Documenting Charitable Contributions
A frequently asked question is, “What records are required for charitable contributions?” In recent years, Congress has passed stringent record keeping rules for charitable contributions as well as harsh penalties for understating taxable income. The following is a summary of the record keeping rules currently in effect for a variety of contribution types. This list is not all-inclusive, so if you don’t see rules that apply to your particular situation, please give our office a call.
Cash Contributions - Cash contributions include those paid by cash, check,electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways.
1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution.Bank records may include:
a. A canceled check,
b. A bank or credit union statement, or
c. A credit card statement.
2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided.
Payroll Contributions - For contributions made by payroll deduction, you must keep:
1. A paystub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and
2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card maybe kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information.
If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B).
Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization.
Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing:
1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property that was donated.
You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).However, you still must document the contribution as described above.
Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following:
1. The name of the charitable organization,
2. The date and location of the charitable contribution,
3. A reasonably detailed description (but not necessarily the value) of any property contributed,
4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and
5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit(such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.
Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above).
In addition, the records must also include:
1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange).
2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed.
3. The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return.
Deductions over $5,000 -Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution.
Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply.
1. You must have adequate records to prove the amount of the expenses.
2. You must get an acknowledgment from the qualified organization that contains:
a. A description of the services provided,
b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred,
c. A description and good faith estimate of the value of any goods or services(other than intangible religious benefits) provided as reimbursement, and
d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.
3. The acknowledgement must be obtained before the earlier of the following:
a. The date of filing the return for the year in which the contribution was made, or
b. The due date, including extensions, for the return.
Car Expenses -When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents permile is used, the records must show the miles driven for the charitable purpose.
If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires o rinsurance cannot be deducted.
Vehicle Donations - When the deduction claimed for a donated vehicle exceeds$500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle.
CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following:
1. The date on which your return was filed for the year in which you made the contribution, or
2. The due date, including extensions, for filing the return.
If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call.
Installment Sale- a Useful Tool to Minimize Taxes
Two new laws that take effect in 2013 can significantly impact the taxes owed from the sale of property that results in capital gains. They include:
Higher Capital Gains Rates - Starting in 2013, capital gains can be taxed at 0%, 15%,or 20% depending upon the taxpayer’s regular tax bracket for the year. Therefore, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%.
Unearned Income Medicare Contribution Tax - This new tax is sometimes referred to as the “surtax on net investment income,” which more aptly describes this 3.8% tax on net investment income. Capital gains (other than those derived from a trade or business) are considered investment income for purposes of this tax. For individuals, the surtax is 3.8% of the lesser of (1) the taxpayer’s net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status. The threshold amounts are:
1. $125,000 for married taxpayers filing separately.
2. $200,000 for taxpayers filing as single or head of household.
3. $250,000 for married taxpayers filing jointly or as a surviving spouse.
Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally push the taxpayer’s income within the reach of these wo new taxes.
This is where an installment sale could fend off these additional taxes by spreading the income over multiple years.
Here is how it works. If you sell your property for a reasonable down payment andcarry the note on the property yourself, you only pay income taxes on theportion of the down payment (and any other principal payments received in theyear of sale) that represents taxable gain. You can then collect interest onthe note balance at rates near what a bank charges. To qualify as aninstallment sale, at least one payment must be received after the year in whichthe sale occurs.
Example: You own a lot forwhich you originally paid $10,000. You paid it off some time ago, leaving youwith no outstanding mortgage on the lot. You sell the property for $300,000with 20% down and carry a $240,000 first trust deed at 3% interest using theinstallment sale method. No additional payment is received in the year of sale.The sales costs are $9,000.
Of your $60,000 down payment, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax.
Here are some additional considerations when contemplating an installment sale.
Existing mortgages - If the property you are considering selling is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan.
Tying up your funds - Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in five years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year – so close attention to the tax consequences needs to be considered in structuring the installment agreement.
Early payoff of the note - The buyer of your property may decide to pay off thein stallment note early, or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note.
Tax law changes
-Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase.
Installment sales do not always work in all situations. To determine if an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance Franklin Katz, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
704-739-4039
E-Mail: [email protected])
Web: www.prep.1040.com/frankstax
IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
A frequently asked question is, “What records are required for charitable contributions?” In recent years, Congress has passed stringent record keeping rules for charitable contributions as well as harsh penalties for understating taxable income. The following is a summary of the record keeping rules currently in effect for a variety of contribution types. This list is not all-inclusive, so if you don’t see rules that apply to your particular situation, please give our office a call.
Cash Contributions - Cash contributions include those paid by cash, check,electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways.
1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution.Bank records may include:
a. A canceled check,
b. A bank or credit union statement, or
c. A credit card statement.
2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided.
Payroll Contributions - For contributions made by payroll deduction, you must keep:
1. A paystub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and
2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card maybe kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information.
If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B).
Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization.
Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing:
1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property that was donated.
You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).However, you still must document the contribution as described above.
Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following:
1. The name of the charitable organization,
2. The date and location of the charitable contribution,
3. A reasonably detailed description (but not necessarily the value) of any property contributed,
4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and
5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit(such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.
Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above).
In addition, the records must also include:
1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange).
2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed.
3. The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return.
Deductions over $5,000 -Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution.
Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply.
1. You must have adequate records to prove the amount of the expenses.
2. You must get an acknowledgment from the qualified organization that contains:
a. A description of the services provided,
b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred,
c. A description and good faith estimate of the value of any goods or services(other than intangible religious benefits) provided as reimbursement, and
d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.
3. The acknowledgement must be obtained before the earlier of the following:
a. The date of filing the return for the year in which the contribution was made, or
b. The due date, including extensions, for the return.
Car Expenses -When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents permile is used, the records must show the miles driven for the charitable purpose.
If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires o rinsurance cannot be deducted.
Vehicle Donations - When the deduction claimed for a donated vehicle exceeds$500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle.
CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following:
1. The date on which your return was filed for the year in which you made the contribution, or
2. The due date, including extensions, for filing the return.
If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call.
Installment Sale- a Useful Tool to Minimize Taxes
Two new laws that take effect in 2013 can significantly impact the taxes owed from the sale of property that results in capital gains. They include:
Higher Capital Gains Rates - Starting in 2013, capital gains can be taxed at 0%, 15%,or 20% depending upon the taxpayer’s regular tax bracket for the year. Therefore, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%.
Unearned Income Medicare Contribution Tax - This new tax is sometimes referred to as the “surtax on net investment income,” which more aptly describes this 3.8% tax on net investment income. Capital gains (other than those derived from a trade or business) are considered investment income for purposes of this tax. For individuals, the surtax is 3.8% of the lesser of (1) the taxpayer’s net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status. The threshold amounts are:
1. $125,000 for married taxpayers filing separately.
2. $200,000 for taxpayers filing as single or head of household.
3. $250,000 for married taxpayers filing jointly or as a surviving spouse.
Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally push the taxpayer’s income within the reach of these wo new taxes.
This is where an installment sale could fend off these additional taxes by spreading the income over multiple years.
Here is how it works. If you sell your property for a reasonable down payment andcarry the note on the property yourself, you only pay income taxes on theportion of the down payment (and any other principal payments received in theyear of sale) that represents taxable gain. You can then collect interest onthe note balance at rates near what a bank charges. To qualify as aninstallment sale, at least one payment must be received after the year in whichthe sale occurs.
Example: You own a lot forwhich you originally paid $10,000. You paid it off some time ago, leaving youwith no outstanding mortgage on the lot. You sell the property for $300,000with 20% down and carry a $240,000 first trust deed at 3% interest using theinstallment sale method. No additional payment is received in the year of sale.The sales costs are $9,000.
Computation of Gain | |
Sale Price | $300,000 |
Cost | |
Sales costs | |
Net Profit | $281,000 |
Profit % = $281,000/$300,000 = 93.67% |
Of your $60,000 down payment, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax.
Here are some additional considerations when contemplating an installment sale.
Existing mortgages - If the property you are considering selling is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan.
Tying up your funds - Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in five years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year – so close attention to the tax consequences needs to be considered in structuring the installment agreement.
Early payoff of the note - The buyer of your property may decide to pay off thein stallment note early, or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note.
Tax law changes
-Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase.
Installment sales do not always work in all situations. To determine if an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance Franklin Katz, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
704-739-4039
E-Mail: [email protected])
Web: www.prep.1040.com/frankstax
IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.