Charitable Gifts: Tax Benefits & Reporting Requirements

To reduce the cost of charitable contributions, consider donating low-basis, appreciated long-term capital gain property. For example, the taxpayer who donates such property worth $100 that was originally purchased for $20 will be entitled to a charitable contribution deduction of $100, measured by the FMV of the property. For high income taxpayers, this reduction in income could be worth up to $39.60 in tax savings.

A second tax benefit also accrues:  since no “sale or exchange” has taken place, a $22.40 capital gains tax has been entirely avoided. In the end, the taxpayer has endowed the charitable organization with property worth $100 at a real cost of only $38 (i.e., $100 – $39.60 – $22.40). Note, however, that the $39.60 component of the tax savings referred to above may be reduced since charitable contributions are itemized deductions subject to the high-income phaseout. On the other hand, state taxes will also be reduced by reason of the reduction in taxable taxable income.

The IRS has recently augmented strict reporting and substantiation requirements for charitable gifts. If the value of noncash gifts exceeds $500, form 8283 must be filed with the taxpayer’s return. If the value of donated property exceeds $5,000, an “appraisal summary” must appear on form 8283. If, however, the gift is of publicly traded securities, no appraisal is required, regardless of the amount of such gift, although form 8283 must nevertheless be filed.

For gifts requiring an appraisal summary, the appraisal must be made no more than 60 days before the gift is made, and the summary must be signed by both the appraiser and the charitable organization. (To be a qualified appraiser, the person must state credentials showing that he is qualified to appraise the type of property contributed. The appraiser must also not be either related to, or employed by, the donor or the charity, and must not be a party to the transaction.

Special rules govern the appraiser’s fee:  generally, no part of the appraisal fee can be based on a percentage of the property’s appraised value. Further, an appraisal fee itself is not a charitable gift. Rather, as a miscellaneous itemized deduction, it is deductible to the extent that it — together with other such deductions — exceeds 2 percent of AGI.

A special rule governs gifts of art works:  returns reporting gifts of art which are valued at $20,000 or more must include, in addition to the appraisal summary, a copy of the signed appraisal itself. In addition, the Service may request that the taxpayer furnish, at a later date, an 8” x 10” color photo of the art work.

In addition to the appraisal rules described, substantiation requirements exist for charitable gifts of $250 or more.  To deduct any such gifts, the taxpayer must obtain a written receipt from the charity describing (but not valuing) the gift. In order for the receipt to be valid, it must be obtained before the return is filed. The receipt need not, however, contain the donor’s social security number.

If any goods or services are received by the taxpayer in exchange for the gift, the receipt must describe them and contain a good faith estimate of their value. If the charity provides no goods or services in exchange for the gift, the receipt must so state. If the taxpayer receives only an “intangible religious benefit” (e.g., admission to a religious proceeding) in exchange for the gift, the receipt must so state, but need not value or describe the benefit. If the taxpayer has made multiple gifts of less than $250, those gifts need not be aggregated for purposes of the $250 threshold, unless the payments are made on the same day.

If a charity receives a gift of more than $75 from the taxpayer and the taxpayer receives something in return, the charity must provide a written statement advising that the deduction is limited to the excess of any money (or other property contributed) over the value of goods or services provided by the charity (other than an intangible religious benefit). In addition, the charity is required to provide the taxpayer with a good faith estimate of the value of the goods or services which it provided. The charity is not, however, required to value “token” benefits received by the taxpayer. A token benefit is one which costs the charity less than $6.70.

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