By Anthony Tocco, Ph.D., Charles A. Tocco, CPA, Natalie Tocco, CPA, and Craig Sasse, Ph.D.

With the enactment of the 2017 Tax Cuts and Jobs Act (TCJA), Schedule A, Itemized Deductions, was modified to the detriment of many taxpayers. More specifically, the deduction for state and local taxes (SALT) was capped at a maximum of $10,000. Many taxpayers who had paid off their home and could not claim any mortgage interest were left with few options for itemized deductions beyond making charitable contributions. This article explores the different opportunities tax preparers have for assisting their clients in minimizing their tax liability by using different charitable contribution strategies.

Overall, the TCJA reduced the marginal tax benefit of giving to charity by more than 30% in 2018, raising the after-tax cost of donating by about 7%. Unless taxpayers increase their net sacrifice — that is, charitable gifts less tax subsidies — charities and those who benefit from their charitable works, not the taxpayers, will bear the brunt of these changes.

Most donors give to charities regardless of the tax incentives, but the possibility of reducing one’s taxes is certainly a motivation. Therefore, the charitable deduction is more than just a tax revenue issue; it has Act of 1936 allowed corporations to deduct charitable donations. These laws established the future modifications as to the limits of how much one could deduct in any one calendar year. For instance, in 1964 the limit for charitable deductions was 30% of adjusted gross income (AGI). Today that limit is 60%. Originally the only way you could deduct charitable donations was by itemizing deductions.

In 2020, total donations from individuals, corporations and foundations were approximately $600 billion.

In tax years 2020 and 2021, individuals were allowed to deduct $300 without itemizing [$600 if filing married filing jointly (MFJ)] and could deduct become a social issue. How do we as tax preparers incentivize and make it possible for our clients to minimize their tax liability and maximize their charitable giving?

TCJA’s impact on charitable giving

We know that tax laws and how they are applied to charitable contributions have an impact on the amount taxpayers donate to charitable organizations. As of 2020, there were over 1.5 million qualified charitable organizations (QCOs) in the United States. Total donations from individuals, corporations and foundations were approximately $600 billion. Charitable giving accounted for 2.3% of gross domestic product in 2020.

Why is this important? The Urban-Brookings Tax Policy Center estimates that TCJA shrunk the number of households claiming an itemized deduction for their charitable gifts from about 37 million to about 16 million in 2018 and reduced the federal income tax subsidy for charitable giving by one-third — about $63 billion to roughly $42 billion in 2018. The Brookings Center estimates the cumulative loss to charitable organizations was $240 billion from 2017–2021.

Brief legislative history of charitable deductions

The 1913 Revenue Act created tax exempt organizations. This was followed by the 1917 Revenue Act, which allowed individuals to deduct donations to QCOs. Approximately 20 years later, the Revenue up to 100% of their AGI. For 2022, Congress did not renew either the $300 deduction for non-itemized filers or the provision allowing for deductions of up to 100% of AGI. Therefore, for 2022, charitable contributions can only be deducted if the taxpayer files a Schedule A (Form 1040).

Itemizing vs. taking standard deduction

Taxpayers have a choice between itemizing deductions or taking the standard deduction. The table below shows the standard deduction for all filers for 2022 and 2023. The standard deduction is increased for taxpayers over 65 and for those who are blind. For instance, if both spouses are over 65, the standard deduction is $28,700 for MFJ. The age adjustment is also applicable to both single and head of household filers.

The IRS limits the amount of cash charitable contributions taxpayers can deduct on Schedule A as itemized deductions to 60% of AGI. Individual taxpayers whose contributions exceeded the deductible ceiling can carry the unused deduction amount forward for five years.

What are qualified organizations?

The IRS says a taxpayer may deduct a contribution made to, or for the use of, any of the following organizations that otherwise are qualified under §170(c) of the Internal Revenue Code:

1. A state or U.S. possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes
2. A community chest, corporation, trust, fund or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals
3. A church, synagogue or other religious organization
4. A war veterans’ organization or its post,auxiliary, trust or foundation organized in the United States or its possessions
5. A nonprofit volunteer fire company
6. A civil defense organization created under federal, state or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services)
7. A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes
8. A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt2

Contributions to foreign organizations generally are not deductible, but the IRS has granted exceptions to certain charities in Israel, Mexico and Canada. Taxpayers can make charitable contributions to those countries only if they have income from those countries. To assist tax clients who are unsure about whether the organization qualifies, use the Tax Exempt Organization Search (TEOS) tool available at IRS.gov.

Contributions with benefits

If a donor contributes to a QCO and receives a benefit, the charitable deduction must be reduced by the amount of the benefit. The benefit could be merchandise, food, event tickets and event entertainment. The value of the benefit must be deducted from the contribution. Let’s assume someone pays $100 for a charitable luncheon. The lunch would be considered a benefit and must be deducted from the contribution.

Let’s look at a popular function: charitable golf tournaments. Usually, the participants are given a round of golf, food and drink, and golf accessories in appreciation of their donation. All of these would be considered benefits and must be deducted from the contribution. In most cases, the charitable organization will let donors know the amount of charitable deduction they can claim after subtracting the benefits received.

Options and strategies

Now that we have created a framework, let’s look at some different charitable contribution options and develop taxpayer strategies to minimize their tax liability. The strategies listed below are not in order of importance. The tax preparer must determine which strategy or combination of strategies is best for their client and whether they can take advantage of these strategies. State income taxes are not included in any of the examples given, but state income tax rates can be from zero to over 13%. Any examples given below can be adjusted for the client’s state income tax calculations.

Combining several years of charitable contributions into one year

Let’s assume you have clients who are married filing jointly and who gave $18,000 to qualified charities in 2022 and 2023. Beyond their charitable deductions, they claimed an additional $10,000 of qualified itemized deductions. Based on this information, they should have filed a Schedule A because their itemized deductions of $28,000 exceeded the 2022 standard deduction of $25,900 and the 2023 standard deduction of $27,700. The couple would receive a tax benefit of $2,100 by itemizing their deductions in 2022 and $300 in 2023. Assuming they have a marginal tax rate of 20% both years, they save an additional $420 of taxes ($2,100 x 0.20 for 2022) plus $60 ($300 x 0.20 for 2023) by itemizing versus taking the standard deduction.

What if they could combine two years of charitable deductions into one year? That means instead of donating $18,000 each year, they would donate $36,000 in 2022, $0 in 2023, and take the standard deduction for 2023. For 2022, they would have $36,000 of charitable deductions plus the $10,000 additional deductions for a total of $46,000 of itemized deductions. The $46,000 would exceed the standard deduction of $25,900 by $20,100 for 2022. Once again, assuming the 20% marginal tax rate, that would lead to a $4,020 ($20,100 x 0.20) reduction in taxes for 2022 with no reduction for 2023.

By combining two years of charitable contributions, the taxpayers have a net tax savings of $3,540 [$4,020 - $480 ($420 for 2022 and $60 for 2023)]. If we take the tax savings of $3,540 and divide that by the additional contribution for year one of $18,000, that gives the couple a return on their investment of approximately 20%. This would be a good use of money sitting in a checking account earning almost no interest.

Donating appreciated stocks, bonds and mutual funds

Donating appreciated non-cash assets allows taxpayers to both reduce their taxes and maximize their giving to charitable organizations. Assume your clients purchased $100,000 of stock, which has since appreciated to $200,000. They sell the stock and have a capital gain of $100,000 with a capital gains rate of 15%. The couple pays $15,000 in taxes and gives $85,000 (the remaining portion of their capital gain) to charity. Let’s assume this is the only contribution they will make. Also, the couple has an additional $10,000 of SALT for total itemized deductions of $95,000. We take the $95,000 and subtract the $27,700 (standard 2023 deduction for MFJ), which gives them $67,300 of excess deductions above the standard deduction. Assuming a 20% tax rate for the taxpayers, the couple will save $13,460 ($67,300 x 0.20) on their $85,000 charitable contribution. The taxpayers in this instance paid out $1,540 more in taxes than what they saved ($15,000 in capital gains taxes less $13,460 in tax savings).

Now, let’s assume the taxpayers donate $100,000 of stocks, bonds or mutual funds directly to a qualified charitable organization. The couple would get to deduct the full $100,000. Taking the $100,000 plus the additional $10,000 of itemized deductions gives them $110,000 of itemized deductions, less the $27,700, for a net deduction of $82,300. Based on a 20% marginal tax rate, the couple would get a $16,460 deduction from their taxes. From a return on their investment perspective, the first alternative gives them approximately a 13% return ($13,460/$100,000). The second alternative gives them an ROI of approximately 16% without any additional cash outlay ($16,460/$100,000). The couple generates an additional $3,000 in cash savings ($16,460 - $13,460) by using the second alternative. Plus, the charitable organization gets an additional $15,000 under this scenario. A win-win for both.

Note: The maximum a taxpayer can deduct on appreciated assets in any one tax year is 30% of AGI. Any excess can be carried forward for up to five years.

When donating appreciated non-cash assets to claim a deduction of more than $500, taxpayers must fill out IRS Form 8283, Noncash Charitable Contributions, which requires them to answer the following five questions:

1. The name and the address of the organization to which the taxpayer donated
2. Description of the donated property (the number of shares and the name of the company)
3. Date of contribution
4. The fair market value (FMV) of the property
5. The method used to determine the FMV

Taxpayers donating appreciated assets that have a ready market value will have an easy time completing Form 8283. However, for those assets that do not have an FMV, determining the value differs by asset class (stocks, bonds, real estate, etc.). When donating items for which the FMV can’t be easily ascertained, the preparer should refer to IRS Pub. 561, Determining the Value of Donated Property, for guidance on determining the market value. Remember, the burden of proof is on the taxpayer to correctly value the donated asset.

Donor-advised funds

Donor-advised funds (DAFs) provide a short-term tax benefit but a long-term solution to charitable giving. The IRS defines a DAF as a separately identified fund or account that is maintained and operated by a §501(c)(3) organization, which is called the sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

As recently as 2020, the impact of these donoradvised funds is demonstrated by how much they were used:

• There were 1,005,099 DAF accounts.
• DAF accounts held $159.83 billion in assets.
• Annual contributions into DAF accounts were $47.85 billion.
• Grants from DAFs to charities totaled more than $34.67 billion.
• The average DAF account size was $159,019.

Here are a few more details on how DAFs operate:

• Taxpayers can donate cash to almost any noncash asset, including stocks, bonds, mutual funds, property, private business interests and even cryptocurrency. As previously stated, there is a limitation as to the taxpayer’s AGI. For example, if a taxpayer invests cash in a DAF, the amount cannot exceed 60% of their AGI. If the taxpayer invests appreciated assets, their investment cannot exceed 30% of AGI. The donor must understand that all donations to a DAF are irrevocable.
• All contributions must be made to a QCO. There are limitations, however. For instance, you cannot donate to political groups or private foundations. The tax deduction applies to the year in which the donations are made.
• DAF accounts are usually set up through a donor organization, such as community foundations, university alumni associations and investment brokerage houses (e.g., Merrill Lynch, Fidelity, Schwab, J.P. Morgan, etc.). While brokerages or donor organizations typically accommodate recommendations to grant contributions to a certain group, there is no guarantee they will do so. Also, DAF participants cannot derive any personal benefit from a grant they request.
• Investments in a DAF grow tax free.
• The DAF is usually managed by an investment manager. There are fees that can be charged of approximately one-half to one percent of the balance in the account.
• It takes a minimum contribution to create a DAF, and this varies by donor organizations. Some require a minimum of $5,000, others have minimums of up to $25,000.
• If the donor to the DAF passes away, the fund can be passed on to their heirs or the donor can specify which QCO will receive the remainder of the funds.
• As long as the fund is active, it doesn’t really have a limited life. But the rules do differ by donor organization, especially if the account becomes inactive and doesn’t make any contributions for five years.
• If your client is interested in a DAF, don’t wait until the end of the year. The process of creating one should begin at least four to six weeks before year end.

To minimize the donor’s tax liability, the taxpayer opening a DAF must still be able to itemize deductions on Schedule A that exceed their standard deduction. From a tax-minimization concept, a DAF is like our earlier example where we combined several years of charitable contributions into one year, making a large contribution in that year and getting the tax deduction for that year. A major difference is that DAFs allow donors to make the contribution from the DAF to a QCO whenever they want, as opposed to making the contribution to the QCO in the year in which the donation is claimed.

Qualified charitable distribution

A qualified charitable distribution (QCD) allows taxpayers who are 70½ years old to withdraw up to $100,000 per year tax free from their IRA to make a direct contribution to a QCO. Spouses who are filing MFJ can each withdraw a maximum of $100,000, for a total of $200,000. The QCD rule only applies to taxable IRAs and not 401(k)s. However, eligible taxpayers have the option of rolling over their 401(k) into an IRA and taking advantage of a QCD. Another benefit of a QCD is that any contributions made count against the taxpayer’s required minimum distribution (RMD) for the year it was made.

To avoid any potential IRS issues, taxpayers should take the following steps:

1. Communicate with their IRA custodian that they are interested in making a QCD.
2. Make the request for a QCD in writing.
3. Specify the dollar amount they wish to contribute to each individual charity.
4. Request the check be made payable to the charity but be mailed to them.
5. Forward the check to the charity and request a receipt for their records.
6. Maintain the receipt and records in their tax file.

All taxpayers who are over 70½, have an IRA and make charitable contributions should think about taking advantage of a QCD, especially those who make charitable contributions and whose total itemized deductions are less than their standard deduction. Let’s look at several examples.

Example 1: Phyllis is 75 and must take an RMD of $15,000 for 2023. She contacts her IRA custodian in writing and arranges to have the total RMD of $15,000 applied to a QCD. She follows all the above steps. Phyllis has both satisfied her RMD, does not owe any tax on the distribution and would still be able to take her standard deduction. Assuming other 2023 income of $50,000 in addition to her RMD, Phyllis would have taxable income of $36,150 ($50,000 minus her standard deduction of $13,850).

Example 2: The facts are the same as above, but Phyllis decides instead to set up a QCD for $10,000. In this case, Phyllis satisfies $10,000 of her RMD but will receive a Form 1099R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for $5,000, which will be taxable income to her. She is still able to claim the standard deduction. Assuming other income of $50,000 beyond her RMD, Phyllis would have taxable income of $41,540 ($55,000 minus her standard deduction of $13,850).

Example 3: In 2023, Phyllis takes her RMD of $15,000 without setting up a QCD. She then makes charitable contributions of $7,500. She satisfies her RMD, and she is taxed on the full $15,000 on her IRA distribution. Let’s assume she is single and has itemized deductions of $10,000 for SALT in addition to the $7,500 in contributions for a total of $17,500. Assuming other income of $50,000 beyond her RMD, she would have to report income of $65,000. After subtracting her itemized deduction of $17,500, she is left with taxable income of $47,500 ($65,000 less $17,500). In this example, Phyllis has satisfied her RMD, but she is taxed on the full $15,000 and cannot take her standard deduction because she itemized.

Tax preparers must make their clients aware of this opportunity to give as a way of minimizing their tax liability. In fact, any IRA owner who makes charitable contributions should set up a QCD.

Crowdfunding donations

Crowdfunding platforms operate internet sites that allow individuals to contribute to a wide variety of causes. Some examples are:

• GoFundMe, a popular site for individuals to donate to individual and small business needs
• Indiegogo, which assists entrepreneurs in fundraising projects
• Mightycause, which assists non-profits in raising money for specific causes
• StartEngine, which allows individuals to invest in early startups
• Patreon, which helps artistic/creative people raise funds
• Kickstarter, a rewards-based fundraiser program

Some of these platforms have raised billions of dollars for different causes. For instance, GoFundMe has raised $17 billion from approximately 200 million donors since it was established. Patreon has raised $3.5 billion to assist approximately 250,000 creative artists. Kickstarter has raised approximately $6 billion.

To be deductible for tax purposes, donations made through a crowdfunding platform must be given to a qualified charitable organization. For instance, any money given to an individual to help them pay for a funeral or health-related expenses or to assist a business that has suffered fire damage does not count as a charitable donation for tax purposes. Any money given through these platforms must still adhere to the IRS rules for it to be considered a deductible donation. “The world may have changed, but the rules about charitable contributions have not,” said Jackie Perlman, tax principal and research analyst for The Tax Institute at H&R Block. “I have to be donating to a qualified 501(c)(3) charity. [Otherwise] no matter how poignant the cause may be, your donation still is not deductible.” To assist taxpayers, most of the crowdfunding sites provide donors with information about whether they are giving to a qualified charitable organization.

Donors must also be aware of gift taxes. As long as a donor gives to a QCO, they will not need to pay a gift tax. As already stated, the money raised by many of these crowdfunding websites doesn’t go to a QCO and will not be deductible. The maximum a donor can give to any one individual is $16,000 in 2022 or $17,000 in 2023. If the donor exceeds these limits, they can incur a gift tax. The IRS defines a gift tax as, “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” The tax applies regardless of whether the donor intends the transfer to be a gift. Depending on the gift given, the gift tax ranges from 18% to 40%.

Third-party providers. With the growth of crowdfunding websites, tax preparers will be seeing more Forms 1099-K, Payment Card and ThirdParty Network Transactions. PayPal, Venmo and Amazon Pay are examples of third-party networks. Prior to and including tax year 2021, any person who received $20,000 or more from 200 or more donations or transactions received a Form 1099-K. As part of the American Rescue Plan Act of 2021, Congress substantially modified the threshold for requiring a Form 1099-K to $600 regardless of the number of donations or transactions to take place in tax year 2022. The IRS has since issued guidance and postponed the new implementation until tax year 2023. Like other forms in the 1099 series, both the IRS and the beneficiary receive a copy of Form 1099-K.

Third-party providers do not have to provide a Form 1099-K to the IRS if those who are donating or contributing do not receive any goods or services in return. Under IRS rules, this would be considered a gift. As stated earlier in this article, gifts are not taxable up to a stated amount. Gifts can essentially be given to anyone for any reason. During the 2020 riots in Minneapolis, many family businesses were damaged or burned. Several of them went on GoFundMe and asked for help in rebuilding. As long as the business did not give anything to the donors in return, the money they received was considered a gift and not subject to income tax. The crowdfunding website Kickstarter assists artistic or technological entrepreneurs in raising money in exchange for a share of ownership in the company. This is also considered a non-taxable event.

Donations of property

While property outside of stocks and bonds encompasses a wide variety of items, it can be broken down into three categories:

1. Household items (furniture, appliances, clothing)
2. Intellectual property (works of art, patents, real estate)
3. New or used vehicles (cars, boats, airplanes)

The specific items listed above are not intended to be a comprehensive list, but examples of items for each category.

The rules regarding all three categories generally have one thing in common: the donor must get a qualified appraisal of the property’s value for any

claimed donation of $5,000 or more. Several examples that are exceptions to this rule are:

• Cars, boats and planes in which the deduction is limited to the proceeds from the sale
• $10,000 or less of a stock that is not traded publicly

Household items and clothing. The most common property donated to QCOs of the three mentioned above are clothing and household items. The IRS considers these as separate categories, but the tax rules are similar for both categories, so we’ll look at them together.

For the taxpayer to receive a deduction for clothing or household donations, the items must be in good or excellent condition. If the value exceeds $500, the taxpayer must fill out Form 8283. If the value of the donated property equals $5,000 or more, the taxpayer must get an appraisal by a qualified appraiser.

To assist the taxpayer in determining the value of the donated property, the QCO can use published sources for estimating the value of donation for a wide range of categories. Two of the charities that are most popular with donors of clothing and household items are Goodwill Industries and Salvation Army. Both sites provide a range for each category of items contributed. For instance, men’s suits range from $16 to $62. Taxpayers must remember the burden of proof is on them to prove the value of each item deducted. They should keep a list of each item donated and the amount of the deduction for each item. We strongly suggest to our clients that they keep pictures of the donated property.

Let’s look at two tax strategies that apply these rules:

• Tax strategy 1. For donations exceeding $5,000, there needs to be an appraisal. The IRS categorizes clothes into various categories (children’s, men’s and women’s) and taxpayers can deduct up to $5,000 for each category. Taxpayers should try to avoid the cost of an appraisal because they can be expensive and are not deductible. For each category, the tax preparer must fill out a separate Form 8283.
• Tax strategy 2. An MFJ couple decides to downsize. As with most downsizing, they get rid of a substantial amount of clothing, furniture, appliances, etc. Let’s assume that if they donate their extra items to a QCO, the total amount of deductions for all categories is $6,000. If they want to avoid the cost of an appraisal, they may consider gifting at least $1,000 worth of the items to one or more of their children to get them under the $5,000 threshold. Likewise, if the couple does not have enough deductions to itemize, they can gift some of the items to children who do, although they’ll probably want to keep the gift under the $5,000 threshold for appraisals. As long as the couple doesn’t exceed the 2023 gift tax exclusion of $17,000 per child, everyone benefits.

New/used vehicles. The IRS defines vehicles in this case to be cars, trucks, boats and planes, and states the following: If you donate a qualified vehicle with a claimed fair market value of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization, or the vehicle’s FMV on the date of the contribution.

If the vehicle values for over $500 and the charity intends to sell it, the taxpayer gets to deduct the gross proceeds from the sale. If the vehicle is going to be used by the QCO or the charity intends to donate/sell the vehicle to a needy family or individual at below market price, the donor can deduct the fair market value of the vehicle. As with household items and clothing, any donation that exceeds $500 requires the completion of Form 8283, and any vehicle that has an FMV greater than $5,000 must have an appraisal.

Note: Almost any QCO that accepts vehicles will offer free towing. The cost of towing will be deducted from the final donation. Depending on where the vehicle is towed, this could substantially reduce the amount of the taxpayer’s donation.

• Tax strategy. Let’s assume a taxpayer has a vehicle whose original cost was $30,000. The vehicle is eight years old and has 115,000 miles on it. It’s in good condition and, based on Blue Book value, has an FMV of $9,000. In this case, the only way the donor can be assured of getting the FMV of $9,000 is if the QCO either decides to use it in their organization or give/sell it to a family or individual in need of transportation. It’s in the donor’s best interest to talk to the QCO to maximize the deduction. If the QCO is going to sell the vehicle in an arm’slength transaction, it might best serve the taxpayer to take the vehicle to a company like CarMax or Auto Nation for an on-the-spot quote of what they will pay. The taxpayer could always sell the car and give the proceeds to the QCO. There wouldn’t be any tax consequences to selling the vehicle, and there wouldn’t be additional forms to fill out since the taxpayer would be making a cash donation.

Intellectual property. Intellectual property is generally defined as patents, copyrights, trademarks, etc. In general, the IRS rule for donations of intellectual

property has two significant parts:

1. The owner must give their entire interest in the intellectual property to receive a tax deduction.
2. The donor can deduct the lesser of their cost basis or the fair market value of the asset.

In many cases with intellectual property, the cost basis may be minimal while the FMV may be significant. For instance, published books can take thousands of hours of work and research by the author. The author cannot incorporate their time as part of their basis.

Assume the author of a popular book wants to donate the copyright to a charity. The book has an FMV of $1 million, but the donor’s cost basis is $25,000. Unless the author donates 100% of the copyright to the charity, they cannot take the deduction. If the author donates 100% of the copyright, the donor can only deduct $25,000.

Intellectual property may come with perpetual income in the form of royalties. In the case of patents and copyrights, royalties are usually paid as a fixed amount or are based on the number of items sold. Book authors and record artists are usually paid by the book or record sold.

Future income from intellectual property can enhance the donation. This income is referred to as qualified donee income (QDI). It is the gift that keeps on giving, at least for a while.

The donor must notify the QCO that they are going to take the QDI as a future charitable deduction. The QCO must then provide written proof to the donor of the income from the donated property.

The deduction for QDI has a limited life for the donor, maxing out at 12 years. The charitable deduction available to the donor is calculated based on a sliding scale. For instance, in Years 1 and 2, the donor gets to take 100% of QDI. In Years 11 and 12, the donor only gets to take 10% of the QDI.

Personal services to QCO. Personal services can enhance the total amount of donations recorded on Schedule A. The most common personal service would be volunteering. The volunteer can deduct the direct expenses (gas/oil) associated with driving to and from home to the volunteer site. Alternatively, the donor can take 14 cents per mile. There isn’t a threshold for mileage, but taxpayers need to keep accurate records.

Beyond mileage, certain out-of-pocket expenses directly associated with performing services associated with a QCO are deductible. A few examples include:

• Parking fees and tolls
• Travel, hotel, food, conference fees and any other associated expenses away from home while performing services associated with a QCO
• Cost of uniforms and cleaning of uniforms required for volunteering

Costs that cannot be deducted include:

• Fair market value of the volunteer’s services
• Maintenance costs associated with the volunteer’s vehicle
• Childcare costs incurred while volunteering

Substantiation

Tax preparers must educate their clients to always be prepared for an IRS audit. While an audit can be initiated anytime and for any amount, usually the larger the deduction, the higher the probability of an audit. When it comes to verifying donations, clients need to know that the IRS and Tax Court follow a strict interpretation of IRC §170.

1. Donations under $250. While contemporaneous written acknowledgment is not mandatory for donations under $250, the taxpayer must still be able to substantiate the donation. No matter the level of donation, it is assumed the taxpayer keeps adequate records. As long as any one donation does not exceed $250, the taxpayer only needs their cancelled checks, even though the total contribution exceeds the $250 limit. For example, let’s assume a taxpayer donates $150 a week to a QCO. Even though the total amount was $7,800, the taxpayer only needs their cancelled checks for substantiation.
2. Donations of $250 to $500. At this level, the taxpayer not only needs to keep adequate records but must also have contemporaneous written acknowledgment from the charitable organization. The taxpayer must receive the substantiation prior to filing the tax return. For example, let’s assume a taxpayer makes periodic donations of $250 to a QCO that total $7,800 over the course of a year. In this case, the taxpayer must keep adequate records and receive a contemporaneous written acknowledgment from the charitable organization prior to filing their tax return.
3. Donations from $500 to $5,000. Donations that exceed $500 but are less than $5,000 must have substantiation from the QCO. The taxpayer must maintain proper records and complete all forms required by the IRS (specifically, as it relates to non-cash donations and the filing of Form 8283). If the form is improperly prepared, the IRS may deny the deduction. For example, Form 8283 requires that the donor provide information on date of contribution, date acquired, cost, FMV, etc. for non-cash assets. Failure to properly report the required information may be cause to deny the contribution.
4. Donations that exceed $5,000. The taxpayer must provide all the documentation discussed above at the lower levels. In addition, for noncash donations, the taxpayer must attach an appraisal to the tax return, along with a signed declaration from the appraiser of their qualification for each donation classification over $5,000. For example, if a taxpayer makes a non-cash donation over $5,000, gets a qualified signed appraisal, but fails to attach it to their return, the IRS could deny the donation.
5. Cash contributions will be disallowed unless the cash contribution can be verified by a QCO.

Conclusion

Because of the 2017 TCJA, which limits the SALT on Schedule A to $10,000 and dramatically increased the standard deduction, a substantial number of taxpayers no longer benefit from itemizing deductions. While many taxpayers donate to a QCO regardless of the tax benefits, there are many taxpayers who either reduced their charitable contributions or don’t donate at all because of a lack of tax benefits.

A fundamental objective of all tax preparers is to minimize their clients’ tax liability. The authors have listed various strategies that taxpayers can use to reduce their tax liability. These strategies not only benefit the taxpayer but also the charities and the people they serve.

Endnotes

1. https://www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving
2. https://www.irs.gov/charities-non-profits/ charitable-organizations/charitable-contributiondeductions
3. The IRS considers cryptocurrency in the same class as any other marketable security (stocks and bonds). Therefore, it is subject to both short- and long-term gains depending on the taxpayer’s holding period. The rules for deducting cryptocurrency for donation purposes are the same as for stocks and bonds.
4. https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
5. https://www.lendingtree.com/debt-consolidation/charitable-donations-survey-study/
6. https://www.bergankdv.com/resources/blog/howto-make-a-qualified-charitable-distribution-fromyour-ira#:~:text=Make%20the%20request%20for%20a,a%20receipt%20for%20your%20records
7. https://www.investopedia.com/best-crowdfundingplatforms-5079933
8. https://www.cnn.com/2021/05/07/success/onlinefundraisers-tax-feseries/index.html
9. https://www.irs.gov/publications/p526#en_US_2021_publink1000229755

About the authors

Anthony Tocco, Ph.D., is a professor of accounting and the division chair of decision sciences at Rockhurst University in Kansas City, MO. He has taught courses in managerial and financial accounting, financial analysis, individual taxation, income tax preparation practicum, professional development for managers, and contemporary issues in finance and accounting.

Charles A. Tocco, CPA, has more than 10 years of experience providing tax consulting for clients primarily in the professional services and the private equity and manufacturing and distribution industries. He also assists individuals, partnerships and corporations with tax compliance, planning and accounting services.

Natalie Tocco, CPA, is a partner in tax at Wipfli LLP in St. Louis MO. She brings experience in professional service providers, manufacturing and distribution, senior living and healthcare, foreign tax, multistate tax compliance, and mergers and acquisitions. Natalie assists individuals, partnerships and corporations with tax compliance, planning and tailored business solutions.

Craig Sasse, Ph.D., is a professor of management and Director of the Executive MBA program at Rockhurst University. He focuses on issues related to performance management, leadership, strategy and corporate social responsibility.