Answers to Common Questions about Charitable Gifting
Throughout the year, Americans support causes and charities through monetary and in-kind gifts. But in addition to benefiting charities, donations can also be helpful to the giver, if you know the rules about taxation. Here are some answers to frequently asked questions about charitable gifting.
Are donations of art, wine, theatre tickets and other tangible property tax deductible?
The short answer … it depends. The longer answer involves a bit more effort on your part to donate tangible property. Generally, you can take the deduction for the cost you paid for items you donate, as long as you have a receipt. It gets trickier if you held the item for a longer period of time or if the value of the donated property fluctuated from your original cost. In these cases, you need to have documentation of an “arm’s-length” offer, in which the documentation indicates the buyer’s willingness to pay a specific price to support an increase from your cost to the value of the item you are donating, or documentation from the charity that supports the value they may have received in a charity auction.
As an example, if you have a time-share week that you have difficulty using, you can donate it to a nonprofit that could use it in a charity auction. The value paid for maintenance fees is well documented (your cost), because you’ll have an invoice and a receipt. Suppose a colleague was willing to pay $500 more than your cost and you received an offer documenting it from that colleague. You could take the cost of maintenance fees, plus the $500 as your deduction. Now, further, if your time-share week sells for even more at the auction, you can deduct that amount. Don’t forget that you need a letter from the charity indicating the value of the donation – but you can take your cost, the arm’s length or the value of the item sold at charity auction (whichever is higher) as your deduction (see IRS Publication 561 for specific guidance).
Are donations of services tax deductible?
If you are a business owner or an employee yourself, the value of your services is not deductible to you. But, if you have an employee provide those services and you document the time and related costs AND the services are provided to a 501(c )(3) nonprofit, you may be able to take the donation. However, make sure the nonprofit provides an acknowledgement of the value of the services that agrees with the costs you plan to deduct.
What type of documentation does the IRS require to claim federal tax deductions for noncash gifts?
As with the above examples, taking tax deductions are all about documentation. No matter if you donate cash, a check, or non-cash contributions, you must have an acknowledgement letter from the charity, and it needs to include the value of the gift donated. The more documentation the better. Pictures of non-cash items donated are also extremely helpful documentation, but the letter from the charity is imperative.
What is “bunching” of charitable deductions?
The concept of bunching charitable deductions came about after the Tax Cuts and Jobs Act (TCJA) became law in 2017. The TCJA roughly doubled the standard deduction, eliminating the need for many people to itemize their deductions, through which they could write off their charitable donations. For those who would still like to donate to charity and are close to having enough to itemize, bunching multiple years’ donations into a single tax year enables you to itemize in the bunching year and claim the standard deduction in other years. Your tax preparer or financial advisor can help you set this up. People often use their Donor Advised Funds to bunch and distribute their donations.
How can I create a charitable gifting strategy, and can it save money on taxes long-term?
Bunching is one of those strategies, but there are several others that include using Donor Advised Funds and donation cash-flow planning to offset Roth conversions and other wealth-building techniques.
If you have other questions about charitable gifting, be sure to register for Savant’s Educational Charitable Giving webinar that will take place on Wednesday, Dec. 1 at 1 pm CT. My colleague Tracy Beard and I will discuss the benefits of having a long-term charitable gifting strategy and answer more of your questions about tax implications. I hope you can join us!
This is intended for educational purposes only and should not be construed as personalized tax or investment advice. Please consult your tax and investment professional(s) regarding your unique situation.