Keeping the Right Records

Who is Your Charitable Appraiser?

The IRS has strict rules for substantiating charitable gifts of property. For example, a taxpayer is required to obtain a qualified appraisal for donated property if the cost claimed on the taxpayer's return exceeds $5,000.     Now the Pension Protection Act of 2006, signed into law in August, defines a "qualified appraiser" for this purpose. The new law also imposes a tax penalty for excessive valuations that a qualified appraiser should have known would be used on a tax return.     For starters, a charitable appraisal must be performed by a qualified person in accordance with professional standards such as the ones developed by the Appraisal Standards Board. The appraisal must also comply with tax law regulations spelling out the elements of a qualified appraisal (described in the box below).     A qualified appraiser must:      Be certified by a professional organization or meet education and experience requirements established by the IRS.      Be familiar with evaluating the type of property being donated.      Regularly give appraisals for a fee.      Comply with other tax regulation requirements.     The appraiser should declare that he or she meets the requirements for being "qualified." Furthermore, he or she cannot have been barred from practice before the IRS in the three years preceding an appraisal. For returns filed after February 16, 2007, the appraiser must declare that he or she understands that a civil penalty will be assessed for an inadequate appraisal.      Note: These rules do not apply to donations of publicly-traded securities. A donor can use their quoted prices to determine fair market value.

Achieving a Qualified Appraisal

If required, you must attach an appraisal summary to your tax return. The summary should reflect records that:      Identify the recipient of the contribution.      Identify the date and location of the contribution.      Describe the property, its value, and if relevant, the property's basis.

As a result, it's more important than ever to keep the records needed to substantiate your deductions.

Basic rules: Generally, you can deduct the full amount of cash contributions up to 50 percent of your adjusted gross income (AGI). This gives most taxpayers plenty of leeway. However, for donations of $250 or more, you must obtain a written acknowledgement from the charity by the time you file your tax return. The acknowledgement should include the amount of the donation, a detailed description of any property that was donated and the value of the benefit received if any goods or services were provided by the charity to you.

Other special rules continue to apply to gifts of property. For example, if you donate artwork to a charitable organization, you get no deduction if the charity does not use it to further its tax-exempt purpose. There are also appraisal rules described in the right-hand box.

Caveat: Certain itemized deductions, including those for charitable contributions, are reduced for high-income taxpayers. For 2006 tax returns, the reduction begins at $150,500 of AGI for joint filers; $75,250 for single filers. (For 2007, these amounts increase to $156,400 and $78,200 respectively.)

In recent years, the IRS has shown it means business by denying deductions for cash donations, even when relatively small amounts are involved. 

Recent court example: In one year, a taxpayer claimed to have made a series of cash contributions totaling more than $1,000 to a church. But the only evidence he could offer was a list prepared by his accountant of the dates and amounts of the purported donations. The taxpayer did not provide canceled checks, receipts from the church or other reliable written evidence for the cash donations. Result: The deductions were disallowed by the Tax Court. (Warren, TC Summary Opinion 2006-142)

Update: Beginning in 2007, taxpayers will face even stricter scrutiny. Under the Pension Protection Act of 2006, deductions will not be allowed for cash contributions unless the donor has written proof as to the amount of the contribution, the date, and the name of the charity. Cash donations must be substantiated by a cancelled check, bank record, credit or debit card statement, or by a written statement provided by the charity.

Also New: Stricter Rules for Donations of Clothing and Household Items

If you are doing some year-end closet cleaning, keep this new rule in mind. Effective for donations after August 17, 2006, no deductions are allowed for contributions of clothing and household items that are not in "good used condition or better."

For purposes of this new rule, "household items" includes furniture, electronics, appliances and linens. A favorable exception allows write-offs for single items that are not in "good" condition or better if they are appraised at more than $500.

IRS Announces New Guidelines for Payroll Deduction Contributions to Charity If your company allows payroll deductions to charity, you will be interested in new guidelines from the IRS on how to substantiate these donations. The Pension Protection Act of 2006 changed the recordkeeping requirements for taxpayers claiming deductions for cash contributions to charities, including those made by payroll deductions. For calendar year taxpayers, the new rules apply to contributions made beginning in 2007. Under the new guidelines, a taxpayer should retain a pay stub, Form W-2, or other document furnished by an employer that shows the total amount withheld for payment to charity, along with the pledge card that shows the name of the charity. (IRS Notice 2006-110)