A number of years ago, I inherited a time-share condo 2,000 miles from my home. It was in a hurricane-prone area that I rarely visit any more. I did the usual, signing up for one of the time-share trading organizations, and of course, I could never find a desirable vacation spot at the time I wanted. At one point, I became disgusted and decided to sell the time-share.
Thankfully, I chose a reputable realtor who insisted I get an appraisal before selling. I knew very quickly that the real estate would not sell easily, so I donated the time-share condo to a local university’s foundation and ended up with a very nice charitable deduction on my taxes. Luckily, everything was done properly and my deduction was allowed. This is often not the case for a number of taxpayers, for there are a huge number of onerous regulations which control this deduction.
“A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.” IRS Pub 526
Most taxpayers donate to charity each year, and oftentimes, those deductions are just minimal. The IRS has very clear guidelines for any allowable charitable deduction:
- You must give to a legitimate, qualified charity, as defined by the IRS.
- To be able to deduct, you should use Form 1040 and then itemize on Schedule A.
- When donating and receiving something back from the organization (for example: tickets, dinner, etc.), you have to subtract the value of that benefit from your donation, or in other words, you can only claim monies that exceed the fair market value of the tickets, dinner, or whatever.
- If you donate things, such as household items, they have to be in good condition and you have to estimate their fair market value. Many charitable organizations, such as Goodwill, have lists of suggested market value for your donations, and it would be good for you to use those lists in determining your deduction. Any type of donated vehicle has a different valuation, so you need to check with your tax preparer on this. If the totals on your non-monetary donations are $500 or more, you must fill out Form 8283 (Noncash Charitable Contributions).
- You must have a paper trail for any monetary donation that you make. This could include a cancelled check, receipt, or written acknowledgement from the organization, especially if your contribution exceeds $250.
- If your non-cash donation is worth at least $5,000 or more, you still have to complete Section B of Form 8283, comply with very specific rules, and attach an appraisal from an independent, certified appraiser.
Donations don’t necessarily mean deductions.
That last point, having an appraisal of a charitable donation, is what generated the tax court case Mohamed v. Commissioner. There was a very wealthy California entrepreneur/philanthropist, Mohamed, who obviously was not well-advised. Over a period of years, he donated over $18 million in real estate to a number of charities but ended up receiving no tax benefit (read that: deduction) from his gifts. First mistake: as rich as he was, Mohamed still filled out his own tax returns. He even filled out the Form 8283 for his donations, but failed to read and follow the instructions. Since he dealt in real estate and was also a real estate appraiser, he filled out the form as he saw fit, never thinking that the IRS would have a specific format for handling this type of donation.
For real estate donations, the IRS requires an independent appraisal. This appraisal must be completed within 60 days of the gifting and be handled by an independent appraiser (he can’t be the donor or the receiver). In addition, there is a great deal of extra information required by the IRS to make this type of donation valid.
After the audits started, Mohamed did have independent appraisals done on the donated properties, and even though that declared value exceeded what he had claimed, the IRS said that he had failed to satisfy the rules. This case did end up in tax court, and ultimately the IRS claims were upheld by the court. The court did allow, however, that this was a severe result for his good deed.
There are two things to learn from this case. First, use tax experts regardless of how much you know and how much you have. With that much money involved in the charitable donations, Mohamed would have benefited from a tax lawyer who could advise as to the tax and legal implications of all that he was doing. Secondly, the IRS does not really care if you are making a generous charitable donation which will benefit a multitude of people and causes. The IRS is concerned with how you report it, and if you do not follow their rules, you will lose that deduction. For charitable donations, follow the advice of professionals who have specialized in dealing with the IRS and its regulations. You will only benefit from their expertise.