The holidays are often a time of giving. There is nothing like the warm fuzzy feeling of knowing that you are helping your community, and picking up potential tax deductions. But before you go putting every gift down as a tax deduction on your tax return, stop and ask yourself: what makes a charitable contribution deductible on your tax return? Are there limitations on what I can deduct? How about how much I can deduct? And is there anything else I should know?

Let’s dive right in.

What is a charitable contribution?

A charitable contribution is a voluntary donation, or gift, to a qualified organization, that is made without receiving or expecting to receive, something of equal value.

Well, then what is a qualified organization?

A qualified organization is a nonprofit group that can be religious, educational, charitable, scientific, or literary in purpose or that works to prevent cruelty to children or animals. The IRS has a Tax Exempt Organization Search tool that can be used to check an organization’s ability to receive tax-deductible contributions https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

Also, it is worth noting – there is the first category of qualified organizations (this would include churches, publicly supported charities, certain medical organizations, and other items like that) and the second category of qualified organizations (everything that does not fall into the list of the first category). This can impact the deduction limitations, so you must understand what type of organization you are donating to.

What are some common items that do not qualify as charitable contributions?

Not every good act is tax-deductible as a charitable contribution. Gifts to individuals, contributions to GoFundMe campaigns, the value of donated time or professional services, pledged donations (you can only deduct the amount given, not the amount pledged), political contributions, and blood donations are all common areas that taxpayers may think are deductible, but are not. If you have questions, please contact an HBK professional to discuss.

Also, note – it is common to see a partial deduction for donations given at charitable events. For example, you may pay for tickets to dinner to help a local art organization for $250. However, on the ticket, it will tell you the value that you are receiving (let’s say $50 for the dinner itself) which means that only $200 of your $250 ticket is deductible. The organization typically lists if any goods or services were received and what the value was so that you can treat this correctly.

So can I only deduct cash donations?

No! First though – to see a benefit related to charitable contributions, you may need to be a taxpayer who itemizes deduction rather than taking the standard deduction. Cash donations to qualified organizations are not the only option though. You can also potentially deduct non-cash contributions. Common examples of these would include stocks/securities, furniture, clothes, artwork, cars, and any other number of items. Often there can be worthwhile tax planning opportunities when donating non-cash items and you should discuss with your HBK tax professional. Note that if you are donating something of value, other than a publicly-traded stock, over $5,000 you will likely need a qualified appraisal.

The CARES Act did allow in 2020 for a maximum $300 deduction for those who made cash contributions and did take the standard deduction still though. This was what is known as an “above-the-line” deduction. This was extended into 2021, and expanded to $600 if you are a taxpayer with a married filing joint status – it remains $300 for single, married filing separate, etc. This means that for tax years 2020 and 2021, it is possible to have a tax deduction related to charitable contributions even if you take the standard deduction.

Can I deduct the full amount of my donation?

Now it is time for every accountant’s favorite answer: it depends. As noted above, you first must confirm that you did not receive back some value of goods or services in exchange for your donation. But then you also must consider that different donation types may allow you to deduct different total amounts of your AGI.

What are these limitations?

Let’s start with the 100% and 60% limitation – as you will see, it makes sense to discuss them together since they are based on cash donations.

If your donations for the year are 20% or less of your AGI, you will be able to fully deduct all of your charitable contributions for the year and will not be limited. If you have donated more than 20% of your AGI for the year, the potential for limitations comes into play based on what types of donations you made, and to what types of organizations.

Before 2020, the highest percentage of your AGI you could deduct based on charitable contributions would have been 60%. For the tax year 2020, the CARES Act increased this to a potential deduction of 100% of AGI. This was extended to 2021 as well and is currently set to return to the 60% limitation in 2022.

The 100% limit is applied to qualified cash contributions – that is, you cannot achieve a 100% AGI deduction by donating only stocks or other non-cash items. If you elect not to treat the donation as a 100% AGI qualified cash contribution, the limitation becomes 60% as under the pre-2020 rules.

What is the next limitation?

50% of AGI is the next limit – this limitation applied to two different scenarios (one is much more common than the other). First – if you make noncash contributions to a 50% organization, your deduction may be limited to 50% of AGI. Also, less commonly, qualified conservation contributions are limited to 50% of AGI.

It is important to note, this is calculated as 50% of your AGI minus cash contributions subject to a 60% limit. This means that if you donate cash up to 55% of your AGI, and noncash for another 5% – you will see only the 55% deduction related to cash, as you must first subtract 60% limitation items. The additional 5% related to noncash contributions would be carried into the future. Understanding the structuring of the limitations can be important for planning purposes, and it is recommended you discuss with your HBK tax professional.

I’m guessing there are more limitations still?

Correct! Capital gain property contributions to a 50% organization are limited to 30% of AGI. Contributions to the second category of qualified organizations also may be limited to 30% of AGI. And finally, noncash contributions to the second category of qualified organizations may also be limited, but this time it may be to 20% of AGI.

Well now that I know all of that – what do I need to keep as documentation related to charitable contributions?

Another great hypothetical question. Once again we look to our tried and true answer: it depends. This time it depends on what type of donation you made. For cash donations, you will need either a bank record (think canceled check, bank statement, credit card statement, etc.), a receipt (which may also be a letter or email) that lists the organization, date and amount contributed, or a record of a payroll deduction (think to pay stub or W-2). If your cash contribution was over $250, you need to have a contemporaneous written acknowledgment that has a set of parameters as well (name, date, value of services given/received, etc).

Noncash contributions have different levels of substantiation based on the amount as well. For most noncash contributions, you will need a written document showing the name and address of the organization, the date, and location of the contribution, and a description of the items (publicly traded securities should also include information about the security itself). For noncash contributions greater than $5,000 – you may be required to have an appraisal.

That’s a lot of information to process!

Yes, it is – charitable giving can be a great way to support your community as well as a great tax planning opportunity. But there can be many factors to consider, so please make sure to consult with your HBK tax advisor.

Sources: IRS Publication 526

This week, October 19th through October 23rd, is the third annual International Charity Fraud Awareness Week (ICFAW). The ICFAW is led by an international coalition of over 40 charities, regulators, sector and professional representative bodies, and other interested stakeholders. The goal of this week is to raise awareness of, and to share good practices for, tackling fraud and cybercrime among non-profit organizations.

In support of this important initiative, the HBK Non-Profit Solutions group and HBK Risk Advisory Services is teaming up to provide the following information. We encourage everyone to learn more about ICFAW here: https://www.fraudadvisorypanel.org/charity-fraud/get-involved/

If you are a charitable donor:

• Make sure that a charitable organization is legitimate before donating.

Charitable scams are incredibly common, especially as we move into the holiday season. Before you decide to write a big check in support of a charity, make sure you check that the organization is legitimate on the IRS website (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search). GuideStar (https://www.guidestar.org/) is also a great resource to research whether or not a charitable organization is worthy of your support. Often, its best to research the organization on both platforms to ensure information is accurate.

Other great resources to vet the organization include your state’s registry of non-profits and the Better Business Bureau.

1. 1. Watch for suspicious e-mails, text messages, and phone calls.
      

      Social engineering threats, such as phishing e-mails and fraudulent advertisements, continue to increase at alarming rates due in part to COVID-19. As a general best practice, avoid clicking links received via email and text. If you find a message or organization of particular interest, its often best to access their webpage via an internet search or typing their URL directly into the address bar of your browser—after ensuring they are legitimate, of course (Item #1). This extra step will reduce the risk of being misdirected to a fraudulent webpage. Remember, fraudsters often create exact replicas of common webpages making it difficult to spot the difference.

      To avoid falling for a fraudulent webpage, make sure you look at the domain name and web address populated in your browser. Does it match the intended organization? Are there any glaring errors or misspellings? Sometimes these may not be so apparent, so be careful. Simple tricks such as switching a lowercase “L” to a number “1” (l vs 1 –no, those are not the same character) may be the only difference between a legitimate page and a fraudulent one.

      If you are absolutely certain the email is trustworthy, take a second to hover over any URL’s contained in the body of the e-mail to ensure that it leads to a trusted website. Again, keeping an eye out for misspellings or swapped characters. However, avoiding the click will eliminate the need for vigilance at this stage.

      Lastly, we recommend similar actions for voice calls. Rather than disclosing your billing information and contributing money over the phone, advise the representative that you will donate via webpage or mail in check. Securely navigate to the trusted website via search engine or known URL.

1. Remain vigilant.
   

   Once you’ve made your contribution its important to remain vigilant. First, make sure you receive your donor acknowledgment letter in a timely manner. These should typically be received soon after your donation is processed and before the end of the year. Secondly, make sure your transaction is processed or check is cashed promptly. Slow processing could indicate your account information is being used for other things. Lastly, remember to review your account statements at least monthly. Daily monitoring of transactions is preferred where feasible.

If you are a charitable organization:

1. 1. Watch for suspicious e-mails, text messages, and phone calls
      

      Charities can be a treasure trove of donor information and financial records—information that is very attractive to fraudsters. As discussed above, avoid clicking links in emails and texts and be suspicious of unsolicited phone calls. If its too good to be true, it probably is. Always verify the source and do not be rushed into a decision.

1. 1. Stay educated.
      

      Maintaining an educated workforce is critical. Fraudsters are having an easier time given the recent pandemic as the workforce is largely working remotely. As such, cybersecurity awareness has never been more important. Consider undergoing awareness trainings to remain educated on the latest threats and how to avoid them.

1. Establish and maintain processes and internal controls.
   

   Established processes and sound internal controls have always been critical, but prior to COVID-19, few organizations faced the task of migrating these processes and controls to remote work environments. COVID-19 and a new environment is no excuse to stray from these fundamental concepts. In fact, it’s more important than ever to ensure your processes and controls migrate to, if not strengthen, this new environment.

   It should be noted that cybersecurity insurance coverage may be lost if these controls do not remain implemented, so make sure you understand the requirements of your insurance policy. The dispersed and remote work force is introducing greater risks, and we are seeing a rise in malicious attacks. Your employees are also out of their routines and may find new ways to accomplish old tasks that could put the organization at risk. This increased risk coupled with a potential loss of coverage can be disastrous.

If you would like to discuss ways in which you can protect yourself, your organization, and/or your employees from fraud and cybercrime, please reach out to your HBK advisor.

For more information about Charity Fraud Awareness Week, visit the Fraud Advisory Panel website.

The IRS has recently issued proposed regulations here which clarify that the IRS is utilizing a substance over form approach for all states that are attempting to circumvent the $10,000 state and local deduction cap under the Tax Cuts and Jobs Act (TCJA) through charitable giving strategies.

Under the TCJA taxpayers are limited in their Schedule A deductions for all state and local income, sales, and property taxes such that these cannot exceed $10,000 ($5,000 for married filing separately). Prior to the TCJA there was no limitation on the amount of state and local taxes you could claim.

New York, New Jersey, Maryland and Connecticut in an attempt to fight the new $10,000 cap on state and local tax deductions, have legislation in place in an attempt to bypass this limitation. The suggested workaround for many of these states involved variations on a state and local charitable fund that taxpayers could make payments to in satisfaction of their state and local liabilities. These payments would then be re-characterized as a fully deductible charitable contribution completely bypassing the $10,000 cap on state and local deductions under the TCJA.

The IRS has now issued new rules that will block states’ attempts at circumventing this deduction cap. The IRS warned taxpayers back in May that they would be looking into state-approved maneuvers to avoid these new federal limits, especially those that involved charitable organizations and charitable giving. The proposed regulations state that whenever a charitable gift is given, if the taxpayer receives anything in return the Fair Market Value (FMV) of what you receive must not be included in your total charitable deduction. This is a well-established principal that the IRS is now applying in the context of state work around charitable funds. When a taxpayer makes a contribution to one of these workaround charitable funds, they are expecting a benefit in return, the state or local tax credit in return for their contribution. The IRS will now be looking at the receipt of these benefits as quid pro quo, and taxpayers will not be permitted to claim the full value of the deduction. The proposed regulations state that the amount that would otherwise be a deductible charitable contribution must be reduced by the amount of state or local tax credit received or expected.

For example:

If a taxpayer contributes $20,000 to a state charitable fund in lieu of paying their state property taxes, and receives a $13,000 state credit for that donation, for federal income tax purposes that taxpayer would only be permitted to deduct $7,000 as a charitable deduction. The remaining quid pro quo $13,000 is disregarded.

Additionally, if you were to receive or expect to receive a state or local tax deduction that exceeds the amount of your FMV contribution, your charitable contribution deduction must be reduced. The proposed regulations also include a de minimis provision that allows a taxpayer to disregard the value of their state or local tax credit if that credit does not exceed 15% of their payment or 15% of the FMV of the transferred property.

The IRS has also proposed that these regulations apply to all contributions made after August 27, 2018. This means the IRS may challenge contributions made before today.

If there are any questions on this or any other tax matters please contact a member of TAG.