faith, for doing so. This can be easier said than done for goods and services that are not generally or commercially available. If that’s the case it’s recommended to estimate the FMV off of similar/comparable products and services that are available. Let’s consider a couple examples:

Example 1. For a contribution of $20,000 a history museum allows a donor to hold a private event in a ballroom of the museum. The museum doesn’t typically rent out this room, so how can a FMV be determined if there’s no standard rate? Looking at other similarly sized and quality ballrooms in the surrounding, general area cost $3,000 a night to rent. So, even though the museum’s ballroom has unique artifacts, a good faith estimate of the FMV of the museum’s ballroom is $3,000. The donor would then have a charitable contribution deduction total of $17,000.

Example 2. Your charity offers a one-hour golf lesson with a golf pro at the local country club to anyone who donates $500 or more. Usually the golf pro can be hired for a one-hour lesson for $100. An estimate made in good faith of the lessons’s FMV is $100.

Example 3. What if the service offered is unique, but is typically free? A state park foundation fundraiser advertises that a donation of $200 or more entitles you a spot on one of four different guided nature hikes with a volunteer park ranger. Typically the foundation doesn’t offer guided hikes to the general public, but hiking in the state parks is otherwise free. So, the FMV made in good faith for the hike is $0 and the charitable contribution eligible for deductions would be the full amount.

The only time you wouldn’t need to disclose the quid pro quo donation is when the good(s) or service(s) are of insubstantial value. The IRS also says disclosure is not required when the donor makes a payment of $75 or less (per year) and the exchange is only membership benefits that equate to, “Any rights or privileges (other than the right to purchase tickets for college athletic events) that the taxpayer can exercise often during the membership period, such as free or discounted admissions or parking or preferred access to goods or services.” The contribution can also stay undisclosed if the good/service is, “Admission to events that are open only to members and the cost per person of which is within the limits for low-cost.”

Basics of What Donors Need to Know

woman in winter with scarf

As a donor, if you’re making a contribution to an organization and receive something in exchange, know that it’s almost like you’re paying for the good/service you receive, but then can deduct the rest of the contribution.

Let’s say you make a charitable contribution of $100 to a 501(c)(3) organization that helps mistreated farm animals. To celebrate their anniversary, the organization is offering donors that gift $80 or more a large coffee table book filled with stories, poems, and photographs of the animals the organization has helped over the years. The book’s fair market value is $30. This FMV is based on the price if you were to buy it outright from the organization’s online shop. In this situation you as a donor would need to receive a written disclosure detailing your contribution amount ($100), FMV of the good (the book) received ($30), and the portion that is considered a tax-deductible charitable contribution amount ($70).

Even though the tax-deductible charitable contribution amount is $70 (less than the $75 threshold), the total donation was $100, so the charity is still required to provide a written disclosure.

Whether you’re a donor or a nonprofit leader, I’m here to help promote and maximize charitable giving in Iowa. Questions about written disclosure compliance or FMV calculation? Don’t hesitate to contact me.

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25 Days of Giving: Tax tip- Substantiation of Gifts of $250 or More per Donee

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holiday wreath with ornament

Thank you for reading the 25 Days of Giving series! In the spirit of the holiday season, I’m covering different aspects of charitable giving…perfect to get you thinking about your end-of-year giving.

I came across an article in Forbes about two tax court cases where families claimed large charitable contributions on their federal income tax and, given that they were fraudulent claims, failed to have the substantiation to back it up. As the article stated, “the IRS is NOT messing around when it comes to holding taxpayers to the substantiation requirements for charitable contributions.” The substantiation is required in exchange for the federal income charitable deduction.

Note there is, of course, a limit to the charitable deduction on your taxes. Mind this when considering maxing out your charitable deduction.

25 Days of Giving: Quick Rule-of-Thumb on Charitable Deduction Limits

Substantiation requirements

First and foremost, the donations must be made to a qualified charitable organization. You must then be able to substantiate your contribution to said qualified charitable organization. The record-keeping required by the IRS depends on the amount of your contribution. At their most basic, the IRS substantiation rules for the charitable deduction are as follows:

  • Gifts of less than $250 per donee — you need a canceled check or receipt
  • $250 or more per donee — you need a timely written acknowledgment from the donee
  • Total deductions for all property exceeds $500 — you need to file IRS Form 8283
  • Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

25 Days of Giving: IRS requirements for non-cash gifts greater than $5,000

Gifts of $250 or more per donee

Let’s focus for today on gifts of $250 or more per donee. Specifically, the income tax charitable deduction is not allowed for a separate contribution of $250 or more unless the donor has written substantiation from the donee of the contribution in the form of a contemporaneous written acknowledgment.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

The $250 threshold

Note this $250 threshold is applied to each contribution separately. So, if a donor makes multiple contributions to the same charity totaling $250 or more in a single year, but each gift is less than $250, written acknowledgment is not required. [Unless the smaller gifts are related and made to avoid the substantiation requirements].

Written acknowledgment

The written acknowledgment must indicate:

  1. the name and address of the donee;
  2. the date of the contribution;
  3. the amount of cash contributed;
  4. a description of any property contributed;
  5. whether the donee provided the donor any goods or services in exchange for the contribution; and, if so;
  6. a description, and a good faith estimate, of the value of the goods or services provided or, if the only goods or services provided were intangible religious benefits, a statement to that effect.

Contemporaneous acknowledgment

The IRS definition of contemporaneous is that the acknowledgment must be obtained by the donor on or before the earlier of:

a. the date the donor files the original return for the year the donation was made; or

b. the return’s extended due date.

A donor cannot amend a return to include contributions for which an acknowledgment is obtained after the original return was filed.

Responsibility lies with the donor

Giving Like a Rock Star: Legal Tips for Donors on Giving Tuesday

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

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25 Days of Giving: Charity Auctions & Tax Deductions

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Candles and christmas tree for charity auction

Thanks for reading the 25 Days of Giving series! Share with friends, family, & colleagues. Knowledge is indeed a “gift” when it comes to encouraging and maximizing smart charitable giving. 

Headed to a holiday party this season? If it’s to celebrate/fundraise for your favorite charity, you might experience an auction (silent or otherwise). Charity auctions can be great fun and it feels like you’re giving back while also gaining a great gift to tuck under the Christmas tree!

Sometimes charity auction participants mistakenly believe their successful bids are completely deductible. However, since the individual receives the auction property, there is usually no federal income tax charitable deduction. But, if the bid can be shown to be in excess of the fair market value of the item, the amount in excess can be deducted as a charitable contribution.

The charity may make a “good faith estimate” of the fair value of the auction item before bidding commences.

Noel at charity auction

Let’s look at a few easy examples:

Example 1. A $50 gift certificate to a retail store is purchased at charity auction for $40. No deduction.

Example 2. A different $50 gift certificate to the spa is purchased at the charity auction for $70. This generates a $20 charitable deduction.

Example 3. You bid on and win a fruit basket for $30 at an auction supporting a local high school basketball program. The equivalent fruit basket at a local grocery store would cost $15, so you may receive a $15 tax deduction.

Unsure if your actions at a charity auction mean a charitable deduction? It’s always a good idea to get a second opinion. Also, if you’re a nonprofit leader planning on hosting a charity auction it’s advantageous to be briefed on all the tax and legal rules surrounding the event in case donors ask. I’m always happy to help and offer a free one-hour consultation. Reach me by phone at 515-371-6077 or by email at gordon@gordonfischerlawfirm.com.

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25 Days of Giving: Charitable Gifts Defined

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pinecones with candle

If you’ve been reading along with the 25 Days of Giving Series throughout December, thank you. If you’ve happened upon the GoFisch blog just now, welcome! I hope to see you back here often.

Giving for the sake of giving is great, however it’s financially wise to make certain your charitable donation is also beneficial in terms of your taxes.

Charitable gifts are defined by the IRS, at least for the purpose of qualifying for a charitable deduction from federal income tax. A review of statutes and caselaw show that the IRS attributes several major characteristics to charitable gifts:

Charitable intent

snow-globe-christmas

There must be a clear and unmistakable intention on the part of the donor to absolutely and irrevocably to divest herself of both title and control of the property.

Irrevocable transfer

The irrevocable transfer of the present legal title and dominion and control of the entire gift to the charity so that the donor can exercise no further act of dominion and control over it.

Delivery

bus with tree on top

The donor must deliver the gift to the charity. (Delivery can be made through a number of ways. This could be hand-delivered, like dropping off a check. It could also mean a secure electronic payment made on the charity’s website. In the case of charitable gifts of grain this could mean physically delivering the grain to a specific silo.)

Acceptance

The charity must accept the gift. For instance, you may want to donate part of your modern art collection to your favorite nonprofit, but if the nonprofit doesn’t have the resources to accept or doesn’t want the collection for some reason, it’s not a charitable gift.

Qualified organization

The donee must be an organization recognized as charitable by the IRS. You can use this IRS online search tool for organizations to see if the charity you’re considering donating to is recognized as tax-exempt.

Want to be sure your charitable gift is indeed a tax deductible charitable gift in the eyes of the IRS? What about charitable gifts or life insurance or a retained life estate? It certainly doesn’t hurt to take me up on my offer for a free one-hour consultation. Give me a call at 515-371-6077 or shoot me an email at gordon@gordonfischerlawfirm.com.

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25 Days of Giving: What the Personal Benefit Transfer Means for Charitable Contributions

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gold and silver christmas gift

Thanks for the reading the 25 Days of Giving series! Each day through December 25, I’m covering different aspects of charitable giving for both donors and nonprofit leaders. Have a topic you want to be covered or questions you want answered regarding charitable giving? Contact me.

The vast majority of public and private universities and colleges are tax-exempt entities as defined by Internal Revenue Code (IRC) Section 501(c)(3) because of their educational purposes and/or the fact that they are state governmental entities. If this is the case, have you ever wondered why tuition for a student to attend a university is not deductible as a charitable contribution? This is known in gift law as as a “personal benefit” transfer. The personal benefit of education for the student is equal to the tuition paid. Because of the benefit value, there is no charitable gift and therefore no federal income tax charitable contribution deduction.

university library

Another example of personal benefit transfer would be payment to a charity for specific services, and such payments are not deductible. In Hernandez v. Commissioner, the U.S. Supreme Court determined gifts of fixed amounts to the Church of Scientology (a tax-exempt religious organization) in exchange for personal counseling were not deductible. The Court held that such “gifts” were more appropriately considered payments for services rather than charitable contributions.

If you ever have a question if a charitable gift is tax deductible, don’t hesitate to contact me. It never hurts to get a second opinion on potential personal benefit situations, especially if the opinion can mean potentially avoiding an IRS audit.

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Not Every Charitable Donation is Tax Deductible

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hand holding flowers

It’s the end of January and that means Tax Day is creeping closer. You tend to hear a lot about what sort activities are tax deductible. You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. And, you’ll certainly want to be aware for substantiation purposes what contributions are indeed deductible.

What recordkeeping is required for charitable deduction?

But, in conquering your charitable giving goals, it’s just as important to know which nonprofit organizations are NOT qualified beneficiaries for tax-reducing gifts. Additionally, not all gifts to qualified charities are eligible. Contributions to certain entities may appear to be tax-deductible, but in actuality are not. This is not to say that these contributions are not valuable and helpful to the respective donees, it’s just that the U.S. government isn’t going to give you a tax break.

Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Contributions made to the following are NOT considered viable for the charitable deduction:

Promises and Pledges

man on computer in blue room

Let’s say you made a charitable pledge to a local 501(c)(3) for $150, but only paid $50 in donation during the tax year of the respective tax return. You can only deduct the $50 actually donated. Once you make the transfer of the rest of the pledge ($100) then you could deduct that from the appropriate tax year.

Political parties, campaigns, and action committees

It’s important to get involved in the process fo democracy, but joining politic through monetary support does not translate into a charitable donation. Funds given to political candidates, parties, and PACs cannot be claimed. This also includes money spent to host or attend fundraising events or advertising.

boy skateboarding with American flag cape

Fundraising tickets

I’m sure you cannot count all the times you’ve been asked to purchase raffle tickets, bingo cards, lottery-based drawings and the like. It’s a common fundraising tactic, but such costs are not deductible.

Personal benefit gifts

The IRS considers a charitable contribution to be one-sided. This means if you receive something in reciprocity for a donation—anything from a tote bag, to a plant, to a three-course dinner—only the amount in excess of the fair market value of the item/service received is deductible. Let’s say your little neighbor is selling popcorn to raise money for their scouting troop. You buy some popcorn from the kid for $10 and the retail value of such a popcorn tin is $6. This donation would translate into a $6 charitable deduction. Likewise, you purchase a $75 ticket to an annual event hosted by a qualified charity. The event includes a meal that would have cost you $30 at a restaurant; overall your charitable deduction would be $45. (Read more about quid pro quo donations here.)

25 Days of Giving: What the “No Smile” Rule Means for Your Taxes

Receipt-less donations

You’ve probably given more than you can write off from small cash donations to your church’s collection plate, the Salvation Army holiday bell ringer, and charity bake sales. Why cannot you just guesstimate, add this all up, and deduct the amount off of your taxes? Receipts. The IRS requires proof of all cash donations big and small; a canceled check, statement or receipt from the recipient organization can suffice for cash donations up to a $250 (in total), and then more substantiation is demanded.

Person-to-Person

I’ve seen many successful crowdfunding campaigns for individuals raising money for a multitude of things. Let’s say your cousin is raising money for an expensive medical procedure through an online site and you donate to help them reach their goal. Or, maybe your nephew is raising money to take a mission trip this summer. Unfortunately and contributions earmarked for a certain individual (despite the economic/medical/educational need) are not deductible, according to IRS Publication 526. However, if you were to make a contribution to a qualified organization that in turn helped your cousin or nephew out with a grant or scholarship, for example, the contribution would be deductible. Make note though, even if you were to give a contribution to a charity in order to help a specific individual, you cannot designate the money to one specific individual for the gift to. Basically, the contribution cannot be given directly or indirectly to a specific individual and still be tax deductible.

two people talking

The list could go on for contributions that are not deductible, but some other notable inclusions to be aware of include:

  • For-profit schools (nonprofit schools are good to go so long as donations are not made to benefit a specific individual)
  • For-profit hospitals (nonprofit hospitals are A-OK)
  • Foreign governments
  • Foreign-based nonprofits (with some exclusions for specific nation-states)
  • Fines or penalties paid to local or state governments
  • Value of your time for services volunteered to a charity
  • Value of blood donations (you just need to do that one out of the goodness of your heart…literally)
  • Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
  • College tuition (Even if the school is a nonprofit, tuition to attend the school is NOT tax deductible as a charitable contribution)
  • Professional groups/associations (such as civil leagues)

This may make it seem like there are many exceptions to the charitable deduction rule, however there are still an innumerable number of qualified nonprofit organizations that are a good way of reducing taxes (remember, you have to itemize) while also helping others. If you have questions about the charitable contribution tax deduction it’s a good idea to consult with your professional advisors. It’s also a good idea to heed these tips prior to making a charitable donation and double-check the organization’s status on the IRS’ Exempt Organizations Select Check tool, which allows users to search a list of organizations eligible to receive tax-deductible charitable contributions.

25 Days of Giving: Donation Bunching

I would be happy to have a conversation regarding the tax code, the best time and way to maximize a charitable donation, and help ensure you’re in compliance in compliance with all state and federal laws. Contact me at via email or by cell phone (515-371-6077). 

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Giving to your Church’s Collection Plate? Substantiation of Gifts of Cash Less Than $250

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church pews

I worry about all the folks going to church this morning. (I use “church” as a term that could be easily replaced with other houses of worship: synagogue, mosque, etc.) Here’s my specific concern: when the collection plate comes around, do folks give cash? Probably. And if so, are they documenting their charitable gift? Probably not. For most people, it’s a $20 here and a $10 there, but over the course of many Sundays that can add up quickly. The total figure of such donations to a tax-exempt organization, like your church, could be claimed as a federal income tax charitable deduction. But, without substantiation, you cannot claim the beneficial charitable deduction.

The IRS requires you to have records and documents backing up your claims of charitable donations. The greater the amount of the deduction you seek, the more records that are required. Let’s start with a basic category: gifts of cash less than $250.

Substantiation requirements for monetary gifts less than $250

wallet with cash money on top

A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

Meaning of “monetary gift”

For this purpose, the term “monetary gift” includes, of course, gifts of cash or by check. But monetary gift also includes gifts by use of:

  • credit card;
  • electronic fund transfer;
  • online payment service;
  • payroll deduction; or
  • transfer of a gift card redeemable for cash.

Meaning of “bank record”

Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee. The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.

Meaning of “written communication”

The term “written communication” includes email. Presumably it also includes text messages. But, again, the written communication, whether paper or electronic, it must show the name of the donee, the date of the contribution, and the amount of the contribution.

I must repeat. A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

How about monetary gifts [as defined above] which are $250 or more? As to cash contributions of at least $250, an extra set of substantiation rules apply. Click here to read more.

pulling dollar out of wallet

Responsibility lies with the donor

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

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Give More & Pay Less in Taxes: 5 Pro Tips for Iowans

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5 giving packages

It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Giving now allows you more say over how your gifts are handled, and you’ll get to experience the joy that comes with helping the causes you care for most. Gifts to charities made during your lifetime also provide significant tax advantages. Here are five pro tips to stretch your charitable dollar.

Pro tip #1: Don’t give cash.

Sure, it’s easiest to give by cash or check. But, cash gifts are not tax-wise gifts…almost any other asset is a smarter, tax-wise gift than cash! As you’ll see throughout this short article, it makes much more tax sense to give other, less obvious assets.

giving-cash

 

Pro tip #2:  Use the federal income tax charitable deduction.

I once read a Forbes article where the journalist said she cringes at church, when the collection plate goes around. The reason? The columnist worries churchgoers who toss in cash aren’t keeping records, and so are losing money by not claiming the federal income tax charitable deduction.

I don’t go that far, I don’t cringe in church, but I do think we should all keep records of our charitable gifts. What information you have to keep, and may need to provide to the IRS, depends on the size of your gift.

Pro tip #3: Use appreciated assets.

Gifts of long-term capital assets can receive a double federal tax benefit. Long-term capital assets may include items such as stock, real estate, and farmland, or even artwork, or collections like stamps or coins. The first tax benefit was just discussed; donors can receive an immediate federal income tax charitable deduction, equal to the fair market value of the long-term capital asset. Second, assuming the donor owned the asset for more than one year, the donor can avoid long-term capital gain taxes which would have otherwise been owed if the asset was sold instead of donated.

https://www.gordonfischerlawfirm.com/gifts-of-long-term-versus-short-term-capital-gain-property/

Pop quiz!

Let’s look at a concrete example to make sure the first three pro tips are clear. Pat owns farmland and she want to give one acre. Let’s assume one acre has a fair market value of $1,000. She wants to use the farmland to help her favorite causes. Which would be better for Pat — to sell the farmland and donate the cash, or give the farmland directly to her favorite charities? Assume the farmland was originally purchased at $200 (basis), Pat’s income tax rate is 37%, and her capital gains tax rate is 20%.

donate farmland over cash table

NOTE: Above table is for illustrative purposes only. Only your own financial or tax advisor can advise in these matters.

Pat receives a double benefit; she gets a federal income tax charitable deduction equal to the fair market value of the asset, AND avoids paying capital gains tax.

Pro tip #4: Make gifts which are eligible for the Endow Iowa Tax Credit

Through the Endow Iowa Tax Credit Program, donors can receive a 25% state tax credit for gifts made during lifetime. Endow Iowa has three requirements to qualify. The first two requirements are simple, but the third requirement can be tougher to meet.

  1. The gift must be given to, and receipted by, a community foundation. Opening a fund at your local community foundation is easy.
  2. The gift must be made to an Iowa charity. If it’s a national charity, and not a statewide or local organization, you simply need to check if they have an Iowa arm, and many do. In other words, to get the Endow Iowa tax credit, you couldn’t give to Girl Scouts of America, while you could give to Girl Scouts of Greater Iowa. To get the Endow Iowa tax credit, you couldn’t give to National Public Radio, but you could give to Iowa Public Radio.
  3. This third requirement is a bit more difficult than the first two. The Endow Iowa Tax Credit Program was designed to encourage endowments. Endowment means a permanent fund—something that will go on forever. So, to get the Endow Iowa tax credit, there is a limit on spending; you can only give out a maximum of 5% per year. This may, or may not, square with your charitable goals. Yet, for a tax credit of 25% off your gift, it’s something to seriously consider.

Endow Iowa Tax Credits are capped. The Iowa Legislature sets aside a pool of money for Endow Iowa, and it’s available on a first-come, first-served basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. However, you can submit your application to be placed on the wait list for the next year’s tax credits.

Endow Iowa also has a cap for individuals and couples. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million (if both are Iowa taxpayers).

giving compass hand

Pro tip #5: Combine Pro Tips #1-4 for dramatic tax savings.

Combine the first four pro tips! If you combine the first four pro tips, you can achieve dramatic tax savings. Let’s look again at the case of Pat and her donation of a long-term capital gain asset (her farmland) with the addition of the Endow Iowa Tax Credit. Check out Pat’s tax savings:

Endow Iowa tax credit table

NOTE: Above table is for illustrative purposes only. Only your own financial or tax advisor can advise in these matters.

Pat gave her favorite charity $1,000 in the form of a long-term capital gain asset. After Pat combines the federal income tax charitable deduction, the capital gains tax savings, and the Endow Iowa Tax Credit, the out-of-pocket cost of that gift of $1,000 is less than $250. Because her gift was endowed, it will be invested by the local community foundation and presumably will grow. It will continue benefiting the charities Pat cares about, forever…talk about a legacy!

Case Study for St. Patrick’s Day: Save Some Green on Gifts of Long-Term Capital Assets

Let’s Talk

Remember, all individuals, families, businesses, and farms are unique and therefore have unique tax and legal issues. This article is presented for informational purposes only, not as tax advice or legal advice for an individual’s situation. If you would like to discuss how you can help the causes you’re passionate about, while also making smart tax decisions, don’t hesitate to reach out via email or phone (515-371-6077).

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