Big charitable contribution, no deduction?
It may be better to give than to receive, but it's sure easier to give when it cuts your tax bill. That's why gifts of appreciated long-term capital gain property are in every tax planner's toolkit. You can get a deduction for the full value of the property without ever paying tax on the property's appreciation. Even cash contributions can fail as tax deductions without the right paperwork.
Any good tax tool can be abused, so Congress has enacted a long list of formal requirements that property contributions have to meet. If you fail to get the paperwork right, your deduction goes to zero, no matter how valuable your contribution is. While the rules can be complex, here are some that come up often:
- Any gift more than $250 -- cash or property -- requires a written receipt from the charity stating the amount, if any, of value received by the donor (other than intangible or religious value). That means if you get 50-yard line seats for your donation to good-old Alma Mater U., they have to tell you how much of your donation was for the seats; you can't deduct that part. No receipt, no deduction -- even if you have a cancelled check.
- Any gift of property more than $500 must be reported on IRS Form 8283 with your tax return. This can subject your return to greater scrutiny. If you aren't sure your dropoff at Salvation Army was really worth more than $500, that's something to think about.
- Any gift more than $5,000 -- except for cash or publicly-traded securities -- must also have a "qualified appraisal" or the deduction goes to zero. The tax casebooks are full of horrendous stories of taxpayers who have lost enormous deductions because no appraisal wasn't received, because the appraiser wasn't a "qualified appraiser," or because the appraisal itself didn't meet IRS requirements.
This rule can wreck your dedection even in instances where you have strong evidence of the value without an appraisal. For example, if you donate a parcel of land to charity and the charity sells it right away, you still need an appraisal. You can't just rely on the actual sales price, as reasonable as it may seem. No appraisal, no deduction. You even need an appraisal for a deduction of more than $5,000 even if you paid more for the donated property than the deduction you are taking.
- Special rules apply to donations of tangible personal property, like art. If the property is sold in the year of contribution, the deduction can't exceed your cost. If the property is sold within three years, you may have to recaputure part of your donation.
While these are some of the commonly-encountered rules, there are some more obscure ones. For example, there are special rules limiting the deduction for "qualified taxidermy property," because hunters were "paying" for their safaris by donating their stuffed trophies to museums.
The bottom line? If you want to deduct a property donation, get your tax advisor involved early. The money you save on professional fees can turn out to be a bad bargain indeed.