A closer look at charitable giving

If you deduct your donations to charitable organizations, you'll soon have to do a bit more bookkeeping.

Tucked into the pension bill, now awaiting the president's signature to become law, are a couple of provisions governing charitable gifts that many of us might encounter. (You can read about some of the pension bill's actual retirement account tax-law changes in this earlier post.)

Let's start with the new substantiation rule. Previously, you had to get a receipt or other acknowledgement from a charity if you gave $250 or more. Now, for a monetary gift of any amount, you've got to have "a bank record or a written communication" from the charity detailing the group's name and the date and amount of the gift.

A canceled check will serve as the requisite "bank record." If you charge a contribution, your credit card statement should be sufficient.

Many charities already provide a receipt for monetary gifts, regardless of the amount. But if your favorite nonprofit doesn't automatically do so, ask the next time you donate.

The one bit of good news here: This provision doesn't take effect until 2007, so you don't have to worry about reconstructing all those smaller amounts you gave this year.

Also, you don't have to submit the confirmation with your tax return; just have it on hand in case the IRS asks.

Policing property gifts: You also might run into new limitation on gifts of goods. In an effort to reduce taxpayer inflation of the value of donated items, the IRS now can deny deductions for clothing and household goods that are of "minimal monetary value." Specifically, the law requires that these items be in good used condition or better.

Basically, the IRS says you can't just dump junk off at Goodwill or the Salvation Army or any similar organization and then claim it on your tax return. Charities also are likely to have their own guidelines, such as these "thanks, but no thanks" lists from the Lower South Carolina and Cleveland Goodwill branches.

So how will the tax examiner know? That's the $64 dollar question. When you give goods, you have to fill out Form 8283, Noncash Charitable Contributions, detailing your generosity, and send it in with your return. (Download the form here; its instructions here. These versions are for 2005 tax year, but you get the idea.)

But what's to stop you from still inflating the used property's value? Perhaps the IRS will, at least for a while in this new requirement's initial stages, start pulling more returns that list donated property and asking filers to confirm the worth of their gifts. That will at least put the fear of the tax collector, if not God, into someone whose considering lying about the tax value of a charitable donation.

You need to be aware of this new law, since it takes effect for donations made after W signs the bill into law. That will undoubtedly make people look twice at the items they take to the drop-off bin in December in an effort to pad their 2006 charitable write-offs.

Comments

[Kay]

TP,
You don't have to submit the receipts, but if the IRS questions the deduction and you don't have any substantiation, then it can automatically disallow the deduction. Do you have a canceled check, bank statement or credit card statement showing the gift? These are acceptable records for these smaller donations. Noting that I am not your or anyone's tax adviser and all my blog comments are for educational purposes only, I can say that personally I would go ahead and claim all legitimate charitable gifts.
Kay

[TP]

With the tighter rules on charitable deductions, do i really need to hold off on claiming gifts under $250 for which I don't have a receipt? Or is there a certain threshold (e.g. percentage of income) below which i'm probably safe to claim them anyway?

[Kay]

That is the case in most donations now under the new rule. But there an exception to this general rule. A donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the recipient organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. In this case, the charity provides to the donor an acknowledgment indicating that the donor may claim a fair market value deduction for the vehicle.

[Chris]

I believe the tax deduction you get on things such as car and boat donations is equal to the amount that the charity actually sells the item for. The should give you a receipt to show your accountant/taxman once it had been sold. No more Fair Market Value price...

[Kay]

LOL. Good point, Mapgirl. So sad but true. Actually, we better keep an eye on that when he does get around to signing it (he's got until early September). Who knows what he might or might not want to enforce here!

[mapgirl]

Shrub didn't put a signing statement on this bill too? Shucks.