Planned Charitable Giving

Posted on December 05, 2022

Authors: Jeffrey D. Scibetta and Kenzie P. Ryback

Originally published in October 2022

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Charitable Giving: Who, What, When and Why?

The WHO - Qualified Organizations

Definition. Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals (IRS Publication 526; see also IRC §§ 170(c)(4), 2055(a)(2), and 2522).

Examples of Qualified Organizations (IRS Publication 526; IRC § 170(c)):

Churches, Synagogues, temples, mosques and other religious organizations
Federal, state, and local governments, if the contribution is solely for public purposes (i.e. maintain a public park)
Nonprofit schools and hospitals
The Salvation Army, American Red Cross, Goodwill Industries, United Way, etc.
War veterans’ groups

What Can You Give?

Charitable Contribution Definition: A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value (IRS Publication 526; see also IRC § 170(c)).

If the donor receives a benefit as a result of making the contribution, the donor can still claim a deduction, however, the deduction is reduced by the value of the benefit received by the donor in exchange for the contribution. For the excess value to qualify, the donor must pay it with the intent to make a charitable contribution (IRS Publication 526).

Example: Donor pays $100 to attend a dinner dance at a hospital. The entire $100 goes to the hospital. The fair market value of the ticket is $40. Therefore, the donor can deduct $60, the value of paid for the ticket less the benefit received.

When and Why to Give

During the donor’s lifetime: income tax benefits and reduces the donor’s taxable estate, subject to adjusted gross income limitations.

In 2022, the federal standard deduction is $12,950 for individuals, $19,400 for heads of households, and $25,900 for married filing jointly. Due to the increased amount in the standard deduction, donors may have less incentive to itemize and claim a charitable deduction, but for those who do itemize, the charitable deduction can reduce their income tax liability.

Upon the donor’s death: The federal estate tax rules (IRC § 2055) allow unlimited charitable deductions for the full value of the property given by an estate outright to charity, regardless of the type of property donated or the appreciation in the property.

Gifts made to charity at death allow for a deduction on the estate tax return, reduced by any administrative expenses paid out of the bequest.

Charitable Giving at Death

Federal Estate Tax Exemption

In 2022, a person can pass $12,060,000 free of federal estate tax, any amount in excess of $12,060,000 is subject to federal estate tax. Married individuals can elect portability, and collectively pass $24,120,000 free of federal estate tax. The federal estate tax exemption is scheduled to sunset in 2025, and as result, on or after January 1, 2026, the federal estate tax exemption will be reduced to $5,000,000, adjusted for inflation.

The federal estate and gift tax exemption is a unified credit, meaning, if a person gives away $12,060,000 during their lifetime, the individual will not have any federal estate tax exemption upon their death and any assets included in the decedent’s estate will be subject to federal estate tax, assuming the federal exemption amount has not increased above $12,060,000 at the time of the decedent’s death.

For assets passing outright to charities, generally, there is no limit on the estate’s charitable deduction against the federal estate tax under Treasury Regulation 20.2055-1(a). The deduction which is allowed under Internal Revenue Code (“IRC”) Section 2055 “shall not exceed the value of the transferred property required to be included in the gross estate.” (IRC § 2055(d); Treas. Reg. § 20.2055-1(a)). Assets that qualify for the charitable deduction are listed on Schedule O of IRS form 706.

Requirements for Estate Tax Charitable Deduction

The Decedent must make the Transfer. As a general rule, an estate tax charitable deduction is allowed under Section 2055 where “the value of the property [is] included in the decedent’s gross estate and transferred by the decedent during his lifetime or by will.”

Property passing to charity through the actions of the decedent’s personal representative or the beneficiaries of the estate do not qualify for an estate tax charitable deduction, although the beneficiary may be entitled to an income tax deduction.

If the decedent made a binding charitable pledge that is outstanding at death, the estate’s payment of the pledge does not give rise to an estate tax charitable deduction under IRC 2055, however, it does qualify as a claim against the estate and is deductible on Schedule K under IRC 2053, if it otherwise would have been a valid bequest.

The charitable bequest must be ascertainable at the time of the decedent’s death.

If the charitable organization and the amounts to each are not fixed by the will, the estate tax charitable deduction will likely be denied. However, if the testator imposes a fiduciary obligation on a third person to distribute residue to charitable organizations under state law, the estate tax charitable deduction may be allowed even without naming a specific organization. If it is possible, however, that no qualified charities will receive the charitable bequest, no deduction will be allowed.

Testamentary Provisions and Inter Vivos Transfers Included in the Decedent's Estate

Pecuniary Gifts are express gifts in a testamentary instrument for a specific dollar amount. These gifts are paid before residuary gifts but after specific gifts. When a pecuniary gift is made to charity it is deductible for federal estate and state inheritance tax purposes.

Example: “I give $10,000 to the ABC Nonprofit.”

Specific Gifts are express gifts tied to a specific property or asset of the testator. After estate debts and expenses are paid, specific gifts will be paid first, before pecuniary and residual gifts. The charitable deduction is equal to the fair market value of the property donated. If the charity sells the property shortly after receipt of the property, there is no capital gain tax due to the stepped-up basis on the testator’s death.

Example: “I give my Picasso painting to ABC Nonprofit.”

Residuary Gifts: These gifts are paid after all debts, specific and pecuniary gifts are made. When the charitable beneficiary is a residuary beneficiary, the preparer of the decedent’s 706 must attach a statement showing how the residuary amount was computed (Treas. Reg. § 20.2055-3(a)).

Example: “After all taxes and expenses incurred by reason of my death, I give fifty percent (50%) of my residuary estate to ABC Nonprofit.”

If death taxes are payable in whole or in part out of the property subject to the charitable bequest, the charitable deduction is reduced by the amount of the tax (IRC § 2055(c); Treas. Reg. § 20.2055-3(a)). As a result, the charitable deduction and tax liability become subject to a series of trial-and-error computations or a formula (Treas. Reg. § 20.2055-3(a)(2)). The charitable deduction is also further reduced for some administrative expenses paid from the charitable residue (See Treas. Reg. § 20.2055-3(b)(3); IRC § 2056(b)(9)).

The calculation often depends on the complexity of the estate. For specific assets passing to charity, it may be easiest to list the specific assets passing to charity by reference to their item numbers, subtract the charity’s share of debts and expenses from the aggregate value of the specific bequests, and then deduct the difference as the charitable deduction.

For residuary charitable bequests, if may be easier to start with the gross estate, subtract specific bequests passing to others and expenses and taxes allocable to the residue, thereby arriving at the net charitable deduction.

Proof to Support Deduction

A copy of the written instrument transferring the property subject to the deduction claimed (Treas. Reg. § 2.2055-1(c)(1)). If the instrument is of record, the copy should be certified; otherwise the copy should be verified.

A written statement, under penalties of perjury, stating whether any action has been instituted to construe or contest the decedent’s will or any other provision thereof affecting the charitable deduction claimed, and whether, based on the executor’s information and belief, any such action is contemplated (Treas. Reg. § 20.2055-1(c)(2)).

Beneficiary Designations

Transfer on Death / Payable on Death

IRA or other retirement accounts - Additional Planning Consideration:
Generally, when an individual beneficiary receives an IRA distribution, the individual receives taxable income. Which, as a result, may decrease the intended gift by as much as 70%, due to estate and income taxes. The charity, on the other hand, is able to realize the full value of the gift and the distributions are not ordinary income to the charity. The gift from the estate is not income to the beneficiary, but it would be subject to Pennsylvania inheritance tax, however, for lineal descendants, Pennsylvania inheritance tax is only 4.5% compared to the income tax brackets.

Example: Client A has one child and has one charity in which Client A wishes to benefit. Client A’s estate is worth $500,000 and Client A has an IRA worth $500,000. If Client A’s child is the sole beneficiary of Client A’s estate, Client A’s child would not have to recognize income and would only have to pay 4.5% inheritance tax (in Pennsylvania), depending on the Client A’s child’s income tax bracket, there are potential significant tax savings.

Life Insurance Policies

Designate charity as beneficiary of a policy
Transfer ownership of a policy to a charity
Gift Dividends from a Life Insurance Policy

Advantages:

Can make a major gift to charity without having to draw funds from the donor’s estate.
Donor can retain control over beneficiary designations, which offers greater flexibility for the donor is the donor retains ownership of the policy.
Leveraged giving –While the insured is alive, the policy is worth less than the death surrender value at the time of the insured’s death. Thus, the insured could either donate $100,000 to the insured’s charity of choice, or put the $100,000 into a life insurance policy that is owned by the charity of choice or the charity is named as a beneficiary, and charity will receive a much larger death benefit on the insured’s death.
Simple to create and administer.
Proceeds may be excluded from gross estate, depending on who is the owner of the policy.
Premium payments may be deductible from ordinary income tax if assign ownership of the policy to charity.

Disadvantages:

Timing of proceeds is uncertain – charity has to wait until donor passes away.
Lose typical benefits associated with life insurance policies, including ability to withdraw cash surrender value or take loans against the policy.
If gifting dividends, usually dividends are tied to the death benefit and could therefore reduce the death benefit.

Traditional Ways to Give During Lifetime

Federal Income Tax Deduction

A charitable contribution that qualifies for an income tax deduction under Section 170 generally consists of five elements: (1) a transfer of (2) money or property (3) to a permissible donee (4) that is both voluntary and without receipt of economic consideration or benefit and (5) that is the proper form.

A transfer has two essential elements: (1) maker or donor parts with something, and (2) that the donee receives something.

The amount of the income tax charitable deduction depends on the classification of the donor, the type of property donated and the type of charitable organization that receives the donation (See IRC § 170(b); Treas. Reg. § 1.170A-8(a)(1). For purposes of these materials we will focus on individual taxpayer donors).

The charitable contribution deduction is limited to a percentage of the donor’s income (discussed below), however, excess contributions may be carried forward in subsequent years.

Federal Gift Tax Deduction

Section 2522(a) allows a gift tax deduction for transfers to qualified organizations. The deduction operates as an exclusion.

Transfers to charities are considered “taxable gifts” (IRC § 2503(a)) and the annual exclusion for gifts (other than future interests) also applies, however, such transfers are not required to be reported on annual gift tax returns in most circumstances, and any excess amount over the annual exclusion amount is excluded by reason of the Section 2522(a) deduction. The annual exclusion for 2022 is $16,000 per person per donee. The base annual exclusion amount is $10,000 and is indexed for inflation. IRC § 2503(b)(2).

Gift of Money

A charitable deduction is allowed for any charitable contribution payment made during the taxable year (IRS § 170(a)(1)).

Monetary gift includes a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer, an online payment service, or a payroll deduction (Treas. Reg. § 1.170A-15(b)(1)).

Where the gift or contribution is solely monetary, the entire amount of cash is deductible subject to adjusted gross income limitations, however, the AGI limit for cash only gifts is 60% AGI (IRC § 170(b)(1)(G)(i)).

5 year carry forward of unused charitable contribution (IRC § 170(b)(1)(G)(ii)).

Gift of Property

Examples of gifts of property include: gifts of stock, gift of real estate, assignment of debts and accounts receivable, gifts of tangible personal property, contract rights, patents, royalties, life insurance policies.

General Rule: The amount of a charitable deduction for a contribution of property (other than money) is the property’s fair market value, reduced under the rules of § 170(e)(1) relating to appreciated property. “[F]air market value must be determined with respect to the particular property in question at the time of contribution subject to any conditions or restrictions on marketability.” (Cooley v. Commissioner, 33 T.C. 223, 225 (1959))

Treas. Reg. § 1.170A-1(c)(1). Treas. Reg. § 1.170A-1(c)(2) states that “fair market value” is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”

Exceptions to General Rule:

Unrelated Use: Only if the use of the tangible personal property is related to the tax exempt purposes will the deduction equal the fair market value. If the property is unrelated to the tax exempt purpose, the deduction is based on the lesser of the fair market value and the cost basis (IRC § 170(e)(1)(B)(i); Treas. Reg. § 1.170A-4(b)(3)(i)).

Example: Donor donates a painting to a nonprofit that regularly displays are as part of its mission, and is therefore considered a related use. If instead the donor donates the painting to church, and the church then sold the painting and used the proceeds, then it would be unrelated.

The taxpayer has to provide proof that the property is not being placed to an unrelated used by the charity, or that it is not reasonable to think that it would be unrelated. Whether or not the property is later sold or exchanged is immaterial, the IRS looks at the time the donation was made and analyzes, was it reasonable to believe that the property would be put to related use or not? (Treas. Reg. § 1.170A-4(b)(3)(ii))

Gifts to Private Foundations

The deduction for donating appreciated property to a private foundation, must be reduced by 100% of the long-term capital gain that would have been recognized had the property been sold at its fair market value of the time of contribution (IRC § 170(e)(1)(B)).

Property that Would Produce Ordinary Income

The amount of a charitable contribution of “ordinary income property,” is reduced by the amount of ordinary income that would have resulted if the contributed property was sold at fair market value as determined at the time of contribution (IRC § 170(e)(1)).

Appreciated Property

Benefits of Making Gifts of Appreciated Property:

100% deductible in year of gift, up to 50% of donor’s AGI (30% for long-term capital gain property)
Five-year carryover for excess deductions
Generally, there is no capital gain recognition on the transfer of appreciated property. Two exceptions: (1) Whenever a bargain sale occurs by reason of the donor receiving or being deemed to receive partial consideration in exchange for the appreciated property (IRC 1011(b)), and (2) When the charity sells the property shortly after the transfer and it is determined that the sale was part of an overall plan.
For gifts of marketable securities, the charitable deduction is equal to the fair market value, subject to the donor’s AGI limits (discussed below).

Under 170(e), both the identity of the charitable donee and the nature of the contributed property are significant in determining the reduction, if any, from fair market value required in calculating the charitable deduction for a gift of appreciated property.

Example: Donor A and B each have stock with a basis of $20,000 and a current fair market value of $50,000.

If Donor A sells the stock and then donates the cash proceeds, Donor A will end up paying $7,140 in capital gains tax and the Medicare surtax (23.8%). The $50,000 cash is thereby reduced to $42,860. Donor A, however, thereafter contributed $42,860 to a charitable organization and received income tax savings in the amount of $15,858 (37% x $42,860).

Alternatively, Donor B donated the stock, in kind, directly to the charitable organization, as opposed to selling the stock and gifting the cash proceeds. Donor B does not have to report or pay any capital gains tax, and therefore the net amount contributed to the charitable organization is $50,000. Furthermore, because Donor B contributed a larger sum to the charitable organization, Donor B received income tax savings in the amount of $18,500. Donor B was able to receive a greater tax deduction, and was able to donate more to the charitable organization.

Bargain Sale

A bargain sale is a transfer of property to a charitable organization in exchange for consideration that is less than the fair market value of the property. For tax purposes, a bargain sale is treated in part as a charitable contribution and in part as a sale or exchange of property (Treas. Reg. § 1.170A-4(c)(2)(ii)).

Bargain sales are attractive to taxpayers that (1) desire to make a gift to the charity, or (2) are unwilling or unable to wait until a full fair market value offer on the property is received. Furthermore, for persons that are rebalancing their investment portfolio, a part gift, part sale can be utilized to offset gains in the same tax year.

Gift Portion – The gift portion of the bargain sale is equal to the excess of the fair market value of the property reduced by the purchase price paid by the charity (Kirscheten & Freitag, BNA Tax Management Portfolio, 521-4^th, “Charitable Contributions: Income Tax Aspects” at p. A-62).

The gift portion is deductible under Section 170 as a charitable contribution, subject to the percentage limitations and other restrictions (Treas. Reg. § 1.170A-4(c)(2)(i)).

Sale Portion – The sale portion of a bargain sale is governed by the general rules pertaining to property dispositions, under which gain or loss is determined with reference to the difference between the amount realized and the adjusted basis of the property (IRC § 1011).

The basis for determining gain on the sale portion of a bargain is calculated pursuant to § 1011(b) (Treas. Reg. § 1.1011-2(a)(1)).

If a deduction is allowable under Section 170 with respect to a sale, the adjusted basis for determining gain from the sale is that portion of the adjusted basis that bears the same ratio to the adjusted basis as the purchase price bears to the fair market value of the property (IRC § 1011(b); Treas. Reg. § 1.1011-2(b)).

If a contribution is not deductible in the year of the sale due to the percentage limitations but the contribution can be carried over to succeeding years, the bargain sale rules apply regardless of whether the amount carried forward is actually deducted in the subsequent years (Treas. Reg. § 1.1011-2(a)(2)).

Encumbered Property – a transfer to a charity of property subject to an indebtedness is treated as a sale or exchange in which the donor receives consideration equal to the amount of the indebtedness (Treas. Reg. § 1.1011-2(a)(3)).

Therefore, if the value of the property exceeds the encumbrance, a contribution of encumbered property is treated like a bargain sale of the property to the donee.

A contribution of encumbered property is treated as a bargain sale even if the donee does not agree to assume the debt (Treas. Reg. § 1.1011-2(a)(3)).

Example 1: Taxpayer has a property free and clear of any debts. The taxpayer has owned the property for more than one year. The fair market value of the property is $100,000 and the taxpayer’s adjusted basis is $60,000. The taxpayer sells the property to a charitable organization for $60,000 (the “sales price” or “SP”).

We know this is a bargain sale because the charitable organization paid less than FMV. The key is that even though the taxpayer may not think there is a gain, because the taxpayer sold it for the taxpayer’s basis, for a bargain sale, part of the basis is allocated to the gift portion, which results in a gain on the sale.

Gift calculation: FMV ($100,000) – SP ($60,000) = $40,000 gift
Allocated Basis to Determine Gain on Sale: (SP/FMV) x AB
($60,000/$100,000) x $60,000 = $36,000

Long Term Capital Gain Recognized on Sale by Taxpayer:
SP ($60,000) – Allocated Basis ($36,000) = $24,000

Example 2: Taxpayer has a property with a $10,000 mortgage. The taxpayer has owned the property for more than one year. The fair market value of the property is $25,000 and the taxpayer’s adjusted basis is $15,000. The taxpayer gives the property to the charitable organization.

Gift calculation: FMV ($25,000) – Debt Treated as Amount Realized ($10,000) = $15,000
Adjusted Basis Allocated to the Sale: (Debt/FMV) x AB
($10,000/$25,000) x $15,000 = $6,000

Long Term Capital Gain Recognized on Sale by Taxpayer
$10,000 - $6,000 = $4,000

Takeaways: (1) the gift is net of liabilities, and (2) the taxpayer recognizes gain on the fact that the taxpayer no longer has a liability to pay on.

Adjusted Gross Income Limits

A donor’s charitable deduction is limited in a taxable year to 20%, 30%, 50%, or 60% of the donor’s contribution based which depends on the character of the property donated in the tax year, as well as the federal tax status of the organization which received the donation (IRC § 170(b)).

Contribution base is defined as the adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under Section 172). IRC § 170(b)(1)(H)

Generally, however, the percentage limitations do not apply for most persons making contributions, and really only come in to the discussion where a donor makes a substantial gift or where the donor’s gross income is rather low in comparison to the donation made. With all the percentage limitations, the excess amounts can be carried over for the next five years.

Percentage Limitations:

Sixty Percent (60%) - Taxpayer’s contributions for the taxable year are cash only (IRC § 170(b)(1)(G)(i)).
Fifty Percent (50%) - Aggregate contributions to public charities, private operating foundations and some private non-operating foundations may not exceed 50% of the contribution base (IRC § 170(b)(1)(A)).
Thirty Percent (30%) - Contributions to semi-public charities and private foundations and to contributions “for the use of” any charitable organizations (IRC § 170(b)(1)(B)), as well as contributions of capital gain property to public charities (IRC § 170(b)(1)(C)).
The 30% limitation only applies to capital gains property if the taxpayer wants to deduct the fair market value of the property, otherwise, the taxpayer could elect to deduct only the taxpayer’s basis which would fall under the 50% limitation (IRC § 170(b)(1)(C)).
Maximum deduction allowable is equal to the lessor of: (1) 30% of the taxpayer’s contribution base; or (2) the amount of the taxpayer’s 50% limitation remaining after the taxpayer’s contributions to public charities are considered (IRC § 170(b)(1)(B)).
Twenty Percent (20%) -Contributions of appreciated property to semi-pubic charities and private foundations (IRC § 170(b)(1)(D)).

Order of Priority for Blended Donations

To determine which limitation applies, Section 170(b)(1)(G) is applied first and cash contributions are not taking into consideration for purposes of applying the Section 170(b)(1)(A), the 50% limitation (IRC § 170(b)(1)(G)(ii)).

Cash Contributions – where the cash contribution exhausts the overall 50% deduction, cash contributions may defer 50%, 30% and 20% limited contributions to the five years immediately following (IRC § 170(d)(1)).

Contributions are considered in the following order: cash contributions, contributions to public charities, contributions to semi-public charities and private foundations.

If a donor exceeded the limitation for donations of appreciated property to public charities, no 20% contributions will be allowed in that tax year.

Example: Donor’s AGI is $100,000. In 2022, Donor makes contributions of cash ($40,000) and long-term appreciated property ($20,000).

Donor can deduct all $40,000 for the cash donation, but can only deduct $10,000 for the long-term appreciated property.

The deduction for the long-term appreciated property is limited to $10,000 because of the 50% AGI limit within which the 30% limitation applied and has been reduced to $10,000 by the 40% cash contribution. 50% limitation is $50,000 minus the $40,000 cash contribution, leaving $10,000 of the 30% limitation contribution that will carry forward to the next year (or years).

Similarly, if it was a $60,000 cash gift, none of the long-term gain contribution will be applied to 2022, but the full $20,000 of the 30% limitation will carry forward.

Substantiation and Disclosure Requirements

To ensure taxpayers are reporting the actual value of the property donated, the IRS promulgated substantiation and disclosure requirements, and to provide documentation for such with the return or at least keep documentation in the taxpayer’s records. How a taxpayer substantiates the contribution depends on the value and the type of property donated.

Section 170(a)(1) specifically states that “[a] charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.”

Monetary Gifts

For monetary gifts less than $250, the taxpayer may substantiate the deduction with a bank record, or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution (IRS Publication 1771 (Rev. 3-2016)).

Payroll Deductions – donor may use a pledge card along with a pay stub, Form W-2, or other employer prepared document that shows the amount withheld and paid to a charitable organization.

Under Section 170(a)(2) of the IRC, a monetary charitable contribution deduction is not allowed for any contribution of $250 or more unless the donor substantiates the contribution with a contemporaneous written acknowledgment by the donee.

The Written Acknowledgment (including email) – A donor cannot claim the tax deduction without a written acknowledgement. The acknowledgment is required to state that the donor did not receive any consideration in exchange for the contribution (IRC § 170(f)(8)(B)(ii)).

The written acknowledgement must include the following information:

The name of the organization
The amount of the cash contribution
A description (but not the value) of non-cash contribution
A statement that no goods or services were provided by the organization in return for the contribution, if applicable.
A description and good faith estimate of the value of the goods or serves, if any, that an organization provided in return for the contribution.
A statement that goods or serves, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if applicable (IRS Publication 1771 (Rev. 3-2016)).

The deadline for the donor to receive the written acknowledgment to substantiate the contribution is the earlier of (1) the date the donor files the original return or the applicable year; or (2) the due date, including extensions, for filing the donor’s original return (Treas. Reg. § 1.170A-15(c)).

The donor need not attach the receipt to the donor’s return, but must keep it as part of the donor’s records. Furthermore, a separate acknowledgement is needed for each single contribution of $250 or more. Separate contributions of less than $250 will not be aggregated.

Goods and Services:

Less than $250 - the donor is required to maintain a receipt in the donor’s record, similar to the written acknowledgment for monetary gifts, with the exception that the receipt must include a description of the property, including a reasonable estimate of the property’s fair market value (See Treas. Reg. § 1.170A-16(a); IRS Publication 1771 (Rev. 3-2016)).

More than $250 but less than or equal to $500 – Deduction is not allowed unless substantiated with a written acknowledgment (See Treas. Reg. § 1.170A-16(b)).

More than $250 but less than or equal to $5,000 (See Treas. Reg. § 1.170A-16(c)):

Written acknowledgment is required.

Must complete Form 8283 (Section A), “Noncash Charitable Contribution” and file it with the return for the applicable year and carryforward years (See Treas. Reg. § 1.170A-16(f)(3)), if applicable. Section A requires the following information about the contributed property:

A description of the property;
For real and tangible personal property, the condition of the property;
For securities, the name of the issuer, type of security and whether the security is publicly traded;
Fair market value on the date of the contribution and the method used to determine fair market value;
Manner of acquisition and approximate date of acquisition of the property by the donor, or if created by the donor, the date the property was substantially completed; for a security, a statement that the donor held the security for more than one year is sufficient;
The cost or other basis, as adjusted by Section 1016, of the property, unless the donor elected to limit the deduction to basis;
For tangible personal property, whether the donee has certified it for a use related to the organization’s charitable purpose or for government units, public purpose; and
Any other information that may be required by Form 8283 (Section A) or the instructions thereto (See Treas. Reg. § 1.170A-16(c)(2)-(3)).

More than $5,000 (See Treas. Reg. § 1.170A-16(d))

Requires written acknowledgment; Must obtain a qualified appraisal unless an exception applies. A qualified appraisal is not required and Form 8283 Section A will meet the requirements for contributions greater than $5,000 for contributions of (1) publicly traded securities, (2) certain intellectual property; (3) a qualified vehicle; and (4) inventory and property held by the donor primarily for sale to customers in the donor’s ordinary course of business. See Treas. Reg. § 1.170A-16(d)(2).

Complete Form 8283 (Section B) and file it with the return for the applicable year and any carryforward years (See Treas. Reg. § 1.170A-16(f)(3)).

Section B requires the same information as Section A, however, Section B also requires identifying information about the donor, information about the donee and the donee’s signature, the appraiser’s personal information and appraiser declaration with the appraiser’s signature, and an explanation of whether the contribution was part of a bargain sale and the details of the transaction.

The purpose of the donee’s signature is to show that the done acknowledged receipt of the property on the date indicated and that the donee understands the donee’s information reporting requirements as well. See Treas. Reg. § 1.170A-16(d)(5)(ii).

Treas. Reg. § 1.170A-16(d)(4) provides the language to be used for the appraiser declaration. Specifically, the appraiser must acknowledge that the appraisal is being used to substantiate the value of the property which a donor is claiming a deduction, and acknowledging that the appraiser could be subject to penalty if the value is grossly misstated.

More than $500,000 (Treas. Reg. § 1.170A-16(e))

All requirements for contributions more than $5,000 apply, however, for contributions more than $500,000 the qualified appraisal must be attached to the donor’s return.

Additional Substantiation Rules: Generally, a separate Form 8283 must be filed for each contribution, except the donor may attach a single Form 8283 for all similar items of property as long as the information required is provided for each item of property. Treas. Reg. § 1.170A-13(c)(7)(iii) defines “similar items of property”; and Treas. Reg. § 1.170A-16(f)(2)(ii).

For determining which threshold applies for substantiation requirements, the donor must aggregate the amount claimed as a deduction for all similar items of property (Treas. Reg. § 1.170A-16(f)(5)(ii)).

Authors: Jeffrey D. Scibetta and Kenzie P. Ryback

Originally published in October 2022