When it comes to substantiating charitable contributions, form generally matters. A contribution may be perfectly legitimate, but if you fail to document it properly, you could lose a valuable tax deduction.
Recently, the IRS issued final substantiation regulations that originally were proposed 10 years ago. To avoid costly mistakes, it’s important to familiarize yourself with the final rules.
Any cash gift you make, regardless of amount, must be substantiated with either 1) a bank record or 2) a written communication from the charity (an email will suffice) showing its name and the date and amount of the contribution.
Eligible bank records include:
- Bank statements,
- Electronic fund transfer receipts,
- Canceled checks (including scanned images of both sides from a bank website), and
- Credit card statements.
Contributions made by payroll deduction must be substantiated with two documents: 1) a pay stub, W-2 or similar employer-furnished document showing the amount withheld during the year for payment to a charity, and 2) a pledge card or other document prepared by or at the direction of the charity showing the charity’s name. Cash gifts of $250 or more require, in addition to a bank record or written communication, a contemporaneous written acknowledgment (CWA) from the charity. The CWA must include both the amount of the contribution and a description and good-faith estimate of the value of any goods or services provided in consideration of the contribution.
In a change from the proposed regulations, the final rules permit donors to obtain a single document from the charity that satisfies both written communication and CWA requirements. You need to obtain this substantiation by the earlier of your tax return’s extended due date or the date you file your return.
Non cash gifts
According to the IRS, noncash contributions less than $250 must be substantiated with a receipt from the charity showing the charity’s name and address, date of the contribution, and a description detailed enough that even someone who isn’t familiar with the property type will recognize it as the property being contributed. The level of detail required depends on the value of the gift and other circumstances. For example, if you donate securities to a charity, the receipt must include the name of the issuer, the type and amount of securities and whether they’re publicly traded.
Noncash contributions of at least $250 and up to $500 require a CWA. And for donations between $500 and $5,000, you must obtain a CWA and file Section A of IRS Form 8283, “Noncash Charitable Contributions,” with your return. The tax form provides a description of the property and certain other details, including the property’s fair market value and the method of determining value.
For noncash contributions over $5,000, you must obtain a CWA, file Section B of IRS Form 8283 and obtain a qualified appraisal of the property (although no appraisal is required for certain property, including publicly traded securities). Form 8283 must be signed by you, your appraiser and a representative of the charity. For donations over $500,000, you must also attach a copy of the appraisal to your return.
Be particularly careful if you’re required to get an appraisal. A qualified appraisal is prepared by a qualified appraiser in accordance with generally accepted appraisal standards. It must be signed and dated no earlier than 60 days before the contribution and no later than the extended due date of your return or, if you first claim the deduction on an amended return, the date you file the amended return.
Qualified appraisers must meet certain educational and experience requirements related to valuing the type of property involved. These requirements are satisfied by:
- Successfully completing certain professional or college-level coursework and gaining two or more years of relevant experience, or
- Earning a recognized appraiser designation from a professional appraiser organization.
The final regulations list certain individuals who aren’t qualified, including the donor and donation recipient, appraisers who receive fees tied to the property’s appraised value, and certain related parties. However, donors are permitted to obtain multiple appraisals and select the one to use for substantiation purposes.
Substantiate or lose it
Failure to follow the substantiation rules — including the selection of an appraiser — to the letter can mean the loss of valuable tax deductions. If you’re uncertain about the requirements, talk to your tax advisor.
Sidebar: What to do when you can’t get a receipt
Sometimes it’s impracticable to obtain a receipt — for example, when you leave clothing or other items at an unattended drop site. In those cases, noncash gifts under $250 may be substantiated by maintaining “reliable written records” that contain:
- The information that would be required in a receipt (your name and address, contribution date and property description),
- The property’s fair market value on the donation date, and the method you used to determine its value, and
- For contributions of clothing or household items, their condition.
The reliability of written records depends on the facts and circumstances, including their proximity in time to your contribution.