4. HOW TO DOCUMENT CHARITABLE GIFTS, Part 2 of 2

4. HOW TO DOCUMENT CHARITABLE GIFTS, Part 2 of 2

Article posted in General on 17 September 2015| 1 comments
audience: National Publication, Russell N. James III, J.D., Ph.D., CFP | last updated: 17 September 2015
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Summary

We continue through "Visual Planned Giving" with Professor Russell James, by exploring proper gift documentation.

VISUAL PLANNED GIVING:
An Introduction to the Law and Taxation
of Charitable Gift Planning

By: Russell James III, J.D., Ph.D.

4. HOW TO DOCUMENT CHARITABLE GIFTS, Part 2 of 2

Links to previous sections of book are found at the end of each section.

Thus, for gifts of property of $5,000 or more, all of this documentation is required: Charity receipt with gift date, location, and description and quid pro quo statement, donor records of gift, charity, date, location, fair market value (and basis if relevant), IRS Form 8283, and a summary of a qualified appraisal attached to the tax return.  If any item is absent, no deduction is allowed.

The highest level of documentation is reserved for gifts of property over $500,000 or gifts of artwork over $20,000.  As before, publicly traded securities are exempted from the appraisal requirement because their valuation is relatively simple.  Note that these are the gifts with the greatest potential for abuse.  Gifts of property over $500,000 may be subject to a variety of interpretations of fair market value.  And, given their value, such differences of opinion can have a dramatic difference on the payment of taxes.  Thus, these large gifts warrant the most careful scrutiny by the IRS.
Because these types of gifts will be subject to the highest level of scrutiny, it makes sense that the entire qualified appraisal must be included with the tax return.  Not only are very large property gifts included (over $500,000) in this highest documentation level, but even moderately size gifts of art are also included (over $20,000).  This reflects the challenges in the valuation of artwork and the consequent opportunities for abuse.  Remember that for some taxpayers combining both state and federal income taxes can make deductions worth $.50 on the dollar.  Thus, if a valuation were made that was more than twice what the donor could actually sell the property for, it becomes more profitable to give rather than sell the property.  This potential for over-valuation is much more likely with property, such as artwork, where intrinsic value is difficult to define.
As a reminder, appraisals are not required for gifts of publicly traded securities, regardless of the size of the gift.  Thus, a donor could deduct a $10 million gift of Microsoft shares with no appraisal.

Finally, there are de minimis exceptions to the normal rules for quid pro quo gifts.  A quid pro quo gift is one where the donor makes a gift, but also receives something of value in return for the gift.  Typically, these scenarios require both that the charity report the value of the item given to the donor and also that the donor reduce his or her deduction by the value of the item received from the charity.  Although the charity is not a qualified appraiser, it is required to make a “good faith estimate” of the value of the item.  IRS regulations indicate, “The organization may use any reasonable methodology in making a good faith estimate, provided it applies the methodology in good faith.”

However, if the gift was $75 or less, the charity is not required to report the quid pro quo part of the transaction (i.e., they do not have to report the cost or value of the item given to the donor).  The rule applies only to the charity’s reporting requirement.

The donor must still reduce his or her deduction by the value of the item received in exchange for the gift.  The donor can ignore the value of the item received by the charity in exchange for the gift only when one of two de minimis exceptions applies to the donor.  First, the donor can ignore the value of the item received in exchange for the donation if its value does not exceed 2% of the value of the donation.  This exception does not apply to items received that are worth more than $104.  (Note that this $104 level is a 2015 inflation-adjusted number that changes every year.)  Second, the donor need not consider the value of the item received in exchange for a gift if the cost of the item to the charity was equal to or less than $10.50 so long as the gift made in order to receive the item was at least $52.50.  (As before, these are 2015 numbers that are adjusted annually for inflation.) These de minimis rules are intended to reduce reporting hassles for items of an inconsequential amount.

Although admittedly among some of the least interesting rules related to charitable gift planning, these documentation rules are nonetheless important.  The penalties for violating the rules can be severe and typically there is no opportunity to correct documentation errors after a deduction has been erroneously taken.

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Re: 4. HOW TO DOCUMENT CHARITABLE GIFTS, Part 2 of 2

Does anyone know: What documentation is required for a charitable gift of cash to a CLAT and is a disclosure required to be attached to Form 1040?

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