Charitable Deductions: Tax Planning
by Joshua Kreitzer

December 1, 2001

With the end of the year approaching, it's a good time to review your tax situation with a view to finding ways to reduce your Federal income tax liability. One popular way, particularly this year in light of the recent tragic events of September 11, to reduce one's taxes is making contributions to charitable organizations — and, due to the new tax law, your tax savings will generally be greater by making your contribution before December 31 rather than waiting until next year. Therefore, this is also a good time to review the income tax rules regarding charitable deductions.

Make Sure You Can Use The Deduction

If you wish to reduce your taxes by making charitable donations, keep in mind at the outset that contributions to charities are only deductible if you itemize deductions instead of taking the standard deduction. Consequently, your charitable contributions will only reduce your taxes if your total itemized deductions — including not only charitable contributions, but also mortgage interest, state and local taxes, deductible medical expenses, and certain other deductions — exceed your standard deduction (which, for 2001, is $4,550 for single taxpayers and $7,600 for married couples filing jointly). There have been proposals to allow taxpayers who don't itemize deductions to deduct a portion of their charitable contributions as well, including a bill introduced by Rep. Philip Crane (R-Ill.) in 2001, but Congress has not yet passed any of these proposals.

Make Sure The Organization Qualifies

If you are uncertain whether donations to a specific organization qualify as charitable contributions, there are several ways to find out. You can ask the organization to provide you with a copy of its letter from the Internal Revenue Service recognizing it as a charitable organization. All tax-exempt organizations are required to make such letters available for public inspection. Many post them on their Web sites. You may also look up the organization's listing in IRS Publication 78, "Cumulative List of Organizations." Publication 78 can be found in print at most libraries and can be searched online at http://www.irs.gov/prod/search/eosearch.html. (That Web page also links to a list of organizations founded to assist victims of the terrorist attacks on September 11, 2001 which have been granted tax-exempt status and are eligible to receive tax-deductible contributions. Of course, there are also charitable organizations established before September 11 which also assist victims of the terrorist attacks, and those older organizations are listed in the main listings of Publication 78.) Note, however, that churches, synagogues, temples, and other religious congregations are not required to apply for recognition of their tax-exempt status (although some still do so) and, thus, contributions to them are deductible even if they are not listed in Publication 78. You may also deduct contributions made to Federal, state, or local governments — which don't have to apply for recognition of tax-exemption, either, and aren't listed in Publication 78 — as long as your contribution is made solely for public purposes.

Only Deduct The Contribution

If you receive a benefit from making a contribution to a charitable organization, you may only deduct the amount of the contribution that is greater than the fair market value of the benefit you receive. For example, if you pay a charitable organization $100 for a ticket to a charity ball, banquet, show, sporting event, or similar event, and the fair market value of the ticket would be $40, you may only deduct $60 as a charitable contribution. If you make any payment to a qualified charitable organization that is more than $75 and is partially a contribution and partially for goods or services, the organization generally must give you a written statement indicating the fair market value of the goods or services so that you can determine what part of the payment is a deductible contribution.

Keep Good Records

When you make a contribution to a charitable organization, make sure that you maintain a record of the contribution as required by the IRS. The type of records you must keep depends on the value of the contribution and whether the contribution was made in cash or in other property.

If you make a contribution consisting of less than $250 in cash, the following are among the types of records which the IRS considers sufficient documentation of the contribution: a cancelled check; a legible credit card account statement showing the amount paid, transaction date, and name of recipient; or a receipt or letter from the charitable organization showing the name of the organization, and the date and amount of the contribution. However, if you make a monetary contribution of $250 or more, you must get a written acknowledgment of the contribution from the charitable organization, stating the amount of cash you contributed, whether the organization gave you any goods or services as a result of your contribution, and a description and good faith estimate of the value of those goods and services, if any.

More documentation is required to substantiate contributions of property than contributions of cash. For example, if you contribute property valued at less than $250, you must get a receipt from the charity showing the organization's name, the date and location of the contribution, and a reasonably detailed description of the property. The receipt need not state the value of the property. However, in addition, you must also keep reliable written records for each item of donated property. Your records must include the information that the charity is required to state on the receipt, as well as the fair market value ("FMV") of the property at the time of the donation and how you figured the FMV. Please note that if you contribute clothing to an organization, the fair market value of the clothing will generally be "second-hand" or used prices.

If you claim a deduction for a contribution of property of at least $250 but not more than $500, you must keep not only the records required for a contribution of property valued at less than $250, but also a written acknowledgment from the charitable organization stating whether the organization gave you any goods or services as a result of your contribution, and a description and good faith estimate of the value of those goods and services, if any.

If all of the property you contribute to charities is valued at more than $500 (combined), you will have to attach Form 8283 (Noncash Charitable Contributions) to your return to claim the deduction. Form 8283 requires you to state, for each item (or group of similar items) contributed, the name and address of the donee organization; a description of the donated property; the date of the contribution; the contribution's FMV; and the method used to determine the FMV. In addition, for any individual item or group of similar items valued at more than $500, you must state the date you acquired the property, how you acquired the property (for example, by purchase, gift, or inheritance), and your cost or adjusted basis in the property. If you have reasonable cause for not being able to provide information on either the date you acquired the property or its cost basis, you must attach a statement of explanation to your return.

Still more information is required if you contribute any individual item or group of similar items valued at more than $5,000. In that case, you must get a qualified appraisal made by a qualified appraiser and attach an appraisal summary (on Form 8283). (No appraisal summary is required, however, if the contribution consists of publicly traded securities for which price quotations are published on a daily basis.)

A qualified appraisal must be in writing and may not be made more than 60 days before the date of the contribution. The appraiser must be a person who performs appraisals on a regular basis and not be related to the donor, the donee, or the person from whom the donor acquired the donated property (such as an art dealer). In addition, the appraiser must not be paid for the appraisal by means of a fee arrangement where the appraiser's fee is based on a percentage of the appraised value of the property. The appraisal summary to be attached to the return must be signed by the appraiser as well as the donee organization.

Regardless of whether the value of property reported on the tax return is required to be determined by the taxpayer or by a professional appraiser, the amount of the deduction is based on the property's FMV — not necessarily the amount that the taxpayer paid to acquire the property. For example, the IRS advises that used household goods (such as furniture, appliances, and linens) and used clothing usually have an FMV much lower than the price paid when those items were new; consequently, the deduction you can claim for such items should be the amount that such items would sell for in consignment or thrift shops. To determine the value of used cars and aircraft, the IRS suggests that commercially published guides such as "blue books" can provide clues for making an appraisal, but the values in such books are not considered official for the purpose of appraising any specific vehicle.

Conclusion

When deciding whether to make your charitable contributions in December 2001 or wait until next year, keep in mind that most taxpayers will find that a deduction for charitable donations is worth more in 2001 than it will be in 2002. This is a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, which, among other things, reduced income tax rates. As a result, all income tax brackets (other than the 15% bracket) are having their tax rates reduced by 0.5 percentage points for 2001 and another 0.5 points for 2002. Thus, the top bracket of 39.6% for 2000 will be 39.1% for 2001 and then become 38.6% for 2002 and 2003; similar reductions apply to the former 28%, 31%, and 36% brackets. Therefore, the value of a deduction (i.e., the tax savings) will be greater in 2001 than in 2002 given the same income level due to the higher tax rate in 2001. That is, a $100 deduction in the 39.1% bracket saves $39.10 in tax. On the other hand, the same $100 deduction in the 38.6% bracket only saves $38.60 in tax.

Certain aspects of the tax law regarding charitable deductions can be complex. Still, by planning ahead — and contacting your tax adviser for assistance before the end of the year — you can optimize your charitable deduction and ensure you have the records you need to support it.

Joshua Kreitzer may be contacted at http://www.marcjlane.com Joshua S. Kreitzer (B.A., Harvard University; M.A., University of South Florida; and J.D., Northwestern University) is an Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. He practices in the areas of taxation, estate planning, corporate law, business law, and tax exempt organizations. He is admitted to practice in Illinois, the U.S. District Court for the Northern District of Illinois, and the U.S. Tax Court. He has also served as a law clerk to Magistrate Judge Mary Scriven of the U.S. District Court, Middle District of Florida, and as a senior articles editor of The Journal of Criminal Law and Criminology.

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