Charitable Tax Deduction Peculiarities

Charitable contributions are deducted as part of a taxpayer’s itemized deductions on IRS Schedule A, except for the special 2020 and 2021 provisions that allow up to $300 ($600 for married taxpayers filing jointly for 2021) of cash donations as a deduction for non-itemizers.

Charitable contributions can take many forms, and some are unusual or misunderstood. The following includes issues that a taxpayer may encounter related to non-cash contributions.

Charity Auctions – It is not uncommon for charitable organizations to conduct charity auctions where individuals contribute items to be auctioned off that others bid on, with the proceeds going to the charity. Frequent questions arise related to the charitable income tax deduction for those contributing items for the auction and for those that were winning bidders who purchased items at the charitable auction. As with most things tax, the answers can be convoluted.

Charity Volunteer – If individuals volunteer their time to a charitable organization, they probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

• Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
   
• You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing. 
  
  
• Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense. 

Donating a Vehicle to Charity – A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is several rules that, in some cases, limit the amount of the charitable deduction.

Although not as prevalent as in the past, there are still charities that solicit contributions of vehicles. For taxpayers that contribute to a charity a motor vehicle (or a boat or airplane), the deduction is limited for those vehicles with a claimed value exceeding $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.

If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals to the needy or elderly every day for a year or driving 10,000 miles during a one-year period while delivering meals.

The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the poor and distressed or the underprivileged who need a means of transportation. In this case, the fair market of the vehicle is used to determine the amount of the contribution.

Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee (charitable organization). To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.

Acknowledgment by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good-faith estimate of the value of any such goods or services or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all the required acknowledgment elements for the donee to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.

Valuing Non-cash Contributions – One of the most common and abused tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and, in some cases, requires the value to be established by a qualified appraiser.

Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items.

Documentation – The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”

The IRS requires the following documentation for noncash contributions based on the total value of the donation: