Tools & Techniques 101 – You Made the Contribution, Now PROVE It!
As I tell my students at Baruch College, tax deductions are a matter of legislative grace. Congress giveth and Congress taketh away. Allowable deductions of all types are claimable, but subject to later scrutiny and possible disallowance by the IRS. If your documentation is inadequate, then bye-bye deduction! Charity is no exception. In fact, charitable contributions may be one of the touchiest subjects of all. A cranky agent may really chafe at a taxpayer who tries to scam the system – “Look at what a good person I am! I gave $800 to the Human Fund this year and you’re not letting me deduct it?” Believe me, such an approach doesn’t play well on the sympathy meter. But scenes like that are so avoidable – once you make the contribution, all you need to do is make sure you have the proper documentation and you’re all set. Properly papering your file is essential, particularly now as you prepare to meet with your tax advisor to file your 2012 return.
The following information is a start. Your tax advisor does not necessarily need to see all this paperwork because, at the end of the day, you are the responsible party for gathering, organizing, and retaining this documentation in the event of an audit. (Exception – definitely pass on the qualified appraisals of noncash contributions to your advisor). If you have any questions about any of this information be sure to check with him/her. And, of course, for some helpful online information check out the IRS’ excellent publication Charitable Contributions – Substantiation and Disclosure Requirements.
But for now, some basics:
- First of all, verify that your contribution is in fact deductible. Not every tax exempt is a charity, and not all charities are in good standing with the IRS. The best place to verify this information is through the IRS’ online searchable database (formerly known as Publication 78). This database will help you determine the status and allowable deductibility for most charities. The one exception is churches and synagogues, which are not typically listed in Publication 78.
- Gather the required documentation from the charities and your own files. Remember, while the charity bears some responsibility for following these rules, you as the donor are ultimately responsible for ensuring that the documentation you receive is adequate to support your deduction. And it has to be contemporaneous, which means you must receive it before you file your tax return. Biggest source of errors: identification of quid pro quo contributions, valuation of the goods or services received, and the required adjustment of the deduction for this value.
- Qualified appraisals are absolutely required for larger value non-cash contributions (see table). Don’t skimp – and if you don’t believe me, just ask Mr. Mohamed, a taxpayer who recently lost out on a $19MM deduction because he skimped on the appraisal.
- Relatively low-value non-cash contributions of items such as clothing, furniture, and household effects should be valued piece by piece based on fair market value, which is usually interpreted to mean “thrift shop value.” A percentage of cost is not permitted unless it approximates the thrift shop value, nor is a “group valuation” such as “5 bags of clothing worth $X.” In addition, deductions are allowed only for such property that is in good condition or better. A good starting point is the Valuation Guide published by the Salvation Army.
- Vehicles such as automobiles, airplanes, and boats are subject to special rules depending on how the charity uses the donated property. See my previous blog “Car Donations – Under the Right Conditions, What’s Old is New Again” for more details.