One of these actions can be the use of charitable contributions. To take advantage of a charitable contribution deduction, an individual must be able to itemize deductions by completing Schedule A.
The owners of partnerships or S corporations, for example, carry the contribution from the business to their personal Form 1040.
Restrictions on Deductible Contributions
A charitable contribution is deductible only when made to qualified tax-exempt nonprofit organizations. Contributions to nonprofits in other countries may be deductible under limited circumstances.
A taxpayer who receives a benefit in return for a contribution should obtain a statement from the organization stating, among other things, the value of what was received and indicating that part of the contribution is not deductible. For example, if a $100 contribution is made to a qualified organization and something of value worth $10 is received in return, the deductible contribution is only $90.
A gift of only token value generally will not reduce the deductible amount of the contribution. A contribution to a qualified college athletic department for the right to purchase tickets is generally 80 percent deductible. Deductibility of contributions may be further restricted if the donor exercises "undue control" over the donation. For example, a $1,000 donation to a church with the provision that the church pay that amount to XYZ University to pay for the tuition costs of the donor's child is a nondeductible contribution because the donor is exercising undue control.
There are also limitations on the amount of charitable contributions that may be deducted. These limitations are based on a percentage of adjusted gross income (AGI) and include a 50 percent limitation for all charitable contributions.
There are two separate 30 percent limitations placed on:
The 20 percent limit applies to capital gain contributions made to organizations that are not 50 percent limit organizations.
Types of Contributions
Contributions may be in cash or property. Cash contributions include those made in cash, by check or by credit card. Normally, the organization will provide a receipt for the contribution. Under certain circumstances, it is required to provide a receipt.
A noncash, or property, contribution may also be deductible. In these cases, the recipient organization should provide an acknowledgment of the donation but should not place a value on the contribution.
It is the responsibility of the donor to determine the fair market value (FMV) of the noncash contribution. If the FMV exceeds the donor's cost, the deduction is limited to cost. FMV may be determined by making comparisons to thrift or consignment store selling prices.
A taxpayer should maintain an itemized list of items contributed. If the value of all noncash contributions is $500 or more, the taxpayer must complete Form 8283, giving details regarding the recipient organization and the property donated.
If the value of a single item is $5,000 or more, with some limited exceptions, the donor must obtain a qualified appraisal not earlier than 60 days before the date of the contribution. The appraiser must sign the Form 8283.
If a vehicle, boat or airplane is donated, the recipient organization is required to give the donor a Form 1098-C if its value is greater than $500.
Capital gain property can give rise to significant tax advantages. When the property has been held for more than 12 months, it is eligible for long-term capital gain treatment.
In most cases, a taxpayer may take a deduction for the amount of the FMV of the contribution and is not required to recognize gain.
For example, a painting donated to an art museum will give rise to a deduction for the FMV only if the painting is displayed or used for other exempt purposes of the museum. If the museum sells the painting, that sale is not part of the museum's exempt purpose. The deduction would be only for the donor's cost basis.
Out-of-pocket expenditures incurred on behalf of a charitable organization are deductible. Mileage can be deducted at the IRS rate for charitable contributions, currently 14 cents per mile. Some costs of attending a convention, meals, books and uniforms related to activities for the charitable organization may also be deducted. The value of contributed services is not deductible.
Tax Planning of Contributions
A contribution is deductible in the year in which it is given to the organization. A check is deductible based upon the date the check is mailed to the organization or the date it is physically delivered by hand. A contribution by credit card is deductible on the date the charge is made.
A taxpayer should manage contributions to achieve the maximum tax benefit from the deduction.
For example, taxpayers under the threshold for itemizing deductions might delay making contributions until after the first of the year, then attempt to maximize itemized deductions in the next year.
If they are already over the minimum for itemizing, it is usually a good strategy for taxpayers to accelerate contributions to take advantage of the deduction in the current year.
In managing deductions, the taxpayer's marginal tax rate should be considered. If income is high in the current year, a deduction now would reduce taxes more than in a year when the marginal rate is lower.
A final point deals with contributions made by a business. If the business is a Schedule C business, any contributions will be deductible as though made by the individual and deductible on Schedule A.
Contributions made by a partnership or an S corporation owned by the taxpayer will be reported as separately stated items on Schedule K-1 and reported on the taxpayer's Schedule A.