Getting the most from individual charitable contributions.

• Author: Boes, Richard F.

EXECUTIVE SUMMARY

* In analyzing a charitable contribution, a taxpayer must determine if the contribution is to a qualifying charity, the amount of the contribution for deduction purposes, and how much of the contribution can be deducted in the current year.

* The IRS provides a list of qualifying charities in Publication 78.

* When a contribution of property is made, the amount of the contribution depends on the type of property and the type of charity to which the property is donated.

* If the full amount of a donation is not deductible in the tax year it is made, the taxpayer may carry forward the excess amount for up to five years.

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New laws passed in recent years have added complexity to the rules regarding the deduction for charitable contributions for individual taxpayers. This article discusses the issues involved in determining whether a charitable contribution is deductible, what the amount of a contribution is, and when and how much of a contribution is deductible.

The determination of the charitable contribution deduction can be surprisingly complex for some taxpayers. This is especially true when taxpayers donate to relatively unknown organizations, donate property, and/or bump into the various percentage limits that may apply to their contributions. Recent tax legislation has also increased the complexity of even seemingly simple cash and property contributions of clothing, household appliances, cars, and taxidermy property. This article addresses three issues that must be resolved in order to determine the amount a taxpayer is allowed to deduct on the tax return: (1) Is the entity a qualifying charity? (2) How much was donated? (3) How much is currently deductible? The article focuses only on individuals.

Is the Entity a Qualified Charity?

The first question a taxpayer must answer in claiming a charitable deduction is whether the organization is a qualifying charity. Sec. 170(c) basically lists generic qualifying organizations. Many organizations are widely recognized as bona fide charities falling within these general listings, such as the American Red Cross and the American Cancer Society. But what if a taxpayer has made a contribution to the Green Guerillas, the Blue Jeans Center, Inc., or the Fabulous Leopard Percussionists Inc.? Are these organizations bona fide charities? Practitioners and taxpayers can consult IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986 (available at http://apps.irs.gov/app/pub78), to see if a relatively unknown specific organization is listed as a qualifying charity.

This publication also indicates whether the charity is a public charity (50% limit) or a private charity (30% limit). For instance, each of the above organizations is identified as "a public charity with a 50% deductibility limitation." (1) The Bill and Melinda Gates Foundation is identified as "a private foundation, generally with a 30% deductibility limitation." Although this publication is useful, practitioners and taxpayers need to be aware that it does not list all qualifying organizations.

How Much Was Donated?

If an organization is a qualified charity, the taxpayer must next determine the amount that was donated for charitable contribution deduction purposes. For purposes of determining the amount donated, different rules apply to contributions of cash and contributions of property.

Cash Contributions

Cash contributions generally present few problems. However, if a taxpayer receives goods or services from the organization in return for a contribution, there may or may not be a donation. For example, purchasing cookies from the Girl Scouts (a bona fide charity) is not a charitable contribution absent evidence showing that the purchase price exceeded the product's fair market value (FMV). (2) Similarly, amounts paid for chances to participate in raffles, lotteries, similar drawings, or other contests for valuable prizes are not charitable contributions. (3) In these situations, taxpayers have a chance to win a valuable prize and thus get full consideration for their payments. However, the receipt in the past of goods or services from a donee does not necessarily preclude a taxpayer from taking a deduction for a donation. For example, a taxpayer making a contribution to the American National Red Cross in gratitude for food and temporary shelter given to the taxpayer when her home was destroyed by a tornado has made a charitable contribution. (4)

A new complicating factor for cash or other monetary gift donations made after August 17, 2006, is that no deduction is allowed unless the taxpayer has a bank record of the contribution or a written communication from the donee showing the name of the charity, the date of the contribution, and the amount of the contribution. (5) Thus, cash deposited into a Salvation Army kettle is no longer deductible without a receipt from the organization.

Property Contributions

Donations of property are more complex. Exhibit 1 provides a graphical overview of the following discussion. Property donations are based on the property's FMV at the time of the contribution less certain required reductions. (6) This rule basically splits property donations into "depreciated" and "appreciated" categories. Property counts as depreciated when the...