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Tax Tips for Year-End Charitable Donations
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70 1/2 or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
- Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.
- Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under “Search for Charities.” In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
- For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2008 Form 1040 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
- For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.
- The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
- If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
The IRS Wants to Give You Back Your Money
The Internal Revenue Service is looking for taxpayers who are missing more than 279,000 economic stimulus checks totaling about $163 million and more than 104,000 regular refund checks totaling about $103 million that were returned by the U.S. Postal Service due to mailing address errors.
All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due.
Click here to check the status of your stimulus payment and click here to check the status of your tax refund.
The vast majority of checks mailed out by the IRS reach their rightful owner every year. Only a very small percent are returned by the U.S. Postal Service as undeliverable.
Through September 2008, the government distributed 116 million economic stimulus payments with only about 279,000 checks being undeliverable. Meanwhile, the IRS has distributed more than 105 million regular refunds this year with only about 104,000 being undeliverable. In both cases, well under one percent of refunds or stimulus checks were undeliverable.
The IRS encourages taxpayers to choose direct deposit when they file their return because it puts an end to lost, stolen or undeliverable checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct deposit is available for filers of both paper and electronic returns.
The IRS also encourages taxpayers to file their tax returns electronically because e-file eliminates the risk of lost paper returns. E-file also reduces errors and speeds up refunds.
Where’s My Tax Refund?
The regular refund checks that were returned to the IRS average $988. These checks are resent as soon as taxpayers update their address.
Taxpayers can update their addresses with the “Where’s My Refund?” tool on the IRS Web site. It enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2007 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.
Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
Where’s My Stimulus Payment?
It is crucial that taxpayers who may be due a stimulus check update their addresses with the IRS by Nov. 28, 2008. By law, economic stimulus checks must be sent out by Dec. 31 of this year. The undeliverable economic stimulus checks average $583.
The “Where’s My Stimulus Payment?” tool on the IRS Web site is the quickest and easiest way for a taxpayer to check the status of a stimulus check and receive instructions on how to update his or her address. Taxpayers without internet access should call 1-866-234-2942.
Frequently Asked Questions About Homebuyer Tax Credit
If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the First-Time Homebuyer Tax Credit.
Q. Which home purchases qualify for the first-time homebuyer credit?
A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.
Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.
If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.
Q. How much is the credit?
A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.
Q. Are there income limits?
A. Yes. The credit is reduced or eliminated for higher-income taxpayers.
The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.
This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.
Q. Who cannot take the credit?
A. If any of the following describe you, you cannot take the credit, even if you buy a main home:
- Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
- You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
- You stop using your home as your main home.
- You sell your home before the end of the year.
- You are a nonresident alien.
- You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
- Your home financing comes from tax-exempt mortgage revenue bonds.
- You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.
Q. How and when is the credit repaid?
A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.
You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.
However, some exceptions apply to the repayment rule. They include:
- If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
- If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
- If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
- If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.
Tax Credit for Homebuyers Must Be Repaid to IRS
First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.
Available for a limited time only, the credit:
- Applies to home purchases after April 8, 2008, and before July 1, 2009.
- Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
- Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.
However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.
Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.
File by October 15 to Receive Your Stimulus Payment
If you haven’t yet filed a tax return to get your stimulus payment, you still have time to do so. But you must file by Oct. 15 to get your payment this year.
Avoid IRS Scams: Economic Stimulus
Don’t become a victim of this new scam, preying on taxpayers interested in receiving their economic stimulus payments. If you receive an email supposedly coming from the IRS, keep this in mind.
In this scam, a taxpayer receives an email pretending to come from the IRS which tells the recipient he or she is eligible for an economic stimulus payment. The message recommends direct deposit into the taxpayer’s checking or savings account. To receive the payment, recipients must click on a link to complete and submit an online form by a certain date; otherwise, the e-mail warns, payment may be delayed. The form requests personal and financial data, including checking or savings account numbers that the scammers can use to gain access to the accounts.
In reality, the way members of the public receive their economic stimulus payment is to file a tax return with the IRS, not a special form. Additionally, the IRS does not request personal or financial information via email.
Recommendation: Require Electronic Filing
Every year, the Electronic Tax Administration Advisory Committee (ETAAC) presents recommendations tax process improvements to Congress in June. The 14-member ETAAC provides an organized public forum for discussion of electronic tax administration issues and the overriding goal that paperless filing should be the preferred and most-convenient method of filing tax and information returns.
In its recommendation, the ETAAC explains that many professional tax accountants who file tax forms on behalf of clients still do so by paper, and will not electronically file unless mandated to do so. Therefore, the committee is repeating its 2007 recommendation that Congress empower the IRS to require paid preparers who, using tax software, prepare more than fifty individual returns per year to file all returns electronically. This requirement should be buffered by allowing waivers, minimum penalties for non-compliance, and appropriate opt-out provisions.
ETAAC Annual Report to Congress, June 19, 2008.
Form 990 Redesign
Form 990 is one of the most important tax filing reports for a charitable organization. On this form, charities and other non-profits must report the entirety of their fiscal operations. The forms are available to the public for review by investors and prospective contributors. The IRS will be redesigning the form this year, and we’re expecting many questions from the affected organizations.
The Internal Revenue has posted public comments on draft instructions to the 2008 Form 990, the annual return most tax-exempt organizations must use to report information about their operations. The instructions are for the redesigned Form 990 that organizations will file for their 2008 tax year (returns filed in 2009), which was released in final form in December 2007 (IRS News Release IR-2007-2004).
The IRS sought comments from the public on the 2008 Form 990 instructions, in an effort to make sure the final instructions address the needs of the tax-exempt community. The comment period closed on June 1, 2008.
The draft 2008 Form 990 instructions are organized according to a consistent format. There is a general overview of the form or schedule explaining its purpose, an explanation of who must file that particular schedule, and then line-by-line instructions to aid in answering each question on the form or schedule.
The draft instructions also contain a number of new tools designed to make it easier for the organization to answer the questions and to promote more uniform reporting. These tools include a comprehensive glossary of terms; a sequencing list to help organizations determine the order in which to fill out parts of the form; a compensation table to help organizations determine how and where to report items of compensation; and many illustrative examples. These aids were developed in response to comments received last year in connection with the draft Form 990.