Letter To Clients Re: Charitable Gifts
Now is a good time to review substantiating charitable gifts on your 2016 federal income tax returns—due by April 18, 2017.
The federal government encourages your generosity by allowing you to deduct your gifts to charities on your income tax return if you itemize. However, you must follow the IRS’s reporting and substantiation rules to assure your charitable deduction.
I hope that this letter highlighting the requirements of the IRS will be helpful to you when preparing your federal income tax return for the year 2016 (due by April 18, 2017).
This letter will outline the General Rules regarding Donations to Charities:
(1) Reporting Requirements for Non-Cash Charitable Contributions,
(2) Rules for Hard-to-Value Property, and
(3) Receipts needed to substantiate cash and non-cash contributions.
This letter is for informational purposes only and is not intended as legal or tax advice.
To begin, the Internal Revenue Service points out in IRS Publication 557 (February 2016)—“Tax Exempt Status for Your Organization” that: “The donor (the person donating the gift) is responsible for requesting and obtaining the written acknowledgment from the donee (the organization receiving the gift).”
When a receipt is required to substantiate a deduction, a donor must have it in his or her possession by the earlier of the actual filing of the return, or the April 18, 2017 due date, (or extended due date) for the return.
Be advised that the Rules are Numerous—and Overlapping.
I. Non-Cash Donations.
For some non-cash charitable gifts, Form 8283 (Noncash Charitable Contributions) must be filed. That form and its instructions are enclosed. The form is the latest available today.
Before filing your income tax return, I suggest that you check the IRS Web site, www.irs.gov, for the latest forms and instructions for any last-minute changes.
A. If your non-cash gifts for the year total more than $500, you will have to include Form 8283 with your income tax return. Section A—the simpler part of the form—is used to report gifts valued at $5,000 or under. Section A can be completed by you or your tax return preparer.
B. When the property’s value is more than $5,000 ($10,000 for closely held stock), you will generally need to have it appraised. The appraiser’s findings are reported in Section B of Form 8283.
Those rules also apply if you give “similar items of property” with a total value above $5,000—even if you gave the items to different charities.
C. Similar Items of Property are items of the same generic type, including stamps, coins, lithographs, paintings, books, non-publicly traded stock, land and buildings. For example, if you have six paintings worth $1,000 each and contribute each one to six different charities, the appraisal rules would apply.
D. Special Rule for Publicly Traded Securities. You don’t need an appraisal or Section B of Form 8283 for gifts of publicly traded securities, even if their total value exceeds $5,000. But you must report those gifts (when the value is more than $500) by completing Section A of Form 8283 and attaching it to your return.
E. Closely Held Stock. For gifts of non-publicly traded stock, an appraisal is not required as long as the value is NOT over $10,000, but part of Section B of Form 8283 must be completed if the value is over $5,000.
And if the gift is valued at over $10,000, then both an appraisal and Section B of Form 8283 are required.
A. If you need an Appraisal, the gift must be made within sixty (60) days after the date of the appraisal.
(1) The property can be appraised after the date of the gift, but, in that case, the appraisal must state the property’s value on the date of the gift.
(2) You must receive the appraisal by the due date (including extensions) of the return on which the deduction is first claimed.
(3) It is essential to complete Section B of Form 8283 and to attach that form to your tax return.
(4) Section B of Form 8283 must be signed by the appraiser and by the charity that received your gift.
B. Qualified Appraisal. A qualified appraisal is an appraisal document that is prepared by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the qualified appraisal requirements.
C. Qualified Appraiser. The requirements to be a “qualified appraiser” are stringent.
The definition is critically important: if there is no qualified appraiser, there can be no deduction for property gifts valued over $5,000 (over $10,000 for closely held stock).
Under the current definition, a Qualified Appraiser is an individual who
(1) Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements (established by the IRS in regulations);
(2) Regularly performs appraisals for which he or she receives compensation; and
(3) Can demonstrate verifiable education and experience in valuing the type of property for which the appraisal is being performed.
An individual has education and experience in valuing the relevant type of property, as of the date the individual signs the appraisal, if the individual has:
(1) Successfully completed (for example, received a passing grade on a final examination) professional or college-level coursework in valuing the relevant type of property, and
(2) Has two or more years of experience in valuing the relevant type of property; or
(3) Earned a recognized appraisal designation for the relevant type of property.
Ifs, Ands, Buts. A qualified appraiser may NOT be related to—or regularly employed by—you or the charitable donee and may NOT be a party to the transaction by which you acquired the property being appraised, unless the property being appraised is donated within two (2) months of the date of acquisition and its appraised value does not exceed the purchase price.
D. Appraisal Fee. Generally, no part of the appraisal fee can be based on a percentage of the property’s appraised value. An appraisal fee isn’t a charitable gift. If you itemize, the appraisal fee is deductible on your income tax return as a miscellaneous deduction. But it’s only deductible if it—together with other miscellaneous deductions—exceeds a 2 percent of adjusted gross income floor.
III. Special Rule for Artwork. If you donate artworks with a total value of $20,000 or more, your return has to include a copy of the signed appraisal itself, not just Section B of Form 8283. If any single artwork is worth $20,000 or more, IRS may ask you for an 8×10 color photo (or a 4×5 color slide) of the donated property. You don’t have to send the photo with your tax return; just have one ready, if it is requested.
IV. Special Rule for Very Large Gifts. For gifts valued at over $500,000, the donor must attach the qualified appraisal—as well as Section B of Form 8283—to their tax return.
For purposes of the dollar thresholds, property and all similar items of property donated to one or more charitable donees are treated as one property.
An appraisal need not be attached for contributions of cash, inventory, publicly traded stock, or intellectual property. As noted above, a copy of the appraisal must be attached to the tax return when an artwork is worth $20,000 or more.
V. Gifts of Clothing or Household Items. No deduction is allowed for a contribution of clothing or a household item unless the item is in good condition or better at the time of the contribution and the donor meets the substantiation requirements.
A contribution of a single item of clothing or a household item that is NOT in good condition or better, for which a deduction of more than $500 is claimed, requires that the donor submit with the return on which the deduction is claimed a qualified appraisal prepared by a qualified appraiser and a completed Form 8283 (Section B).
The term “Household Items” includes furniture, furnishings, electronics, appliances, linens and other similar items.
Note: Food, paintings, antiques and other objects of art, jewelry, gems and collections are not household items.
VI. Used Car Donations. The deduction for charitable contributions of autos, other motor vehicles, boats and airplanes exceeding $500 depends on the use of the vehicle by the charity.
A deduction is NOT allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment by the charity.
(1) If the charity sells the vehicle without any significant intervening use or material improvement of the vehicle, the deduction is the smaller of the gross proceeds from the sale or the vehicle’s fair market value on the date of the contribution.
(a) The acknowledgment, which is on IRS Form 1098-C (or a statement containing the same information), must contain the name and taxpayer identification number of the donor and the vehicle identification (or similar) number.
(b) The acknowledgment must provide a certification that the vehicle was sold in an arm’s length transaction between unrelated parties and state the gross proceeds from the sale.
(2) If the charity makes a significant intervening use or makes a material improvement to the vehicle, the deduction is the fair market value at the time of the contribution.
(a) The acknowledgment must contain a certification of the use or material improvement of the vehicle and the duration of that use.
(b) The acknowledgment must also contain a certification that the vehicle will not be transferred in exchange for money, other property or services before completion of that use or improvement.
(3) If the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value in direct furtherance of a charity’s ch