BY JOE KRISTAN, CPA, Partner, Eide Bailly
Giving is its own reward. Still, a tax deduction for giving never hurts.
While tax reform changes some of the rules for charitable giving, donations still have powerful tax benefits. Nobody can take away the warm feeling you get inside from giving to a good cause, but the benefits vanish if you don’t get the paperwork right.
Charitable Donations: The Tax Benefits
The big tax benefit of charitable gifts Is the charitable deduction for itemizers. It reduces tax by reducing taxable income. A taxpayer in the 37% top bracket with a $100,000 charitable deduction lowers the tax computed on Form 1040 by $37,000. The same gift for a taxpayer in a 25% bracket would save $25,000. Unfortunately, this benefit is only available to taxpayers who itemize.
For taxpayers claiming the standard deduction, there’s still the warm feeling, but not the tax break. With the increase in the federal standard deduction to $24,000 for joint filers and $12,000 for single filers beginning with 2018, many taxpayers no longer itemize on their federal return. Iowa’s standard deduction is much lower—$2080 for single filers and $5,120 for joint filer—so it still pays for Iowans to track deductions.
A few gifts can get a second benefit. Many states, including Iowa, allow a tax credit for some charitable gifts. Iowa provides a 65% tax credit for qualifying gifts to student tuition organizations that provide financial aid to students in private K-12 schools. Iowa also has a 25% credit for “endowment fund” gifts to community foundations. With a tax credit, you get the same benefit no matter your tax bracket.
While Iowa’s School Tuition Organization and Endowment Fund tax credits are generous, new IRS rules require taxpayers to reduce their itemized deduction by the amount of the credit awarded for gifts made starting in August 2018.
Turbocharging Your Benefit With Property Gifts
Sophisticated taxpayers often make their charitable gifts by donating appreciated property. Done right, the taxpayer gets to deduct the full value of the gift while never picking up the appreciation as income. Done wrong, all you have left is the warm feeling.
First, you must give to a proper charity. Many taxpayers foot-fault by making donations to groups that don’t qualify for charitable deductions. You can see whether your good cause qualifies at the IRS Tax Exempt Organization Search web page.
Next, you need substantiation. If your donation is $250 or more, get a receipt from the charity showing the description of the gift, the date of the gift and the amount of the gift (or a description, for property gifts). The charity also must describe the value of any goods or services received by the donor for the gift—or state that none were provided. No receipt, no deduction.
For property gifts, there are more rules. If you donate a car to one of the charities that does car donation ads on the radio, you get no deduction unless you attach to your return “contemporaneous written acknowledgement” from the charity that meets IRS standards. You also need information from the charity on what they did with the car.
Once your non-cash gift exceeds $500, the tax law requires you to file Form 8283 reporting more details of the gift. Failure to file the form, or to fill out required information on it, reduces your property donation deduction to—you guessed it—zero.
When You Need a Qualified Appraisal
If your property gift exceeds $5,000, another new set of rules kicks in. Unless you are donating publicly-traded securities, donations starting at $5,000 require a qualified appraisal. This must be a third-party appraisal done no earlier than 60 days prior to the donation and no later than the time you file your return. It can’t be provided by the charity or by the person who sold you the property, and the appraiser must meet other tax law standards.
The IRS enforces this rule strictly. It doesn’t matter if the charity sells the property the next day, giving you an objective measure of the property value; you still need the appraisal, or your deduction is zero.
A California real estate broker learned this the hard way in Tax Court. He donated real estate worth millions to a charitable trust. A certified appraiser himself, he filled out his own IRS Form 8283 and listed the amounts of the donations—over $15 million. The IRS came calling. The taxpayer then got a third-party appraisal, but it was too late, and the deduction went to zero. The nature of any warm feeling retained by the taxpayer went unmentioned in the Tax Court opinion.
Charitable Donations Still Work
While the tax benefits for charitable donations have changed, they haven’t gone away. If you don’t take care of the IRS paperwork, though, those warm feelings might be all you get. Contact your tax pro or an Eide Bailly professional to help you get it right.
| Joe Kristan