Cash Charitable Contributions: What You Need to Know
It’s the Most Wonderful Time of the Year
Part I of a Year-end Series
While the holiday season can be a source of great joy and celebration, it also can be a stressful time for tax professionals facing a myriad of year-end questions. One of the most asked questions involves charitable contributions. We’ll concentrate our attention this time on cash contributions, and in future installments, we’ll review the rules involving noncash contributions.
- Is the contribution tax deductible? This seems to be a good place to start. We all receive requests from every kind of organization: from ones who wish to save the planet, to adopting pets, to searching for a cure for Alzheimer’s. While all of these appear to be worthwhile causes to give our hard-earned dollars to, how can we be assured contributions will provide a tax break? Well our friends at the IRS have a search tool to help you. This site is updated often. While the IRS provides this tool to help you determine if the charity meets the criteria for tax-deductible contributions, this is certainly not meant to imply the IRS endorses any of the organizations listed.
- When does your client have to get their contribution to the charity? You might think this is a no-brainer question, but you would be surprised how often it is asked. I think the confusion arises when the IRS makes exceptions. Case in point: you may recall several years back when the IRS allowed contributions in January to help with relief in Haiti and taxpayers could treat January gifts as being made in the previous year. That was truly an exception and not the general rule. The best advice I can give you is to make sure the client mails in or makes their online payment by December 31.
- If they are giving cash:
- By mail. If they are mailing a check to a charity through the post office, their donation is good only if the postmark on the envelope is before midnight on December 31, to meet the IRS mailbox rule. Don’t tell them to just drop their envelope in the mailbox; it might not get postmarked until next year. If they’re close to the deadline, they should send it registered or certified mail. Tell them to keep the receipt and a copy of their canceled check for their file. Under the mailbox rule, the date of mailing to the charity is deemed the date of delivery if there are no restrictions on the time or manner of payment and the check is honored when presented. Thus, a donor may potentially receive a deduction on a 2019 income tax return for a check mailed on Dec. 31, 2019, even though it isn’t received by the charity until January 2020. Oh, and one more word of caution. If your client is thinking about being creative and using the postage meter in their office to establish the date (imagine that), the mailbox rule will still look at when the postal service received it, not when the date was stamped on the envelope.
- Using UPS, FedEx etc. If a check is being sent to a charity through a private service such as these mentioned, the IRS mailbox rule does not apply. Tell your client to keep the receipt to show it was in the delivery service’s hands by Dec. 31.
- Credit or debit card. If the donation appears on the client’s credit card or bank statement as a December charge, it’s good for 2019. That’s true even if the charity doesn’t process the donation and sends out a receipt in January.
- Text. When clients donate to a charitable appeal by using a code with a cell phone, the donation date later appears on their cell phone bill. If the gift shows up as a charge made before Jan. 1 on their cell phone bill, you can use it for their 2019 deductions.
- Pay-by-phone account. In this case, the taxpayer responds to a text message by linking to a website that takes their credit card information. So the date of the donation is the same as when they pay by credit card. Therefore, it’s good for this year if it’s no later than Dec. 31. The client should find that date on their monthly credit card statement, even though they received the statement in January.
- How much can be donated and (potentially) receive an income tax deduction?
- Charitable contributions limits were actually increased under TCJA, from 50% to 60% of AGI. If your client happens to exceed these limits, any disallowed (excess) contribution can be carried forward for up to five years.
- The IRS announced in Notice 2018-229 that individuals who intend to make large gifts between 2018 and the end of 2025 can do so without concern about losing the tax benefit of the higher unified estate and gift exemption level once it decreases as it is scheduled to do after TCJA expires at the end of 2025.
- Remember that your client has to be able to itemize deductions in order to benefit from the contributions made. Many charities have expressed concern that contributions will suffer since, given the new higher standard deductions, many taxpayers will not benefit from their giving. In fact their fears were well founded.
- What do taxpayers have to keep or submit with their taxes as proof of the cash donations being claimed?
- Well, first of all, taxpayers must retain documentation in their records. Do not have them submit the proof to IRS unless it makes a request for documentation.
- Cash gifts using all of the methods we’ve described here are the easiest. However, the substantiation requirements depend on the gift’s value:
- Gifts under $250 can be supported by a canceled check, credit card receipt or written receipt (thank you letter) from the charity.
- Gifts of $250 or more must be substantiated by the charity in a timely fashion.
In our next installment, we’ll discuss the process for making (and documenting) noncash donations such as automobiles or collectibles or those trash bags of clothes your client has taken out of their closet.
by Tom O’Saben, EA