By Claire Ding, CPA, Tax Senior
ASL High Net Worth Group
Charitable contribution deductions are one of many deductions that taxpayers frequently claim, and for many, it is a heartfelt way to make a positive impact. The most frequent contributions come in the form of cash, household items, and clothing—items often earmarked for donation during moves or home cleanups. Often, taxpayers don’t realize that proper documentation is necessary. In this article, we will cover the essential substantiation requirements for documenting these donations.
Depending on the claimed deduction value, substantiation documents can include receipts, written records, acknowledgment letters, and, in some cases, a qualified appraisal. Proper documentation is essential because the IRS can disallow charitable contribution deductions if the taxpayer lacks adequate substantiation. Therefore, it is crucial that taxpayers maintain records of their charitable contributions in case of an IRS inquiry.
Cash Contributions
For cash contributions of less than $250, taxpayers will need a bank record (for example, a copy of the canceled check or bank statement) or a written receipt from the charity indicating the donee’s name, the date, and the amount of the contribution.
When charitable contribution amounts are $250 or more, the IRS requires a contemporaneous written acknowledgment from the charitable organization. A cancelled check or other records alone will not suffice. This acknowledgment must be obtained by the due date (or extended due date, if applicable) of the taxpayer’s tax return or the date the returns are filed, whichever is earlier. The acknowledgment letter must include the following:
- donor’s name;
- amount being contributed;
- date the contribution was made;
- the name and address of the charitable organization; and
- a statement of whether or not the donee organization provided any goods or services in exchange for the donation. The language is typically phrased as “no goods or services were provided by the organization in exchange for the contribution”.
If a donor has received anything from the charity in return, the acknowledgment should also contain a good faith estimate of the value of the goods and services received, along with a disclosure that only the “net” amount is deductible.
Noncash Contributions
Taxpayers should retain written records for all noncash contributions, regardless of type or amount.
Specifically, for household items and clothing, these records should include the following:
- name and address of donee organization;
- date and location of the contribution;
- description of the property;
- fair market value of the property; and
- terms of any conditions attached to the donation, if any.
Additionally, the taxpayer can also consider taking photos of the items being contributed.
The term household items means furniture, furnishings, electronics, appliances, linens, and similar items (but not food, paintings, other art objects, antiques, jewelry, gems, or collections). Household items and clothing contributed to charity must be in at least good used condition to be deductible.
Fair market value (FMV) plays a pivotal role in determining the need for a qualified written appraisal to claim charitable deductions. Generally, a qualified written appraisal is required when the FMV of contributions exceeds $5,000 during the tax year, whether to the same donee or not. It is important to understand that the $5,000 threshold is applied per item or per group of similar items (i.e., items of the same category or type, such as clothing, stamp collections, books, paintings, lithographs). For example, a donation of five bags of clothing valued at $1,500 each would be considered a property contribution of more than $5,000 for which a qualified written appraisal is required. This rule applies even if the items are not all donated to the same charity.
Some charitable organizations such as Goodwill and The Salvation Army have donation value guides to help donors determine tax-deductible values of some commonly donated items.
Similar to documentation requirements for cash contributions of $250 or more mentioned above, acknowledgment letters for all noncash contributions should also include the “no goods or services” language. Again, if the donor received anything in return from the charity, the acknowledgment should include an estimate of the value of those items and indicate that only the “net” amount is tax-deductible.
Conclusion
As the year draws to a close, many people engage in housecleaning and often find themselves with excess or unwanted household items and clothing for donation. If you plan to donate more than $5,000 worth of similar items to charity, consider splitting your donations between the current year and the next to avoid the need for an appraisal. This strategic approach can simplify the donation process while maximizing your tax benefits.
There are also many other types of noncash charitable contributions such as publicly and non-publicly traded stock, artwork, autos, etc. These different types of noncash charitable contributions require specific documentation for substantiation.
We, at Abbott, Stringham & Lynch, are here to help you navigate the complexities and help you with planning opportunities and implementation related to charitable contributions. Please contact us for more information and assistance.