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Gifts to Charity and Income Taxes

Last updated 29th Nov 2022

Several years ago, important changes were made to the tax code regarding gifts to a charity. There were also significant tax breaks introduced for IRA owners, if the accountholder is willing to transfer funds to a charitable organization.

In this article, we're first going to discuss some of the new guidelines the IRS has issued with respect to charitable donations and recordkeeping requirements. In addition to the change in guidelines associated with donating money, there was a change in the rules regarding the donation of clothing and household items. Finally, we'll briefly discuss the tax break for IRA owners interested in transferring money to eligible charities.

New Guidelines for Charitable Donations

As part of the Pension Protection Act, the IRS is now tougher when it comes to claiming gifts to charity on income tax returns. Prior tax law allowed taxpayers to substantiate their donations of money to charity using personal bank registers, diaries, or even notes made around the time of the donation. Starting in 2007, those types of records are no longer sufficient.

To deduct a donation of money, a taxpayer now has three mechanisms they can use as proof:

  • Bank Records: this includes canceled checks, credit card statements, or a statement from a bank or credit union showing the name of the charity, date, and amount of donation. Credit card statements need to show the transaction posting date, as well as the name of the charity.
  • Written Communication: information received from the charity must show the name of the charity, date, and contribution amount.
  • Payroll Deductions: taxpayers that wish to deduct a donation made through regular payroll deductions will need to retain their pay stub, IRS Form W-2, pledge card, or another document provided by their employer that shows the charity's name, date, and amount of the donation.

Please note the above IRS requirements no longer include written logs, diaries, or notes made by the taxpayer at the time of donation. As mentioned earlier, these types of records are no longer considered sufficient proof of the donation's value.

Donating Clothes and Household Items

Clothing and household items donated after August of 2006 must be at least in "good" used condition. Unfortunately, the tax law does not explain, or define, the term "good" used condition. Household items include furniture, furnishings (such as wall art and lamps), electronics, appliances, and linens. An exception to this rule involves items valued at more than $500, which can be deducted as long as a qualified appraisal accompanies the tax return.

Contributions in Excess of $500

All non-cash contributions valued at more than $500 require tax Form 8283, specifying the date the item was originally acquired, original cost, date of contribution, fair market value, as well as the method used to determine the item's fair market value. Donations of items such as cars, boats, art, and jewelry valued at more than $5,000 have more rigorous filing requirements.

Existing Guidelines for Donations to Charity

The change in tax law did not modify the prior IRS requirement that a taxpayer get an acknowledgement from a charity for each deductible donation of $250 or more, which applies to both money and / or property. It is possible to use one statement, containing all of the necessary information, to meet the requirements of both tax law provisions.

charitable gifts

Deducting Gifts to Charity

Taxpayers making a donation, or giving a gift of money or goods, to a charity should also be aware of the following rules that apply to claiming donations on an income tax return:

  • Timing of Deductions: contributions are only deductible in the year in which the donation is made to the charitable organization. Checks that are mailed or credit card donations that are made before yearend are eligible for deduction in that tax year even if the check is not cashed or the credit card bill is not paid prior to year's end.
  • Qualified Organizations: donations are deductible only if made to qualified organizations. A list of these organizations can be found online in IRS Publication 78. Churches, synagogues, temples, mosques, and government agencies are considered qualified organizations, even if not listed in Publication 78.
  • Itemization of Deductions: only taxpayers who are able to itemize their deductions on Schedule A are able to claim a deduction for items or money donated to charity. Taxpayers filing their Form 1040 using a standard deduction are not eligible to claim a gift to charity.

Tax Breaks for IRA Owners

The American Taxpayer Relief Act (ATRA) extended the IRA charitable donation provisions in 2012 and 2013. These rules apply to what are termed qualified charitable distributions, or QCD. Taxpayers can make a 2012 donation prior to February 1, 2013.

Under this provision, IRA owners age 70 1/2 and over can contribute, or transfer, up to $100,000 per year to eligible organizations without paying income tax on the monies transferred. Taxpayers can take advantage of this tax break even if they do not itemize their deductions.

To qualify, the money must be transferred directly from the IRA trustee to the charity. These donations can also be used when determining whether or not the IRA's owner had met all their minimum required distribution rules. Distributions from employer sponsored plans such as a SIMPLE IRA and simplified employee pension plans (SEP) are not eligible for transfer.

If done correctly, the amount donated will not be included in the donor's gross income, which prevents the donor from being penalized on their income taxes. The amounts transferred are neither taxable nor is a deduction taken for the amount given to the charity. This change in tax law is simply a more efficient way for donors to remove money from a taxable IRA and donate it directly to a charity.

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Moneyzine Editor

Moneyzine Editor