We have all done this. Our spouse takes a large garbage bag full of clothes, shoes, books, electronics, the kitchen sink and donates it. Who knows what was really in there? Your spouse doesn’t really remember, and they didn’t write it down. Or maybe you drop a few dollars in the Salvation Army bucket outside the grocery store. Or you write a big check to church or another charity. How do you know what is deductible for your taxes? What documentation must you have? How do you prove it if the IRS examines this issue? How can you take a deduction?
Normally you must itemize deductions on your tax return in order to take a charitable donation deduction. But the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), passed March 25, 2020, changed this for 2020 tax returns. Now taxpayers who do not itemize can still receive some benefit for charitable donations on their tax returns. Taxpayers may take a $300 deduction for cash contributions made during 2020 to qualifying organizations.
The CARES Act also temporarily suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory. This is outside the scope of this article.
Cash donations
What is deductible?
Gifts of money to qualified charities, i.e. 501(c)(3) organizations, including churches, synagogues, etc.
For the $300 deduction allowed under the CARES Act, qualified organizations are those that are religious, charitable, educational, scientific, or literary in purpose (but still must be 501(c)(3) organizations).
What documentation must you have?
To take a deduction on your return, you must have a bank record or written statement from the charity, showing the name of the charity, date, and amount of contribution.
How do you prove it?
- You need a bank record or written statement from the charity. Avoid giving cash as you will not have a bank record. If you feel a tug on your heart to drop something in the red buckets outside your shopping establishments, pull out your checkbook and give them a check instead.
- If $250 or more donated, you must obtain a contemporaneous written acknowledgment from the charity that includes the amount donated and a statement as to whether the donor received any goods or services in exchange for the contribution.
Non-Cash donations
What is deductible?
- Gifts of clothing or household goods in at least good used condition
- Gifts of cars, boats, or airplanes (special rules apply that are outside of the scope of this article)
What documentation must you have?
Receipts or contemporaneous written acknowledgments from the charitable organization that identifies specific property, value, date of the contribution, & proof of condition. These acknowledgments should always identify the name & address of charitable organization
How do you prove it?
- If under $250, a receipt or contemporaneous written acknowledgment identifying date & description of the property donated
- If between $250 and $499, a contemporaneous written acknowledgment identifying specific property, value, date of the contribution, & a statement as to whether the donor received any goods or services in exchange for the contribution.
- If between $500 and $4,999, a receipt as described in the prior point will suffice along with a description of the condition of the property (remember it must be in at least good used condition). Best practice: Take pictures of goods donated so you can prove they were in good or better-used condition at the time of donation.
- If over $5,000, generally a qualified appraisal prepared by a qualified appraiser must be obtained. This would not be required for contributions of qualified vehicles, certain inventory, publicly traded securities or certain intellectual property but those have other rules to follow.
Recent court cases
There is lots of case law—mostly unfavorable to taxpayers—which illustrates how diligent taxpayers need to be in order to receive a tax deduction. The takeaway here is to document the deduction and strictly observe the rules.
- For non-cash contributions, take pictures of items to prove they are in good used condition.
- Keep contemporaneous records on the dates the property was acquired, manner of acquisition, cost, description of the property, fair market value of property at time of donation and the method used to determine fair market value.
- Make sure you obtain receipts from the charity documenting your donation.
Regardless if you donate cash or non-cash items, you must have all of this documentation in place by the time your tax return is filed, or the IRS can disallow the deduction for the contribution.
How DHJJ Can Help
If you have questions on charitable contributions, please contact DHJJ at 630-420-1360.
