CHAPTER 10

Charity Deductions Begin at Home

AMERICANS ARE REALLY GENEROUS people. Whenever there is a flood, earthquake, fires, disaster, or refugee situation anywhere in the world, Americans step up and chip in with money, time, and resources. We do this as individuals, through nonprofit organizations, and via our tax dollars as well. My husband pointed out that we don’t seem to get the same degree of generosity from individuals or governments when the United States faces similar needs. But that won’t stop us. We are Super-Kind!

Some of our donations generate charitable contribution deductions. Some don’t. And some are outright thefts by charlatans. Let’s sort through the noise and help you find the truth so you can continue to be generous and not embittered by thieves.

Tip #136:

Every time there is a major disaster or event, charities spring up to help out. That’s good, right? Well . . . not so good. Many of them are fakes designed to tap into the outpouring of love and money. Confine your contributions to established charities. If you’ve never heard of it, it probably isn’t real. There are two ways to find out if a charity is legitimate via the IRS:

• • Look them up on the IRS list of exempt organizations. This list will tell if you the charity exists, if they have been suspended or are active, how much of your deduction you can use this year, and if the charity has filed the Form 990-N postcard (for very small charities): https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. This resource will let you see the data entered on the Form 990-N, if they were small enough to file one.
• • Call the IRS at 1-877-829-5500 if you think the charity is too new to be on the list.

Tip #137:

Learn how organizations use your money. Most exempt organizations (except “churches,” which include all religious denominations) must file a version of Form 990 every single year. This is public information. You can go online and see their report. This can help you decide if they are using enough of your funds for the intended purpose—or using too much for the administrators’ compensation, trips, and personal benefit. Or just wasting it. Here are some places you can find that information:

• • GuideStar is one of the most established resources online and the one at the top of the search engines. They provide summary information about the organization’s total revenues and expenses. To see the tax returns, you need to set up a free account and log in. For more detailed information, like tax reports going back more than three years and information about officers and more, you must pay for access—http://www.guidestar.org/Home.aspx.
• • The Foundation Center allows you to look up your organization and gives you instant access to their tax forms for free without any log-ins. So you can look up your charity anonymously—http://foundationcenter.org/findfunders/990finder.
  • ◦ To help you understand what the tax return means, let’s look up a charity I know well, since many members of my family have been active in it for over half a century, Shelters for Israel (http://www.sheltersforisrael.com/about-us). It’s a very small organization started by Holocaust survivors pooling their winnings at their weekly card game. Their mission is to provide housing, day care centers, playgrounds, and other facilities for children, students, disadvantaged youth, and immigrants. You can see the list of the projects they have funded since 1950 (http://www.sheltersforisrael.com/list-of-all-projects). They claim that all their funds go toward their projects. Let’s see what we can learn about them and if their claims are true, OK?
  • ◦ First, we look at the overview of their Form 990 filings for the last three years. We learn they are in compliance and have been filing. Here is the summary:

  

  Clicking on the link (under the name) to see the tax return (http://990s.foundationcenter.org/990_pdf_archive/956/956118813/956118813_201312_990.pdf?_ga=1.252167887.7586187.1446561556), we learn:

  • ▪ They spent more than they raised in 2013 (page 1 of Form 990).
  • ▪ They pay absolutely no salaries to any of the officers (page 7 of Form 990) or anyone else (page 10 of Form 990).
  • ▪ They charge no membership dues. Their fund-raising events (an annual banquet and advertising/tributes in their monthly newsletter) raised nearly $226,000, while they spent less than $8,000 on food and related costs (page 9 of Form 990). That’s an astonishing 96.5 percent net return on the event.
  • ▪ They spend minute sums on accounting and rent “occupancy”—totaling less than $500 (page 10 of Form 990).
  • ▪ Their highest expenditures, besides the costs of putting on events and funding their projects, are printing and postage, about $18,500, which is less than 8.5 percent of the funds they raised (page 10 of Form 990).
  • ▪ Most importantly, 91.4 percent of the funds they raise are used for the charitable purpose intended. However, since they did spend more on projects ($230,500) than they raised ($217,869) in 2013, they actually spent more than 107 percent on programs. Compare that to the Los Angeles County Fair Association, which has been paying its chief executive about $900,000 a year while showing losses of millions of dollars every year (http://www.latimes.com/local/california/la-me-fairplex-bonuses-20151103-story.html).
• • GrantSpace.org maintains a page where you can find a list of sources providing information about exempt organizations: http://grantspace.org/tools/knowledge-base/Funding-Research/Forms-990-and-990-PF/finding-990-990-pfs.

Tip #138:

Deducting money. You would think it would be pretty straightforward to claim a deduction for donations of money to legitimate exempt or religious organizations, right? Well, not quite that easy. I cannot emphasize how important it is to get proper receipts from the organization for each and every donation of $250 or more. What is proper? The receipt must show the following:

• • The date of the donation.
• • The legal name of the organization.
• • Its mailing address. (It also helps to have a phone number.)
• • The taxpayer ID number (TIN)—very important.
• • The amount of the donation.
• • A statement that says you did not receive any products or services for your donation, or a statement that spells out the value of products of services you received. (For instance, suppose you pay $250 per person for a fund-raising banquet. The receipt should show that you received an amount, say, $50 worth of food and goody-bag stuff.)

Not having all this information for every single donation means you can lose the deduction if you’re audited.

Tip #139:

Get receipts on time. You absolutely must have the receipt in your hot little hands before you file your tax return, or before the legal deadline to file your tax return (if you are filing late). The receipt must be dated before you file your tax return. This is imperative. When you are audited, even if you can prove that you paid $10,000 to your favorite charity—with all the cancelled checks and a letter from the charity dated during the audit, a personal note from the Pope, Chief Rabbi, or Imam—you will lose the deduction. The IRS auditor has no authority to approve it. IRS Appeals cannot grant you the deduction. Even the Tax Court cannot give you the deduction, though they will be sympathetic. Why is there no leeway? Internal Revenue Code Section 170 (Sec 170(f)(8)(C)) has this totally rigid provision:

(C) Contemporaneous

For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of—

1. (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.

There have been many court cases where people did have proof that they made donations worth many thousands of dollars. But the verifications from the exempt organizations were dated long after the acceptable date. As a result, when my clients tithe or make major contributions, I ask to see the receipts before we file the tax return. In fact, last year, one client had to struggle to get a receipt for a $10,000 contribution because the organization was run by volunteers with no official administrator.

To avoid the problem of gathering receipts for your many donations of $250 or more, consider contributing to a donor-advised fund. Read TaxMama’s December 2015 article in her MarketWatch.com Tax Watch column: http://www.marketwatch.com/story/how-to-get-a-big-tax-write-off-while-doing-a-good-deed-2015-12-17.

Tip #140:

No deduction for disguised donations. Yes, yes, the IRS knows that the $2,000 per month tuition to your child’s religious school isn’t really a donation to the synagogue. It really is tuition—and is not a deductible contribution. What part of the tuition to religious schools may you deduct, if any? Naturally, none of the tuition itself. But what if they call part of it a donation, say $300 per month? If this is a mandatory payment for every student, it’s not a donation. Donations are voluntary. It’s just another way to disguise tuition. Sometimes the invoices have a line where you can add an amount as a donation. That would be deductible. Make sure the school totals that separately and provides a separate receipt monthly or a summary of the donations at the end of the year. The IRS audits religious schools all the time and “teaches” the administrators about how to separate tuition and donations—after making a list of parents to audit.

Tip #141:

Cash in the collection plate. Listening to an inspiring sermon, how can you help but contribute generously when the plate comes around? Please, don’t restrain your enthusiasm. Instead, carry your checkbook and contribute on paper. This way, the organization has your information. They can create a report at the end of the year showing how much you contributed. Without that written receipt, you won’t be able to deduct anything over $250.

Tip #142:

Cash to street people. There are over half a million people who really are homeless (https://www.hudexchange.info/resources/documents/2014-AHAR-Part1.pdf), living on the street or in temporary shelters, begging for handouts. It’s impossible not to feel sympathy, especially with the shaky economy, knowing that this could be you. There are two reasons to think twice about giving them cash:

• • You don’t get a deduction for donating to a person—only to a registered exempt organization or religious organization.
• • Sadly, there are so many phonies out there who do this for a living because it’s free money. It’s hard to tell if someone really is hard up. So if you do help them, just do it out of love and faith and pray that they pass on the goodness to others in need. But no deduction.
  • ◦ I saw one guy at the freeway off-ramp daily for about a year. People gave him cash. I estimated that he probably collected at least $100 a day, at least five days a week. In only fifty weeks, he was collecting about $25,000–$50,000 without paying any taxes. Are you making that much money?
  • ◦ Another woman stood in the post office parking lot for about two years with a sign saying that she had cancer and needed help. Well, being in the middle of that experience myself, I was aware of several programs designed to help her. I offered her information on where to get funding, care, free wigs, courses, transportation, and all. She pushed me away and told me to mind my own business—and went after another postal patron to get cash. (We later learned she was, in fact, a liar.)

Tip #143:

Cash for silent auctions, regular charity auctions, bazaars, and so on. It’s fun to go to the special events where people donate things to help an organization raise money. You may not deduct the value of your purchase. So if you bid on something and get it at a bargain, there is no deduction at all. If you pay more than the retail value, be sure to get a receipt that shows that the excess amount is a contribution.

Tip #144:

Donating time. Ah, this is the most precious, irreplaceable resource there is. How does Congress value your time? (You do know that they write the laws, not the IRS, right?) As far as Congress is concerned, your time is worthless. So whether you are donating your professional services or just your personal sweat, there is no deduction at all for time. Period. Don’t argue with the IRS. It’s been tried, and people have failed.

Tip #145:

Donating money to specific people. The Tax Code (IRC Sec 170 (c)(2)(C)) has a prohibition against making a donation to benefit a specific person. People try to make a sizeable donation to a college, for instance, so they will accept a particular student or provide that specific student with a scholarship. Not deductible. The donation may not have strings on it. Or someone in your community is about to lose her home and the pastor asks everyone to chip in and help her. Even if the donations go to the church, there is no deduction because it’s specifically earmarked for an individual. To raise funds for people without any tax effect on the person receiving the money, read Tip #129. Regardless, there is no charitable contribution deduction.

Tip #146:

Donating things, starting with minor amounts. We all do the year-end thing where we clean out our closets and attics and take all the clean (hopefully) and usable clothing, small appliances, games, and knickknacks to our favorite charity or thrift shop. Make sure you get a receipt for your donations each time that you drop off your bags and/or boxes. You can get away with claiming a deduction of up to $500 without too much substantiation, aside from the receipts. Figure that each bag is worth about $25–$30 and each box is worth $50–$100, depending on what’s in it.

Tip #147:

Donating things and getting a higher deduction for the minor stuff. When I ask my clients to make a list of all the things that went into the bags and boxes, an amazing thing happens. Those three bags and two boxes that were originally worth about $275 now prove to be worth well over $1,000. How did that happen? Instead of bunching together some amorphous junk, you now have a detailed list of each item of clothing, each appliance, each toy or piece of furniture, some of which might have originally been quite pricey. It’s a good idea to take pictures of all the things you’re donating, especially if they are pretty, clean, and make your donation look good. This will help support your list of goodies. One of the best free tools you can use to establish the current market value for each item is Intuit’s ItsDeductible software (https://turbotax.intuit.com/personal-taxes/itsdeductible). The software has the values built in. True, it can take you an hour or two to enter each item one by one. But once you’re done, you might be able to demonstrate that your so-so $275 bags and boxes really contain items that add up to $1,475. Do this before completing your tax return so you can put the printout and pictures into your tax file for the year. An extra $1,200 of deductions could net you anywhere from $180 to over $300 in federal and state tax savings. That’s not too bad for an hour or two of work, is it?

Tip #148:

Donating expensive things. When you have something very special to donate, like a work of art, the rights to a piece of music, especially something worth $5,000 or more, you need to use a special tax form, Form 8283 (https://www.irs.gov/pub/irs-pdf/f8283.pdf). You must also get a formal, written appraisal, and the professional appraiser must sign Part III on page 2 of the Form 8283. In cases like this, I ask the appraiser to sign at least three copies of the form. One for the IRS, one in case the state wants an original, and a third copy for the taxpayer’s own files.

• • Sometimes you can get an objective valuation for some things from the retail or wholesale seller. But only do this if the item’s value is under $5,000—and get the value in writing on their forms.
• • We needed objective valuations on my father-in-law’s two electric wheelchairs. The vendor who sold them to him told us his trade organization had advised all sellers to stop providing written appraisals. Uh oh. Where do we get a value?
• • It turns out that in California there is a special designation called a Probate Referee (http://www.sco.ca.gov/eo_probate_contact.html). These folks are empowered to provide valuations for items in estates for the Probate Court. Using the local referee, who came to us, we were able to get the official reports, valuations, and signatures for a fraction of what some other appraiser might have charged. She was delightful to work with and helpful with some other contacts we needed. See if there is anything like this in your state.
• • Note: The IRS doesn’t always accept appraisals at face value. If you don’t get a professional appraisal done properly, it’s quite likely that the IRS will audit and dispute your valuation (https://www.irs.gov/publications/p561/ar02.html). Using someone flaky who overstates the value of your donation could get you penalties of 20–40 percent of your tax underpayments (https://www.irs.gov/publications/p561/ar02.html#d0e1964).

For more information on the IRS’s perspective about putting a value on your donations, read IRS Publication 561, “Determining the Value of Donated Property” (https://www.irs.gov/publications/p561).

Tip #149:

Appraisal fees. When you pay a professional for the valuation of donated property, the fee is not a charitable contribution. However, you may claim the deduction further down on the Schedule A as a miscellaneous itemized deduction, reduced by 2 percent of AGI (https://www.irs.gov/publications/p526/ar02.html#en_US_2014_publink1000229700).

Tip #150:

Donating vehicles. The best tip that I can give you here is—don’t. Period. It’s just way too much trouble. First of all, if the vehicle really is in good condition, why are you donating it? Why aren’t you using it as a trade-in or selling it? If you do donate it, you have to jump through so many hoops and get specific paperwork with the valuation of the vehicle. You need a Form 1098-C from the organization to which you donated the vehicle (https://www.irs.gov/pub/irs-pdf/f1098c.pdf). You might not get the paperwork from them until after the organization sells it, which might not happen before you file your tax return—which means you don’t really know the value of your donation. Taxpayers have found this process incredibly frustrating and often take it out on the tax professional. Folks, we don’t write the laws. We just try to help you handle them correctly. So, I repeat, don’t donate vehicles. Sell them and give the money to charity if you like, but avoid vehicle donations like the plague. P.S.—if you donate your vehicle to one of those places that also gives you money or trips to Las Vegas or some such thing (that you might never use), you still have to reduce your donation by the face value of the money or goodies you received.

Tip #151:

You love to make donations but get no tax benefit from them. I stumbled across this problem because one of my favorite clients tithes—or more than tithes, actually. She donates more than $10,000 per year to her church. But since her income is mostly retirement, Social Security, and paper losses from her rental properties, she doesn’t need to itemize her deductions. The donation is wasted on her as far as tax benefits are concerned. Do we want her to stop making the donations and supporting her church? Of course not. What’s the solution? She can gift the money to her son and daughter-in-law. They make the donation to the church, now that it’s their money. They get to claim the $10,000 deduction. See what a clean, elegant solution that is? Everyone wins.

Tip #152:

Tax deductions are limited. Depending on what you contribute to what kind of charity, your charitable contribution deductions are limited to 20 percent, 30 percent, or 50 percent of your AGI. I will not bore you with the details. This only matters when you donate appreciated assets (things that are worth more now than when you bought them), donate to foundations, or a couple of other special situations. If you are lucky enough to be in that position, you should be working with a tax professional to plan your giving. But do read what the IRS has to say about these limits (https://www.irs.gov/publications/p526/ar02.html) in Publication 526 (https://www.irs.gov/publications/p526).

Tip #153:

Speaking of limits, what do you do with the deductions you cannot use this year? Good question. You can take those deductions next year, or the year after that, and so on, for up to 15 years. Read about carryovers (https://www.irs.gov/publications/p526/ar02.html). That’s why it was important to have my client stop tithing to her church. She already has enough contribution carryovers that it will take her a few years to use them up. We wouldn’t want to waste them, would we?

Tip #154:

Why would you want to make a $100,000 nondeductible donation? For several years, we have had a special provision in the Internal Revenue Code allowing senior citizens to make donations directly from their IRA accounts to the charity or charities of their choice (https://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs). This was targeted at folks ages 70½ or above who faced taking required minimum deposits (RMDs) from their retirement accounts—or face hefty penalties. This option requires that the withdrawal is transferred directly to the charity (called a Qualified Direct Transfer, or QDT). We’ll talk a lot more about this in the chapter on seniors and retirement.

Note: This has been made a permanent part of the Internal Revenue Code as Section 112 of the PATH Act of 2015. Please see Bonus Tip #270 for more details.

Tip #155:

Services are not deductible, but volunteering can be profitable. Volunteering often comes with costs. As you know, we may deduct our volunteer mileage (a whopping 14 cents per mile), but there are other costs as well. To participate in certain events, we might have to buy and wear uniforms. Those costs, as well as laundering costs, are deductible. We bring food or goodies to supply other volunteers. We print things to hand out, often at our own expense. We might need supplies, tools, and other things that we only use in association with our volunteer activities. We might take our charges out (children, homeless people, seniors, etc.) to lunch or dinner as part of our volunteer function. For camping with Scouts, we might need camping supplies that are only used for these events. How can you deduct these costs? Back to TaxMama’s mantra: document, document, document! Keep excellent records (appointment books, logs, and such), receipts, and detailed notes about the odd or unusual expenses. If you can, submit an overall report to the charity or organization with a list of the costs. Have them write you a “Thank you” letter showing the amount of your out-of-pocket contributions. This will provide additional substantiation for the legitimacy of the costs, as they relate to the charity’s activities. One of my broadcaster friends and his wife are actively involved in several charities raising money to research his wife’s illness, their synagogue, and other organizations. One year, they spent about $30,000, split between money and volunteering costs. Their CPA did not explain the record-keeping requirements to them. They ended up with a massive IRS audit. After spending several hours with them, I was able to help them save about half their deductions. But without proper and timely receipts, they lost well over $10,000 of deductions and faced more than six months of audit hell. Do you want to do a better job? See how the “Crazy Cat Lady” handled her records and won the right to her deductions in Tax Court in the case of Van Dusen v. Commissioner (http://taxmama.com/tax-quips/crazy-cat-lady-takes-on-irs).

Tip #156:

Volunteering doesn’t have to be about depressing charities. It can be fun, too! You can even get intangible rewards. Who knows, you may even meet celebrities. Helping out at a road rally raising money for the homeless, I got to meet and chat with baby boomer idols Connie Stevens, Stella Stevens, Zsa Zsa Gabor, Billy Barty, Chad Everett, and Dorian and Nancy Harewood with their new baby, along with several other delightful celebrities. Speaking of silent auctions, since the event appeared to be in danger of raising too little money, Connie Stevens bid outrageously high amounts for a variety of objects, simply to ensure the event reached its financial goal. Ms. Stevens is definitely one class act.

Tip #157:

Here are some fun ideas for volunteering. They are not only fun, they are good exercise, you get to meet interesting people and, who knows, you might even end up meeting the love of your life—your intended!

• • My long-ago dental hygienist, Linda Baker, author of Cake Girl (http://www.amazon.com/Cake-Girl-Reasonably-Sweetest-Frosting/dp/1503138119), used to be a tour guide and docent for the Los Angeles Conservancy (https://www.laconservancy.org). That brought her into contact with tourist, locals, politicians, and even celebrities.
• • Virginia Lawrence always loved ships. As a widow, she got involved with the Official Los Angeles Tall Ships (http://www.tallshipsfestivalla.com) and is having the time of her life helping schoolchildren learn the ropes (pun intended). She goes on cruises, climbs riggings, and gets younger, more vital, and healthier every day.
• • Our California Society of Enrolled Agents (CSEA) members used to march in the annual Pasadena Doo Dah Parade (http://pasadenadoodahparade.info/about). We would wear our green “We SpEAk Tax” long-sleeved T-shirts (it’s cold in California in November) and boxing gloves, sparring and chanting, “We fight for you!” all along the parade route. Aside from the all moist tortillas thrown at us, we had a ball. Participants from around the state were able to meet each other face-to-face and deduct their travel expenses, while doing public relations work for our organization.
• • Speaking of travel, Doctors without Borders (http://www.doctorswithoutborders.org) needs more than just doctors and nurses. They can use good administrators and people with language skills, especially French and Arabic.
• • As another fun place to volunteer, your local music center or philharmonic venues need volunteers to take tickets, be ushers, work food service, and more. You will get to see most of the performance for free and meet all kinds of interesting people, both volunteers and guests.
• • Like animals? Zoos and animal sanctuaries can use your help. Internet search engines are marvelous tools to help you find places that care for your favorite land, sea, and air creatures.
• • Add your own ideas. The volunteer opportunities are limited only by your imagination. To meet writers, artists, and celebrities, find out which charities they run, or those in which they actively participate. You can also search the web for local organizations that have put out the call for volunteers. Here’s one: https://www.volunteermatch.org.

Tip #158:

An amazing resource for exempt organization administrators and volunteers. Have you ever heard of Tech Soup (http://www.techsoup.org)? Wow! This is a great place to get free, or seriously discounted, software, refurbished computers, tools, and supplies for your entity. You can find entire suites from Microsoft, Intuit, Cisco, GoDaddy, NetSuite, Norton, and many, many more big name vendors. It’s free to register. So don’t overlook this valuable resource. You will find more resources, like TechSoup and other goodies, at the Foundation Center (http://foundationcenter.org/gainknowledge/nonprofitlinks). Remember, as an exempt organization, you have access to government grants, cable television time, corporation foundation grants, and lots more free money—if you know where to find it.

Tip #159:

Start your own. Yes, if you have a passion and time, why not start your own nonprofit organization? Remember the Shelters for Israel ladies (Tip #137)? What do you love to do? With whom do you love to spend your time? Why give your charitable dollars to someone who will spend big chunks on high salaries for executives? (For instance, the United Way Worldwide raised about $78 million in 2013 and spent more than $23 million in salaries and compensation with more than $4 million going to executives in various forms of compensation: http://990s.foundationcenter.org/990_pdf_archive/131/131635294/131635294_201312_990.pdf?_ga=1.209184212.7586187.1446561556.) How do you start your own charity or association? Well, I’ll admit that it’s not very easy. You will need the help of a tax professional who is experienced setting them up. It all starts with two things:

• • A solid business plan where you define your mission, how you plan to achieve your goal, whether you will fund it all or raise funds, how you will get volunteers to participate, and who you will be serving.
• • A tax form. Use one of these forms—Form 1023 (1023-EZ) or Form 1024 (https://www.irs.gov/Charities-&-Non-Profits/Applying-for-Tax-Exempt-Status).

Incidentally, the IRS has an amazingly detailed website to walk you through the entire process, including online training materials (https://www.irs.gov/Charities-&-Non-Profits). You will find an entire area about the Life Cycle of an Exempt Organization that can take you from conception, to inception, to operation of your organization (https://www.irs.gov/Charities-&-Non-Profits/Life-Cycle-of-an-Exempt-Organization).