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25 Days of Giving: Donate More to Your Place of Worship & Pay Less in Taxes

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Thanks for reading the 25 Days of Giving series; this is the “gift” for day 17! Plan on coming back to the blog every day from now through Christmas Day.

Might this be a good season to consider being more generous to your place of worship? Generally, churches are considered to be public charities. This means they are typically exempt from local, state, federal, and property taxes. This also means donations can be deducted if you itemize your federal income taxes.

Allow me to offer up four tips which could allow you to give more to your church and pay less in taxes. It’s a win-win situation: make a financially wise contribution AND a difference in an organization you care about.

Tip 1: Consider All Your Assets

You need to consider ALL your assets for smart giving. Don’t just consider cash, but look at your entire basket. Here are three real-world examples:

  1. I know a farmer who doesn’t have a lot of cash on hand—we’ve all heard the phrase, “land rich, cash poor.” But, farmland itself can be a very tax-savvy gift. So are gifts of grain.
  2. I know a young person who’s self-employed. Again, not lots of cash on hand. But, this person inherited an IRA from a relative, and must make annual required minimum distributions [RMDs]. IRA RMDs can be a tax-wise gift.
  3. I also know a couple who recently retired. The couple has three life insurance policies, which made lots of sense when their kids were younger. Their kids are now grown and independently successful. A paid-up life insurance policy could be signed over to their favorite charity.

Your individual facts and circumstances are unique. Consider seeking a qualified attorney or financial advisor to look at your whole basket of assets.

25 Days of Giving: Help a Charity With Your Retirement Assets

Tip 2: Consider Long-Term Capital Gains Property

Gifts of long-term capital assets, such as publicly-traded stock and real estate, may receive a double federal tax benefit. Donors can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock or real estate.

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 gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met.

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

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

Let’s look at an example to make this clearer. Sara Donor owns stock with a fair market value of $1,000. Donor wants to use the farmland to help her favorite causes. Which would be better for Sara? To sell the stock and donate the cash? Or, gift the stock directly to her church? Assume the stock was originally purchased at $200 (basis), Sara’s income tax rate is 37%, and her capital gains tax rate is 20%. 

Donating cash versus donating long-term capital gain assets, such as publicly-traded stock Donating cash proceeds after sale of stock Donating stock directly
Value of gift $1,000 $1,000
Federal income tax charitable deduction ($370) ($370)
Federal capital gains tax savings $0 ($160)
Out-of-pocket cost of gift $630 $470

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 made during lifetime, such as stocks or real estate, can be doubly beneficial. The donor can receive a federal income tax charitable deduction equal to the fair market value of the asset. The donor can also avoid capital gains tax.

Tip 3: Consider Endow Iowa Tax Credit Program

Under the Endow Iowa Tax Credit program, gifts made during lifetime can be eligible for a 25% tax credit. There are 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 (i.e., 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. This final requirement is a restriction, but still, in exchange for a 25% state tax credit, it must be seriously considered by Iowa lawyers and donors.

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

Tip 4: Combine the First Three Tips!

Let’s look again at the case of Sarah, who is donating stock per the table above. If Sarah makes an Endow Iowa qualifying gift, the tax savings are dramatic:

Tax benefits of donating long-term capital gain asset with Endow Iowa
Value of gift $1,000
Federal income tax charitable deduction ($370)
Federal capital gains tax savings ($160)
Endow Iowa Tax Credit ($250)
Out-of-pocket cost of gift $220

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

Note Sara’s significant tax savings! In this scenario, Sara receives $370 as a federal charitable deduction, avoids $160 of capital gains taxes, and gains a state tax credit for $250, for a total tax savings of $780. Put another way, Sara made a gift of $1,000 to her favorite charity, but the out of pocket cost of the gift to her was less than than a quarter of it.

giving package with green spruce

Each donor’s financial situation and tax scenario is unique; consult your own professional advisor for personal advice. I’m happy to offer you a free consult to discuss your charitable giving options. I can be reached by phone at 515-371-6077 or by email.

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25 Days of Giving: “Related Use” in Charitable Gifts of Tangible Personal Property

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Hands giving ornament

Thanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.

25 days of Christmas - Holiday giving

Tangible personal property is a fancy way of saying “stuff,” such as a painting, computer, furniture, and collectibles (excluding securities, cash, and real estate).  So, if you want to donate your stuff to your favorite charity, what are the tax consequences?

Related Use

The amount of your federal income tax charitable deduction depends on the concept of “related use.” If appreciated tangible personal property is considered related to the charity’s exempt purpose, the deduction is based on fair market value (FMV) and available to the extent of 30% of your adjusted gross income (AGI).

If property is considered unrelated to the public charity’s exempt purpose, you must reduce the FMV by any amount that would have been long-term capital gain had you sold the property for its fair market value. (In short, if the FMV was greater than the basis in the property, your deduction is limited to your basis.)

To sum it up: in order for a donor of tangible personal property to be able to deduct its full FMV, the charity must use the object in a manner that is related to its (the charity’s) exempt purpose. A classic example is the gift of a piece of art, like a sculpture or painting, to an art museum.

Hypothetical

This concept of “related use” can have very profound tax consequences. For instance, assume Jill Donor owns a painting which is now worth $100,000, but Donor purchased it for only $20,000.

If Donor gives this painting to an art museum that keeps and displays the painting, Donor can deduct the painting’s full $100,000 FMV. If Donor gives the same painting to, say, a nature conservancy, which will sell the painting and use the proceeds, Donor can deduct only her $20,000 cost.

Note, that even if the object is potentially related to the charity’s mission–such as a painting given to an art museum–if the charity’s intention is to sell it upon receipt, then the gift is not for a related use and the donor’s deduction will be limited accordingly.

From our hypothetical, it doesn’t necessarily have to be gifted to a museum to be considered for a related use. In Private Letter Ruling 9833011, the IRS ruled that a gift of art to a Jewish community center would be for a related use, as the artwork had both religious and cultural significance. Also, a painting gifted to, say, a hospital may be for a related use if the hospital will display it in a common area so that it helps foster a healing environment for patients.

hands holding evergreen fir

Takeaway

The big takeaway for nonprofits? Nonprofit boards and staffs should know and understand about “related use,” so they can recognize the issue if it arises.

The big takeaway for donors? Donors should obtain in writing the charity’s intent to use the property for a purpose related to its mission.

I want to help you, whether you’re a nonprofit organization or donor, wisely maximize your charitable giving. Don’t hesitate to reach out by phone (515-371-6077) or email (gordon@gordonfischerlawfirm.com).

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ABCs of CGAs: Basics of Charitable Gift Annuities

Dollar bill against white background

The Basics

A charitable gift annuity (CGA) is a contract in which a charity, in return for a transfer of assets, such as say, stocks or farmland, agrees to pay a fixed amount of money to one or two individuals, for their lifetime. A person who receives payments is called an “annuitant” or “beneficiary.”

For the entire term of the contract, the payments are fixed. A portion of the payments are considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).

CGA cycle

Benefits of a CGA

There are at least six key benefits to a CGA:

  1. A CGA provides an immediate income tax charitable deduction to a donor for the gift portion.
  1. A CGA pays a lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  1. The income payout from the gift annuity can begin immediately or can be deferred.
  1. The charity’s obligation to pay the annuity is backed by the general assets of charity.
  1. When appreciated property is provided, and the donor is an annuitant, some of the capital gain is spread over donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
  1. A CGA is (relatively) simple to execute.

3 versions of CGA agreements

There are three versions of different CGA agreements depending on to whom the annuity is to be paid to:

  1. A “single life” agreement (annuity paid to only one person for his/her lifetime)
  1. A “two lives in succession” agreement (annuity paid to A, and then if B survives A, paid to B)
  1. A “joint and survivor” agreement (pay annuity paid to two persons simultaneously, and at death of first annuitant, the survivor is paid full annuity amount). This is most commonly used for married couples who file joint tax returns and/or who live in community property states.

Types of CGA agreements

In addition to the three versions there are three main types of CGA agreements that determine when the payments are issued to the annuitants: immediate, deferred, and flexible.

  1. Immediate Gift Annuity

Under an Immediate Gift Annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.

  1. Deferred Gift Annuity

Under a Deferred Payment Gift Annuity, the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semi-annually, or annually.

  1. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), Donor need not choose the payment starting date at the time of her contribution. The annuitant (who may or may not be the donor) can choose the payment starting date based on her retirement date or other considerations.

Charities That Issue CGAs: The Rules

NOTE: Gift annuities are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue gift annuities must comply with several rules, which may be simplified as follows:

  1. The present value of the annuity must be less than 90% of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10%.
  1. The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
  1. The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
  1. The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.

Rose in hand

CGAs and Tax Considerations

Federal income tax charitable deduction

A charitable gift annuity is considered part gift and part sale, as the donor contributes the property in exchange for annuity payments from the charity. The donor who itemizes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property less the present value of the annuity).

This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50% of the donor’s AGI; if long-term capital gain property is transferred, the limitation is generally 30% of AGI.

Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

watch on wrist

Taxation of payouts

The annuity payments by the charity under a gift annuity are treated for income tax purposes as follows:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. Ordinary income

Let’s break each of these categories down.

Tax-free return of principal

A portion of each payment received by Donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy.

The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.

Long-term capital gain

If property held for more than one year is transferred for a gift annuity, a portion of each payment will be taxed as LTCG. This will reduce the income tax-free return of principal portion of the annuity payments.

Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. Under general tax rules, long-term capital gain is recognized in the year the property is sold. However, with a charitable gift annuity, the donor may spread the gain over life expectancy provided the donor is the sole annuitant, or the donor and another individual named as a survivor annuitant.

Ordinary income

After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.

Gift and estate taxation

giving gift

If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death.

If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.

Regarding gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction.

Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.

Regarding estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if the surviving annuitant is a spouse.

Low-interest rates = higher tax-free income

The applicable federal rate (AFR) selection decision is more nuanced for gift annuities than for other split-interest gift tools.

A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift.

Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.

Choosing start date of deferred CGA

Under an immediate charitable gift annuity, annuity payments begin no later than one year after the initial contribution.

calendar on desk

A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will both increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as always, to AGI limits).

A deferred gift annuity can, therefore, produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, Donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [Ltr. Rul. 9743054].

Testamentary Gift Annuity

If carefully planned, it is possible to arrange a charitable gift annuity through a will. It is, of course, crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

coffee mug and computer

A donor considering a testamentary gift annuity should directly address three important questions:

  1. What if the designated annuitant(s) predecease the testator? Donor may want to specify a contingent annuitant or provide for an outright bequest to Charity.
  2. What if the charity no longer exists at death? Or, what if the charity is either unable or unwilling to accept the gift? The donor may want to name a contingent charitable beneficiary.
  3. What about the payout rate? The donor should leave the charity some degree of flexibility in the payout rate, to assure the 10% minimum charitable interest requirement can be met in the future.

You may have many more questions regarding charitable gift annuities and your personal situation. Feel free to contact me any time to discuss how to maximize your gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.

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Donate Your House & Keep the Keys: Retained Life Estate

Victorian House

Your most valuable asset? Most would say their home.

Could your home benefit your favorite charity? Yes, and with a retained life estate, you can give away your house, keep the keys, and get a current tax deduction.

Under a retained life estate, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for the rest of his/her life, a term of years, or a combination of the two. The term is most commonly measured by the life of the donor, or of the donor and the donor’s spouse.

When the term ends, typically when the last of one or more tenants dies, the charity can either keep the property for its own use, or sell the property and use the proceeds as designated by the donor.

Keep in mind that donating a personal residence doesn’t mean it has to be the donor’s primary residence. It can be a vacation home or any other structure the donor uses as a residence. A farm can include raw farm land, as well as farmland with buildings on it.

tractor on farmland

The blog post dives in deep to the details of what makes the retained life estate a viable and valuable charitable giving tool. If you’re a donor exploring this option, or a nonprofit leader looking for more information on how to facilitate this type of gift, read on and then contact me to discuss your individual situation.

Definitions

Again, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for a certain term, such as the life or lives of individuals, term of years, or a combination of the two. At the end of the measuring term, all rights to the real estate are transferred to the charity. In this scenario, the donor is called the “life tenant,” who has a “life use” of the real estate, and is transferring a “remainder interest” to the charity. The charity is called the “charitable remainderman.”

Necessary: Detailed Gift Agreement

When a retained life estate is used for charitable purposes, for protection of both the donor and the charity, a detailed gift agreement should be worked out. Lots of legal issues should be resolved, regarding a wide variety of responsibilities, including [but hardly limited to]:

  • real estate taxes;
  • liability and casualty insurance;
  • utilities;
  • maintenance and minor repairs;
  • remodeling and major repairs;
  • process for evaluating leases and lessees, should life tenant rent farmland;
  • rights of charitable remainderman to enter and inspect farmland with proper notice given;
  • procedures for removal of the personal property of the life tenant upon the end of the tenancy; and
  • a comprehensive dispute resolution process.

Let’s address several of these items further.

Liability and casualty insurance

Presumably, a donor would want to maintain insurance. The charity may want to consider adding life estate properties to its master insurance list. Also, the charity may want the life tenant to provide the charity an annual certification that appropriate insurance is in place and that premiums have been paid.

Maintenance and repairs

The life tenant is generally responsible for expenses customarily borne by the donor of real property, such as routine maintenance. However, expenses for improvements which benefit, or even might benefit, the charitable remainderman, can and should be addressed in the gift agreement. For example, capital improvements which will last beyond the life tenant’s use of the property, such as a new barn, will benefit both the life tenant and the charitable remainderman. Again, this needs to be handled by agreement between the parties.

Repair center sign

Process for evaluating leases and lessees

The life tenant retains all “beneficial lifetime rights” in the property, which includes, for example, the ability to rent the property and receive rental income. The well-drafted gift agreement should establish responsibilities for property management and maintenance by lessees. The charity, as remainder interest owner, has a huge interest in making certain the real estate is appropriately maintained. It is therefore not uncommon in gift agreements for the charity to have a right of approval over parties who would lease the real estate, and by what terms.

Comprehensive dispute resolution process

The relationship between the donor and the charity can change over time for any number of reasons. Having an agreed-upon and formal process for resolving disputes in place from the outset, should help if issues arise. All parties should consider adding in the agreement a mandatory mediation or arbitration clause.

mediation discussion

Options for flexibility

Should there be a change, such as the life tenant no longer wanting to live in the residence, a life estate provides several options for flexibility. Let’s discuss the most common alternatives.

Joint sale

The donor and the charity can enter into a joint sale. Under a retained life estate, the real estate is owned in part by the donor and in part by the charity. Just as with any other type of joint ownership, the parties can agree together to sell and divide the proceeds.

Gift of life estate

How we live typography paper

The donor could decide to donate the life estate to the charity. In such an event, the charity would then own both the remainder value and the life estate and could sell the farmland (if applicable). The donor would receive a charitable deduction for the gift of the remainder interest.

Charitable remainder unitrust

Another alternative: the donor could contribute his/her life interest to a charitable remainder unitrust [CRUT]. Since a life interest is a valid property interest, if the donor transfers his/her entire retained ownership into the CRUT, they’ll receive a charitable deduction for a gift of appreciated property.

No pre-arranged obligations

Under these alternatives, there can be no pre-arranged binding obligation to select any one of possible options. If a binding obligation exists, the charitable deduction will be denied.

Federal income tax charitable deduction

A federal income tax deduction is permitted for the present value of the remainder interest. As with all charitable contributions, the tax deduction for gifts involving appreciated property is limited to 30 percent of the donor’s adjusted gross income [AGI]. However, any unused portion can be carried over for up to five additional years.

For gifts of a remainder interest in real estate, the donor is entitled to a charitable deduction in an amount equal to the net present value of the charitable remainder interest. The computation is performed under guidelines described in Treas. Reg. § 1.170A-12 and is based on the following factors:

  • the fair market value of the property [including improvements] on the date of transfer;
  • the fair market value of depreciable improvements attached to, or depletable resources associated with the property on the date of transfer;
  • the estimated useful life of the depreciable improvements;
  • the salvage value of the depreciable improvements at the conclusion of their useful life;
  • measuring term of the agreement [if measured by the life of one or more individuals, the date of birth of the individuals]; and
  • the Applicable Federal Midterm Rate [in effect for the month of transfer or during either of the two preceding months].

Let’s look at two additional factors:

Measuring terms

As discussed earlier, retained life estates are most commonly measured by the lifetime of one or more individuals; however, life estates can also be measured by a term of years, or by the longer of the life or lives of individuals and a term of years, etc.

If the life estate is measured by one or more lives, the individuals must be in being at the time the life estate is created. If the life estate is measured by a fixed term of years, there is no minimum or maximum term for federal tax purposes.

Applicable Federal Midterm Rate

The Applicable Federal Midterm Rate [AFR] in effect for the month of the life estate gift is used as the interest component for present value computation purposes. At the donor’s election, the AFR in effect for either of the two months preceding the life estate gift can be substituted. This is an obvious opportunity for good planning.

In short, the lower the AFR, the higher the charitable deduction. Historically speaking, then, this is a very positive time for life estates.

Cautionary note

This article is presented for informational purposes only, not as tax advice or legal advice.

All individuals, families, businesses, and farms are unique and have unique legal and tax issues. If you are considering a retained life estate you certainly should speak with a trusted legal professional. Same goes if you’re a nonprofit leader looking facilitate the gift of a retained life estate. I’m happy to help; reach out to me at any time via email (gordon@gordonfischerlawfirm.com) or by cellphone at 515-371-6077.

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6 Simple Tips for Beneficiary Designations

woman doing photo at sky

You’ve almost certainly had to designate your beneficiaries on savings and checking accounts, life insurance plan, annuity, 401(k), pension, or IRA. All of these accounts are passed along at the time of death via beneficiary designation (sometimes referred to as payable on death (PODs) or transfer on death (TODs) accounts). It’s easy to forget, but beneficiary designations take precedence over whatever is written in your will. So, even if you have the six basic “must have” estate planning documents in place, you still need to address who is named as your beneficiaries.

I have a few simple tips for reviewing and protecting your important accounts:

  1. Be sure to name a primary beneficiary (or beneficiaries), using the appropriate beneficiary designation forms.
  2. Be sure to also name an alternate beneficiary in case the first beneficiary dies before you.
  3. Don’t name your estate as the beneficiary (not without lots of expert advice).
  4. Review the beneficiary forms once a year to make sure they still reflect your wishes.
  5. Update the beneficiary forms more often if there has been a change in your life circumstances, such as a birth, adoption, marriage, divorce, or death. For example, if you’ve gotten a divorce you may not want your ex-spouse to be the beneficiary of your life insurance.
  6. Each time you change the beneficiary designation form, send it to the organization that holds the account, and request they acknowledge receipt.

 

couple holding hands in green space

Checking your beneficiary designations is a smart estate planning step you can take today. But, of course, you’re going to need a solid estate plan to account for all of your assets that are not transferred via beneficiary designation. A great way to get your key estate plan documents started is by downloading my free, no-obligation Estate Plan Questionnaire. You can also contact me by phone (515-371-6077) or email with any questions or concerns.

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Is your Favorite Nonprofit Up-to-Date for the Federal Income Tax Charitable Deduction?

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Is your favorite nonprofit up-to-date on requirements for the federal income tax charitable deduction? You want to be able to ensure your donation maximize benefits for both you as a donor and the charity. Consider the following considerations and requirements.

Save $$$ and help your favorite charities even more

I always say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.

A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. The out-of-pocket cost of your charitable gift is reduced by your tax savings.

Break it Down: Tax Savings

For a discussion of tax brackets, see my post called bracketology. In short, currently there are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Because the U.S. has a progressive federal tax system you’re going to fall into one of those brackets.

The charitable deduction can result in significant tax savings. For example, let’s say a donor in the 33% tax bracket gives to her favorite qualified charitable organization a donation of $100. The charity still receives the full gift of $100. But, for the donor the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.

Let’s take this example and apply it to all tax brackets and see the savings which result:

federal income tax deduction table

This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?

Well, the charitable deduction requires you to be organized in your giving and maintain records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep.

man typing on computer

Basics of Substantiation of your Charitable Deduction

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement 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

Wait, you ask, is it really that simple? Actually, no, not really. For the sake of your favorite nonprofit, let’s go through these categories and dig deeper.

Substantiation requirements for monetary gifts less than $250

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.

wallet with cards

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 (charity). 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. The written communication, whether paper or electronic, must show:

  • the name of the donee;
  • the date of the contribution; and
  • the amount of the contribution.

Substantiation of gifts of $250 or more

For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement” both have very specific meanings to the IRS in this context

Requirements of written acknowledgment

The written acknowledgment must include:

  1. The date of the gift and the charity’s name and location.
  2. Whether the gift was cash or a description of the noncash gift.
  3. A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
  4. A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
  5. A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

“Contemporaneous”

For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.

Non-cash Gifts of More than $500

If you make a total of more than $500 worth of noncash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.

You’ll only have to fill out Section A of Form 8283 if:

  • the gifts are worth less than $5,000, or
  • you’re giving publicly traded securities (even if they’re worth more than $5,000).

Otherwise you’ll be required to fill out Section B of Form 8283 and all that entails.

yellow flower in hands

Non-cash gifts of more than $5,000

If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, Non-cash Charitable Contributions.

An appraisal is required whether you donate one big item or several “similar items” that have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.

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

Requirements for “qualified appraisal” and “qualified appraiser”

Again, non-cash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.

Qualified Appraisal

A qualified appraisal is a document which is:

  1. made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
  2. timely;
  3. does not involve prohibited appraisal fees; and
  4. includes certain and specific information.

Let’s further examine each of these four requirements:

Qualified Appraiser

Appraiser education and experience requirements

An appraiser is treated as having met the minimum education and experience requirements if s/he is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.

Further requirements for a qualified appraiser include that s/he:

  1. regularly performs appraisals for compensation;
  2. demonstrate verifiable education and experience in valuing the type of property subject to the appraisal;
  3. understands s/he may be subject to penalties for aiding and abetting the understatement of tax; and
  4. not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.

Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:

  1. the donor;
  2. the donee;
  3. the person from whom the donor acquired the property [with limited exceptions];
  4. any person employed by, or related to, any of the above; and/or
  5. an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.
Timing of appraisal

The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions).

Prohibited appraisal fees

The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.

Specific information required in appraisal

Specific information must be included in an appraisal, including:

  1. a description of the property;
  2. the physical condition of any tangible property;
  3. the date (or expected date) of the gift;
  4. any restrictions relating to the charity’s use or disposition of the property;
  5. the name, address, and taxpayer identification number of the qualified appraiser;
  6. the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
  7. a statement that the appraisal was prepared for income tax purposes;
  8. the date (or dates) on which the property was valued;
  9. the appraised FMV on the date (or expected date) of contribution;
  10. the method of valuation used to determine FMV;
  11. the specific basis for the valuation, such as any specific comparable sales transaction; and
  12. an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.
Appraiser’s dated signature and declaration

Again, a qualified appraisal must be signed and dated by the appraiser.  Also, there must be a written declaration from the appraiser she is aware of the penalties for substantial or gross valuation

The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Also, all Iowans are unique, so be sure to contact the appropriate tax professional for personal advice and counsel.

calligraphy pen on white paper

All of this can be, well, a lot. Don’t hesitate to contact me for nonprofit staff and board training on charitable giving basics! Whether you’re on the board of directors, are a nonprofit employee, or are a dedicated volunteer, your favorite nonprofit MUST have these rules down cold, and be able to communicate with donors about them. Contact me now to schedule training on charitable giving basics for your board and staff.

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Donations to Foreign Charities not Deductible for Income Tax

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Dandelion blowing in wind

If a charitable contribution is made to a foreign organization, the donor generally cannot deduct the contribution for income tax purposes. Exceptions may apply in very limited situations; specifically, the U.S. has tax treaties with Canada, Israel, and Mexico. Generally, though, if the donee is a foreign charitable organization an income tax deduction is unavailable. Interestingly enough, both the estate and gift tax charitable deductions are available for gifts to foreign charitable organizations.

So, assume Jill Donor wants to help Charity X, which is organized and operated in Paris, France. If Donor made the gift during lifetime then no income tax deduction would be allowed because gifts to foreign charities normally are not deductible for federal income tax purposes. Note, however, that the lifetime gift removes the asset from Jill’s estate, so the gift would have the same effect as a charitable bequest from Donor’s will.

 

Woman looking out from balcony in Paris

It is important to know where the charity is organized and operated. If the organization is operated organized in a foreign nation – such as our example charity organized and operated in Paris, France – donations to such organizations are not eligible for the federal income tax deduction. This is true regardless if donations to a similar organization in the U.S.–such as a similar organization organized and operated in Paris, Texas–would be eligible.

A donor in doubt about a deduction can seek information from the charity, of course. And, a donor can search for the charity using the IRS’ “Select Check” online search tool.

Of course, if concerned about deductibility, a potential donor should also seek advice from a professional advisor. I’m happy to help, so don’t hesitate to reach out via email (gordon@gordonfischerlawfirm.com) or by phone (515-371-6077) if you’re considering making a donation to a foreign-based charity.

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Bountiful Harvest: Charitable Giving Using Gifts of Grain

Corn field

For donors who actively engage in farming on a cash basis [1], significant tax savings can be found through donating grain directly to a favorite charity such as a public library, church, or university. Yes, you read that right. Grain. In short, the charities make money by selling the donated grain and the donors get tax deductions at a better rate than just cash donations.

Who Qualifies?

Keep in mind the tax benefits of gifting grain don’t apply to everyone, so not everyone who works in agriculture may qualify. As discussed more fully below, only cash basis farmers are able to reap these benefits.

Farmer in field

Crop Share Landlords Not Eligible

There are two major kinds of farm leases: cash share leases and crop share leases (as well as hybrids of the two) [2]. A crop share landlord would not be eligible to receive the tax benefits discussed here. A crop share landlord’s share of crops is considered rental income and must be reported as such on the landlord’s tax return.

Tax Benefits

Tax Savings

Cash gifts to a charity are deductible if a donor itemizes deductions on Schedule A. Many farmers, however, take the standard deduction [3].

As many farmers take the standard deduction, no tax benefit is gained by making charitable gifts of cash. However, by directly donating grain to a charity organization the cash basis farmer can exclude the sale of the grain from income, which can result in a triple tax savings. The tax savings can include:

  • Federal income tax savings (up to 39.6 percent)
  • State income tax savings (up to 8.98 percent in Iowa)
  • Self-employment tax savings (15.3 percent)

Expenses Related to Production

For most farm operators, the expenses related to the production of the donated grain are deductible on Schedule F [4]. The charitable donation of grain reduces the income that is reportable on Schedule F.

No Charitable Contribution Deduction

Donors of grain should not report the donation on Schedule A. There is no additional deduction allowed since the tax benefit comes from the deduction of production expenses and not reporting a sale on Schedule F.

Timing of Gift

Another great benefit of donating grain is that it doesn’t matter if the donation is made in the year of production or a later year. Gifts of grain can be donated from the current year or previous years’ harvests.

Fewer Forms

Yet another great benefit of donating grain: fewer forms! Generally speaking, if the total of your donated property is more than $500, you have to file an additional form with your return, Form 8283: Noncash Charitable Contributions. For property valued at more than $5,000, generally, you have to produce a qualified appraisal by a qualified appraiser.

However, with gifts of grain, as mentioned above, there is no charitable deduction taken. Therefore, the donor of grain doesn’t need to provide Form 8283 or a qualified appraisal. So, gifts of grain can be easier gifts than other types of property.

Field rows

Cautionary Notes

Take note of these few considerations regarding prior sale commitments; physical delivery; giving up control; and storage, transportation, and risk.

No Prior Sale Commitment

To receive the tax benefits discussed in this article, farmers cannot sell the grain and then order the sales proceeds to be sent to the charity. The gift must be from unsold grain inventory with no prior sale commitment.

Physical Delivery

This is similar to the point made directly above regarding no prior sale commitment. The commodity should be put into the name of the charity when it is delivered to the elevator and a warehouse receipt should be issued in the name of the charity. For grain stored on the farm, the farmer should deliver to the charity a notarized letter of transfer.

Tractor in field

Giving Up Control

The farmer must give up dominion and control over the grain and cannot offer any guidance as to when to sell the grain. The charity must direct the sale and the original sales invoice must list the charity as the seller.

Storage, Transportation, and Risk

After the transfer, the charity assumes the full costs of storage, transportation, and marketing, and bears completely the risk of any loss.

Use Professional Advisors

Donors should always consult with their professional tax and/or legal advisors to determine tax implications specific to their situation prior to making the gift.

Case Study of Tax Savings from Gift of Grain

Pat, a cash-basis grain farmer who takes the standard deduction every year, donates 1,000 bushels of corn to her favorite charity, a local hospital. Her cost of production is $2,000, and the proceeds from the sale of the corn by the hospital is $5,000.

Pat is entitled to deduct her $2,000 of production expenses on Schedule F. In addition, she will not be required to report the proceeds from the sale of the corn as income. Assuming that Pat is in the 25% federal and 8.98% Iowa tax bracket, the following are the tax savings that result when Pat reduces her taxable income by making a gift of the corn to a charity:

$1,250            Federal income tax ($5,000 x 25%)

$449               State income tax ($5,000 x 8.98%)

$765               Self-employment tax ($5,000 x 15.3%)

=$2,464         Tax savings

By donating the corn rather than selling it outright and making a cash gift, Pat saves $2,464 in taxes. In addition, she can still deduct the $2,000 of production expenses she incurred to grow the corn.

(Note: If Pat itemizes her deductions rather than claiming the standard deduction, her additional tax savings through making a gift of corn rather than cash would be limited to the savings on self-employment tax.)

Steps to Make a Gift of Grain to Your Favorite Charity

Field with hay bales

Be sure to consult with your tax preparer or financial advisor to determine the tax implications prior to making a charitable gift of grain. Staff of potential recipient charities are also usually more than happy to assist!

Contact the intended charity recipient of their intention to make a gift. (Some charities actually has forms specific to gifts of grain.)

  1. Donors will deliver the grain to the elevator and tell the elevator of the wish to transfer ownership of X number of bushels (or X fraction of the load) to the donee charity.
  2. Clients will need to request the elevator to issue a warehouse storage receipt in the name of the charity and send it to them. The donor should instruct the elevator not to sell the grain until they are contacted by the receiving charity.
  3. The receiving charity should be notified that the grain is at the elevator.The charity will then contact the elevator to direct the sale of the grain and will send the farmer (donor), an acknowledgment letter.

As you can see, it is very important for professional advisors and the recipient charity to be consulted before making the gift.

Every Iowan and every farm is unique. Be sure to consult with your own professional advisor. This article is not to be construed as legal advice, and is provided merely as general information.

Additional Information

[1] There are several methods of accounting for income. Farmers have been given an advantage in the Internal Revenue Code by being allowed to use the cash method of accounting. Most farmers choose the cash method because of the tax advantages. The cash method of accounting allows (many) farmers to claim the expenses of the current year’s crops while postponing the recognition of income. Under the cash method, all income is included in the year it is actually or constructively received. Farm business expenses are deductible in the year in which they are paid. For much more on farming, income issues, and the IRC, find a wealth of information here on IRS.gov.

[2] In a cash rent lease, generally, the tenant usually pays a fixed dollar amount in rent (either on a per acre or whole farm basis). These types of leases may be modified depending on crop yield (i.e., increase in good years and decrease in bad years). With cash rent leases, the landlord is not as involved in crop production, thereby giving the tenant more autonomy.

In a typical crop share lease, the landlord will share input costs (including but not limited to seed, fertilizer, and fuel), while the tenant provides all of the labor and remaining input costs. Once harvested, proceeds will be divided according to the agreement (which may range from, say, 25/75 to 50/50). With crop share leases, most often both parties share the risks.

Of course, there are hybrid arrangements. In any case, it’s important for both parties to make sure they have competent legal and tax counsel drafting the lease agreements.

[3] You can either claim the standard deduction or itemize your deductions—whichever lowers your taxes the most. The standard deduction is a fixed dollar amount that reduces the income you’re taxed on. Your standard deduction varies according to your filing status.

Three noteworthy items about the standard deduction:

  1. Standard deduction allows you a deduction even if you have no expenses that qualify for claiming itemized deductions.
  2. It eliminates the need to itemize deductions, like medical expenses and charitable donations.
  3. The standard deduction allows you to avoid keeping records and receipts of your expenses.

The benefit of itemizing is that it allows you to claim a larger deduction that the standard deduction. However, it requires you to complete a Schedule A attachment to your return and to maintain records of all your expenses.

Itemized deductions include a range of expenses that are not otherwise deductible. Common expenses include the mortgage interest you pay on up to two homes, your state and local income or sales taxes, property taxes, medical and dental expenses that exceed 7.5 percent of your adjusted gross income, and the charitable donations you make. Itemized deductions also include miscellaneous deductions such as work-related travel. Once you decide to itemize, you are eligible to claim all of them.

[4] If you earn a living as a self-employed farmer, then you most probably need to include a Schedule F attachment with your tax return to report your profit or loss for the year. The IRS defines “farmer” in a very broad sense and can apply whether you grow crops, raise livestock, or even breed fish!

In addition to money earned from selling crops and livestock, Schedule F also reports other types of farming income, such as any crop insurance payouts, including: federal disaster payments; money you earn through a farming cooperative; and payments you get from an agricultural program.

Cash basis farmers can deduct any cost incurred that’s an ordinary and necessary expense of farming on Schedule F to reduce the profit—or increase the loss—on which you’ll owe taxes. Some of the expenses farmers commonly deduct cover the cost of livestock and feed, seeds, fertilizer, wages paid to employees, interest paid during the year on farm-related loans, depreciation to recover a portion of equipment costs, utilities, and insurance premiums.

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What recordkeeping is required for charitable deduction?

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gifts-to-charity-form

Save $$$ and help your favorite charities even more.

Some say it’s better to give than receive. I say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.

A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. Assuming the gifts are deductible, the actual cost of your gift is reduced by your tax savings.

Charitable deduction tax savings

In short, as of March 2017, there are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. (For a general discussion of tax brackets, see my post called bracketology.)

The charitable deduction can result in significant tax savings. For example, assume a donor in the 33% tax bracket gives to her favorite qualified charitable organization a donation of $100. The charity still receives the full gift of $100. But, for the donor, the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.

Let’s make these assumptions for all tax brackets and see the savings which result:

Bracket          Donation                 Savings                           Actual cost
10%                     $100                               $10                                       $90
15%                     $100                               $15                                       $85
25%                     $100                               $25                                       $75
28%                     $100                               $28                                       $72
33%                     $100                               $33                                       $67
35%                     $100                               $35                                       $65
39.6%                  $100                               $39.60                                $60.40

This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?

The charitable deduction requires you to be organized in your giving and maintain records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep.

The basics of substantiation of your charitable deduction

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement 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

Wait, you ask, is it really that simple? Actually, no, not really. Let’s go through these categories and dig deeper.

Substantiation requirements for monetary gifts less than $250

Donate button on keyboard

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.

Substantiation of gifts of $250 or more

Hands raising to give to charity

For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement”; both have very specific meanings in this context.

Requirements of written acknowledgment

The written acknowledgment must include:

  1. The date of the gift and the charity’s name and location.
  2. Whether the gift was cash or a description of the noncash gift.
  3. A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
  4. A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
  5. A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

“Contemporaneous”

For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.

Noncash gifts of more than $500

If you make a total of more than $500 worth of noncash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.

You’ll only have to fill out Section A of Form 8283 if:

  • the gifts are worth less than $5,000, or
  • you’re giving publicly traded securities (even if they’re worth more than $5,000).

Otherwise, you’ll be required to fill out Section B of Form 8283 and all that entails.

Noncash gifts of more than $5,000

Kids holding a "Give"" sign

If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, “Noncash Charitable Contributions.”

An appraisal is required whether you donate one big item or several similar items which have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.

Requirements for “qualified appraisal” and “qualified appraiser”

Again, noncash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.

“Qualified appraisal”

A qualified appraisal is a document which is:

  1. made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
  2. timely;
  3. does not involve prohibited appraisal fees; and
  4. includes certain and specific information.

Let’s further examine each of these four requirements.

“Qualified appraiser”

Appraiser education and experience requirements

An appraiser is treated as having met the minimum education and experience requirements if she is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.

Further requirements for a qualified appraiser include that she:

  1. regularly performs appraisals for compensation;
  2. demonstrates verifiable education and experience in valuing the type of property subject to the appraisal;
  3. understands she may be subject to penalties for aiding and abetting the understatement of tax; and
  4. not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.

Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:

  1. the donor;
  2. the donee;
  3. the person from whom the donor acquired the property [with limited exceptions];
  4. any person employed by, or related to, any of the above; and/or
  5. an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.

Timing of appraisal

The appraisal must be made no earlier than 60 days prior to the gift and no later than the date the return is due (with extensions).

Prohibited appraisal fees

The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.

Specific information required in appraisal

Specific information must be included in an appraisal, including:

  1. a description of the property;
  2. the physical condition of any tangible property;
  3. the date (or expected date) of the gift;
  4. any restrictions relating to the charity’s use or disposition of the property;
  5. the name, address, and taxpayer identification number of the qualified appraiser;
  6. the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
  7. a statement that the appraisal was prepared for income tax purposes;
  8. the date (or dates) on which the property was valued;
  9. the appraised FMV on the date (or expected date) of contribution;
  10. the method of valuation used to determine FMV;
  11. the specific basis for the valuation, such as any specific comparable sales transaction; and
  12. an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.

Appraiser’s dated signature and declaration

Again, a qualified appraisal must be signed and dated by the appraiser.  Also, there must be a written declaration from the appraiser that he/she is aware of the penalties for substantial or gross valuation.

Work with professional on taxes

The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Also, all Iowans are unique, so be sure to contact the appropriate tax professional for personal advice and counsel.

I provide trainings for nonprofits and their staffs, board members, and stakeholders. Reach out to me any time by emailing me at gordon@gordonfischerlawfirm.com or call 515-371-6077. I’d love to hear from you!

 

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Record Keeping Requirements for the Federal Income Tax Charitable Deduction

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Federal Income Tax

I say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.

A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. Assuming the gifts are deductible, the actual cost of your gift is reduced by your tax savings.

Charitable Deduction Tax Savings

For a discussion of tax brackets, see my post called bracketology. In short, as of this writing (April 2017), there are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

The charitable deduction can result in significant tax savings regardless of which bracket you’re in, although the bracket does change the savings. For example, assume a donor in the 33% tax bracket gives a donation of $100 to her favorite qualified charitable organization. The charity receives the full gift of $100, but, for the donor, the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.

Let’s make these assumptions for all tax brackets and see the savings which result:

Bracket of Gift Donation Savings Actual Cost
10% $100 $10 $90
15% $100 $15 $80
25% $100 $25 $75
28% $100 $28 $72
33% $100 $33 $67
35% $100 $35 $65
39.6% $100 $39.6 $60.40

This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?

One common is excuse is that the charitable deduction requires you to be extremely organized in maintaining records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep. Yet, this organization is made a little bit easier when fully understanding the deduction.

Charitable Deduction: Basics of Substantiation

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement 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

Wait, you ask, is it really that simple? Actually, no, not really. Let’s go through these categories and dig deeper.

Substantiation Requirements for Monetary Gifts less than $250

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 the common ones you think of when thinking of the term–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.

Definition: 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.

Definition: 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.

Substantiation of Gifts of $250 or more

For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement” both have very specific meanings in this context.

Requirements of written acknowledgment

The written acknowledgment must include:

  1. The date of the gift and the charity’s name and location.
  2. Whether the gift was cash or a description of the non-cash gift.
  3. A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
  4. A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
  5. A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

“Contemporaneous”

For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.

Non-Cash Gifts of more than $500

If you make a total of more than $500 worth of non-cash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.

You’ll only have to fill out Section A of Form 8283 if:

  • the gifts are worth less than $5,000, or
  • you’re giving publicly traded securities (even if they’re worth more than $5,000).

Otherwise, you’ll be required to fill out Section B of Form 8283 and all that entails.

Non-Cash Gifts of more than $5,000

If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, Noncash Charitable Contributions.

An appraisal is required whether you donate one big item or several similar items which have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.

Requirements for “qualified appraisal” and “qualified appraiser”

Again, non-cash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.

Qualified appraisal

A qualified appraisal is a document which is:

  1. Made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
  2. timely;
  3. does not involve prohibited appraisal fees; and
  4. includes certain and specific information.

Let’s further examine each of these four requirements.

“Qualified Appraiser”

Appraiser Education and Experience Requirements

An appraiser is treated as having met the minimum education and experience requirements if she is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.

Further requirements for a qualified appraiser include that they:

  1. Regularly performs appraisals for compensation;
  2. demonstrates verifiable education and experience in valuing the type of property subject to the appraisal;
  3. understands they may be subject to penalties for aiding and abetting the understatement of tax; and
  4. not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.

Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:

  1. The donor;
  2. the donee;
  3. the person from whom the donor acquired the property [with limited exceptions];
  4. any person employed by, or related to, any of the above; and/or
  5. an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.

Timing of Appraisal

The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions).

Prohibited Appraisal Fees

The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.

Specific Information Required in an Appraisal

Specific information must be included in an appraisal, including:

  1. A description of the property;
  2. the physical condition of any tangible property;
  3. the date (or expected date) of the gift;
  4. any restrictions relating to the charity’s use or disposition of the property;
  5. the name, address, and taxpayer identification number of the qualified appraiser;
  6. the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
  7. a statement that the appraisal was prepared for income tax purposes;
  8. the date (or dates) on which the property was valued;
  9. the appraised FMV on the date (or expected date) of contribution;
  10. the method of valuation used to determine FMV;
  11. the specific basis for the valuation, such as any specific comparable sales transaction; and
  12. an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.

Appraiser’s Dated Signature and Declaration

Again, a qualified appraisal must be signed and dated by the appraiser.  Also, there must be a written declaration from the appraiser she is aware of the penalties for substantial or gross valuation

The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Almost all Iowans have a unique estate plan, so be sure to contact the appropriate professional for personal advice and counsel.

gordon fischer looking in book

Feel free to contact me any time to discuss how to maximize your charitable gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.

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