Advising Your Clients on Philanthropy: Substantiating Charitable Contributions
By Stephen C. Lande
My mother served in the Army Nurse Corps in New Guinea during World War II. Her stories from those days could fill several of these columns, but that’s not what they asked me to do here. One of the souvenirs she brought back, which sat on the ledge under her kitchen window throughout my youth, was a small statue of a boy sitting on a potty. The caption on the base read, “The job’s not finished until the paperwork’s done.” While this would seem to be a universal truth for professional advisors, it’s critical for anyone seeking income tax benefits from a charitable contribution. Failing to meet and maintain the substantiation requirements is to risk having the IRS deny your charitable contribution deduction.
Cash and publicly traded securities make up a clear majority of all itemized charitable deductions, and the substantiation rules for these gifts are generally known. For gifts of cash under $250, a receipt or some form of bank record reflecting the date and amount of the donation will substantiate the gift. For cash gifts over $250, a written acknowledgement from the recipient charity is a must, and the client needs to secure it before the date the tax return is filed. Of course, there are rules as to the content of this acknowledgement, but most charities understand and comply with them. The charitable income tax deduction for a gift of appreciated stocks, bonds or mutual funds that have been held by the donor for more than a year is the fair market value of the securities on the date the gift. The fair market value is the mean value between the highest and lowest quoted selling prices on the date of the gift. The date of the gift is the date the securities were transferred out of the donor’s possession. These gifts must also be substantiated by a written acknowledgment from the recipient charity and there is a somewhat different set of rules as to the content.
But what of the many other possibilities? Non-publicly traded securities valued at more than $10,000, partnership interests, real estate, and other assets valued at more than $5,000, even artwork or jewelry (special rules for the charitable contribution of these assets not related to substantiation of value may apply) – literally almost anything of value – can be given away. The inducement for your clients to gift these assets is the same as for appreciated securities – make the contribution, receive a charitable income tax deduction for the full fair market value and pay no capital gains tax. In addition, circumstances may be such that your clients are presented with a unique opportunity to do major philanthropy as they receive most favorable tax treatment on the disposition of one of these types of assets. The only difference is that a qualified appraisal for the gift must be obtained, and an extra page must be completed for their tax return. The substantiation requirements should never be an impediment to these gifts.
To substantiate a charitable income tax deduction for such a contribution, your client simply secures a qualified appraisal and completes Section B of IRS Form 8283 to be attached to his or her tax return. To substantiate a charitable income tax deduction for an item or group of similar items valued at more than $500,000, the qualified appraisal must also be attached to the tax return, along with Form 8283. Your donee charity will need to sign off on Form 8283 as well, which is never a problem.
The Pension Protection Act of 2006 defined “qualified appraisal” as an assessment conducted by a qualified professional in accordance with generally accepted appraisal standards. A “qualified appraiser” is defined as an individual who has earned an appraisal designation from a recognized professional appraiser organization. So is it really difficult to secure the appraisal? We don’t think so. Many of you are working with them now or otherwise acquainted with them in other capacities. There are registries and associations. It is the donor’s responsibility to secure and pay for the appraisal, but charities are often able to assist, if informally.
In summary, we think the best advice you can give your clients is to get and keep some form of acknowledgement for every charitable contribution they intend to deduct. Keep bank records and get and keep written receipts, even for smaller, simpler contributions. Encourage your clients to use assets other than cash or appreciated securities to fund current philanthropy or establish a donor-advised fund. Don’t let the appraisal requirement for donated property other than cash or publicly traded securities dissuade your clients from using these assets for their philanthropy.
As usual, there’s no way to include all the possibilities in a short column. A lot has been written on this subject, but the foremost authority is still IRS Publication 561, Determining the Value of Donated Property. Like most things IRS, the substantiation rules have evolved over time. The Foundation and most charities stay on top of the rules in the best interests of their donors. Feel free to consult us as you work through the charitable gift planning process with your clients.
The resources of The Foundation of the Greater Miami Jewish Federation are always available to you and your clients, in complete confidence and without obligation, as you consider these issues and the many possibilities for giving that offer your clients the opportunity to fulfill their charitable objectives in a tax-wise manner, inspire and engage the next generation of their families and create a lasting legacy. For more information, please contact Foundation Director Steve Lande at email@example.com, or at 786-866-8623, or consult JewishMiami.org.