Deductions (Loans/Donations)

Charitable giving not only supports those in need but also can provide financial benefits in the form of tax deductions. However, maximizing these benefits while staying compliant with IRS regulations requires careful planning and understanding. Learn how to best ensure you get full credit for your charitable donations, covering the importance of receipts, understanding what constitutes a charitable donation, and the various types of donations you can make.

Securing and Managing Donation Receipts

One of the most crucial steps in ensuring you receive full credit for your charitable donations is obtaining and properly managing donation receipts. Regardless of the donation size, always ask for a receipt that includes the charity's name, the date of the donation, and the amount or description of the donated item. For non-cash donations, the receipt should also detail the condition of the items donated, as this can affect the valuation. Develop a system for organizing these receipts, such as a dedicated folder or digital storage, to simplify your record-keeping and make tax preparation easier.

Understanding Eligible Charitable Donations

To make the most of your charitable contributions from a tax perspective, it's essential to understand what qualifies as a deductible donation. Generally, contributions must be made to qualified organizations with a 501(c)(3) status, as designated by the IRS. This includes a wide range of entities such as religious organizations, educational institutions, and public charities. Donations made directly to individuals, political campaigns, or for-profit organizations do not qualify for tax deductions.

Types of Donations

Monetary Contributions - The simplest form of charitable giving, monetary donations can be made via cash, check, or credit card. Ensuring you receive a receipt for these donations, especially for any single contribution of $250 or more, is vital for tax deduction purposes.

Non-Cash Donations - Items such as clothing, furniture, and other goods can be donated to charity, and their fair market value at the time of donation is generally deductible. However, special rules apply for items of significant value, making proper valuation and documentation crucial.

Stocks and Securities - Donating stocks or securities that have appreciated in value can be particularly tax-efficient. Not only can you deduct the fair market value of the securities, but you also avoid paying capital gains tax on the appreciation. Ensure that the transfer of securities is directly to the charity and obtain a receipt that acknowledges the donation.

Real Estate and Other Assets - Donating real estate or other valuable assets can offer substantial tax deductions. However, these types of donations require careful appraisal and documentation, often involving more complex IRS forms and potentially legal assistance.

Timing of Donations

The timing of your donations can significantly impact your tax return. Contributions are generally deductible in the year they are made, so planning your donations towards the end of the year can be beneficial if you're looking to increase your deductions for a specific tax year. Keep in mind that donations charged to a credit card before the end of the year count for that year, even if the credit card bill isn't paid until the next year.

Understanding Donation Limits

While charitable giving can reduce your taxable income, there are limits to how much you can deduct. Generally, you can deduct donations up to 60% of your adjusted gross income (AGI) for cash contributions to public charities, but lower limits may apply depending on the type of donation and the organization. Being aware of these limits can help you plan your charitable giving strategy effectively. Talk to your CPA for details.

Leveraging Donor-Advised Funds

For those who wish to make significant charitable contributions but want to spread the actual distribution of funds over several years, a donor-advised fund (DAF) can be a strategic option. Contributions to a DAF are deductible in the year they are made, allowing you to receive an immediate tax benefit while deciding over time how to allocate the funds among your chosen charities.

Appraisal Requirements for Large Non-Cash Donations

For non-cash donations valued over $5,000, except publicly traded securities, obtaining a qualified appraisal is necessary to substantiate the claimed value for tax purposes. This appraisal must be attached to your tax return, along with a completed Form 8283 (Noncash Charitable Contributions).

Consulting with a Tax Professional

Given the complexities surrounding charitable donation deductions, consulting with a tax professional can be invaluable. A CPA or tax advisor can provide personalized advice based on your financial situation, helping you navigate the nuances of tax laws and ensuring you maximize your deductions while remaining compliant with IRS regulations.

Why Charitable Donations Matter

Making charitable donations is a powerful way to contribute to causes you care about, support communities in need, and drive positive change in society. Beyond the altruistic and societal benefits, charitable giving can also offer personal satisfaction and potential tax advantages. 

Finding Eligible Organizations

Before donating, it's crucial to ensure that your contributions go to reputable and effective organizations. Verifying an organization's legitimacy and tax-exempt status can be easily done through the IRS's "Tax Exempt Organization Search" tool online, which lists all registered 501(c)(3) nonprofits. Additionally, websites like Charity Navigator, GuideStar, and the Better Business Bureau's Wise Giving Alliance provide detailed evaluations of charities, including their financial health, accountability, and transparency. To find organizations that align with your values and interests, consider exploring these platforms or participating in community forums and social media groups focused on philanthropy. These resources can help you discover causes that resonate with you and/or your employees, whether you're passionate about environmental conservation, education, human rights, or any other area where your donation can make a significant impact.

Charitable giving is a worthy practice that benefits both the giver and the recipient. By understanding the tax implications and strategies for maximizing the benefits of your charitable contributions, you can ensure that you receive all the credit you deserve while supporting the causes important to you. Proper documentation, awareness of IRS regulations, strategic planning, and professional advice are key to making the most of your charitable donations from a financial perspective.

by Kate Supino

Did you know that you can make charitable contributions as a business as well as donating as an individual? If not, you’ve been missing out on a great opportunity to get a tax deduction. Of course, if you use a professional CPA you’ve likely already been advised about the benefit of donating. But the tax break is only one aspect of donating. The better part of the deal is the feeling of giving to an organization that is dedicated to helping the less fortunate. Unfortunately, not all charitable causes are worthy. Here’s a guide to choosing worthy charitable causes in 2022.

Decide What You Care About

There are thousands of charities to choose from. This gives you ample opportunity to give to causes that you feel personally connected to. For instance, if you love animals, you might donate to an animal shelter or an animal sanctuary. If one of your parents suffers from dementia, you might like to donate to an Alzheimers research center or a long-term care facility that has non-profit status. The point is, figure out what matters to you and then you can start to narrow down possibilities.

Decide How to Disburse Contribution

You don’t have to donate all of your contribution to just one cause, either. You can choose to distribute the money across several organizations equally, or give the bulk to one and then the rest individually. You can also donate monthly. You could, for instance, make a business pledge to donate 2% of each month’s profits to a charitable cause. This can help smaller business to make the donations that they deem important without trying to handle a bulk sum in one month.

Think Local

When thinking about charitable causes, most people automatically think about national organizations like the American Cancer Society, the SPCA and more. But consider that you might be able to effect more dramatic change by donating locally. Almost every little town across the country has its own charitable causes. Maybe it’s a small office that helps the mentally ill, or one that helps vets find jobs, or one that keeps animals out of kill shelters. These little non-profits need a lot more help than the larger charities that get national media coverage. Wouldn’t it be nice to see your local women’s shelter stay open another year due to your small business donation? You might get more personal satisfaction out of seeing for yourself the impact you can make.

Consider How the Funds Will be Used

Charities use donation money in different ways. Some charitable organizations have very high administrative costs They may pay employees high salaries and use only a small percentage of donations to actually help those on their mission statement. Before donating, take a look at the financial documents of the organization. This will give you a clear picture of how much of your donation will actually go toward your chosen cause. If you can’t understand or don’t have the time to read these documents, ask your CPA to help you choose among a select few that you’re interested in.

Rely on Charity Watchdogs

There are organizations that oversee charitable organizations in a non-official way. These organizations provide insight into how the charity operates, if there are complaints against it and how much help the charity has provided. These “watchdogs” can be very helpful when choosing a worthy charity in 2022. Visit Give.org, CharityWatch.org, and CharityNavigator.org for more information.

How to Find Worthy Charities in 2022

To find a list of possible charities to donate to in 2022, start with some websites. You can look at the sites listed in the previous chapter. You can also try a charity directory, such as GuideStar.org. Another avenue is to visit the website of your local Chamber of Commerce. They may have a list of local charities, even ones that are newer to your area. Also, consider visiting your town hall and asking how local charities are kept track of. If you just want to donate to a national charity, a simple online search for “veteran’s charities” or something similar will also work. You may also consider talking to colleagues, friends and neighbors and letting them know you are researching how best to utilize your donation spend for the year. They may know of some very small local charities that need urgent help.

Be Wary of Pseudo-Charities

Know that, in order to be tax deductible, you need to make sure that your charity of choice has actual tax deductible status. Usually this is in the form of a 501(c)(3) entity. When asked, they should be able to provide you with their tax-exempt status number. In addition, make sure you acquire a written receipt for your donation. If the IRS audits you, you may be asked to present proof of your donation.

Your CPA can be very helpful with your charitable contributions in 2022. Remember, you can also donate unused office equipment so long as it still has some value. If that equipment is still being depreciated, your CPA will need to make certain adjustments on your tax returns. And you still need to get a receipt, with the estimated value of the equipment. The time to start looking at worthy charitable causes is now. The sooner you begin your search, the more care you can take to ensure that the charity you choose is truly worthy.

If you own a small business, you know how important it is to support various charitable causes, both within your own community and throughout the world.  But as you know, there are always changes related to your taxes and how your charitable donations may be done from one year to the next.  As 2021 begins, it is important for you to be aware of several changes to charitable donations, some of which have been done so via the CARES Act passed by Congress in 2020.  If you are a small business owner and make it a priority to provide charitable donations each year, here is what you need to know going forward in 2021.

The Basics

As part of the year-end spending package that was passed by Congress at the end of 2020, the basics involved for charitable donations focus mostly on two major tax changes related to charitable giving.  In essence, these changes will boost the tax deductions charitable donors can take, allowing them to make larger donations to charities while doing so at a lower net cost.  However, donors must also be aware that if the value of charitable gifts is overstated on tax returns, IRS penalties have been greatly increased for doing so. 

Above the Line Tax Deduction

The first important change for small business charitable donations in 2021 is the above the line tax deduction.  This deduction, both an extension and enhancement of the tax break Congress enacted with the CARES Act, allows individuals to take a tax deduction for cash gifts made to charities of up to $300.  For married couples who file jointly, they can receive double the deduction in 2021 if they make cash gifts of at least $600 to charity.  This marks a change from 2020, when this deduction was only $300 per tax return.  However, charitable gifts made to private donations or donor-advised funds are not covered by this provision. 

Why This Change is Important 

While to some this change may not sound extremely important, it is considered to be a major change in how it will impact the amount of money donated to charitable causes in 2021.  When tax laws were changed in 2017, the result was far fewer people choosing to itemize their deductions, in particular the gifts they made to charity.  Yet with this change, the above the line deduction will now allow those who do not itemize on their tax returns the opportunity to take a charitable deduction. 

Reduction of Adjusted Gross Income 

Because this is an above the line deduction, taxpayers will receive additional benefits in 2021.  For example, since the deduction will reduce adjusted gross income, it will thus open up additional tax breaks for which you can take advantage of in tax year 2021.  As an example, a married couple who files jointly in 2021 and provides charitable gifts of $600 will not only get the $600 tax break from this, but will also be able to take the standard deduction of $25,100 for joint filers.  As a result, if a couple is in the 37% tax bracket, they would save as much as $222 in taxes.

Individual and Corporate Givers 

Another change that will have a significant impact in 2021 focuses on those charitable donors, both individual and corporate, who make large-scale donations.  This change, which was put into effect in 2020 under the CARES Act and is extended into 2021, will eliminate the percentage of AGI limits for all charitable deductions.  Thus for individuals, the adjusted gross income limitation of 50% will be eliminated.  For corporations, the change will be an increase from a limitation of 10% to instead 25% of taxable income.

IRS Penalties 

While the above-mentioned changes are considered to be very positive and likely to result in additional giving to charities, those doing so will face much stiffer penalties should they overstate the value of their charitable gifts.  Under new IRS guidelines in 2021, a penalty of 50% of your total deduction will be assessed, which is an increase from only 20% under previous IRS law.

Employers Matching Charitable Gifts 

Now that these changes have taken effect, it is also important to note that any charitable gifts made may also be eligible for matching contributions by employers.  In 2020, employees across the United States contributed over $500 million to charities on their own, which was an increase of 76% from 2019.  However, many companies will restrict the charities to which they will give matching contributions.  In many situations, companies may not provide matching gifts to charities associated with religious organizations as well as colleges or universities. 

Helping the Majority of Taxpayers 

As these changes have taken hold, the end result is that they will be of help to the vast majority of taxpayers, who in past years have chosen to take the standard deduction at tax time rather than choose to itemize their deductions.  If you rely on Form 1040 for your taxes, a new line 10b has been added to the form that allows you to report your donations.  However, remember that the donations must be cash donations, not goods. 

Needless to say, these above-mentioned changes can be complex and confusing to most taxpayers.  As a result, you should never try to make sense of these new regulations on your own.  Instead, it is always best to consult with a CPA who has the necessary experience and knowledge to know how these deductions can benefit you the most when filing your taxes.  Since you naturally want to give as much as possible to the causes you believe in, listen to the advice of your CPA and make sure you receive the tax breaks open to you in 2021.

Before making your next donation to your favorite charity you might want to do some research. Do you really know to whom you’re donating? Do you know the charity’s stated mission? How much of your donation goes toward achieving the charity’s mission? How much of your donation goes toward “overhead” (officer compensation – other than toward the charity’s mission)?

The following press release, published online by the Federal Trade Commission (“FTC”), highlights the importance of getting answers to these questions and learning how to avoid becoming a victim of charity fraud:

The Federal Trade Commission, All 50 States And D.C. Charged Four Cancer Charities With Bilking Over $187 Million From Consumers.

The Complaint Alleges Defendants Falsely Claimed Donations Would Help Pay For Pain Medication, Hospice Care & Other Services; But Spent Donations on Cars, Trips, Sports Tickets, & Professional Fundraisers.

The defendants told donors their money would help cancer patients, including children and women suffering from breast cancer, but the overwhelming majority of donations benefitted only the perpetrators, their families and friends, and fundraisers. This is one of the largest actions brought to date by enforcers against charity fraud.

According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees for non-profit organizations, to portray themselves as legitimate charities with substantial programs. In fact, the complaint alleges that these claims were deceptive and that the charities “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.

How could this have been avoided? Kiplinger provides the following tips that if followed can help avoid falling prey to scams similar to the cancer charities case previously noted.

Hang up on telemarketers. The cancer charities charged with fraud by the FTC used telemarketing calls – as well as direct mail and Web sites – to solicit donations. You should decline any requests to give over the phone, says Leonie Giles, a senior program analyst for Charity Navigator, which evaluates and rates charities. 

Don’t wait for charities to come to you. Browse charities that have been evaluated by Charity Navigator by category – such as education or human services – to identify groups you want to support.

Research before you give. The FTC charges against the four cancer charities shows that just because an organization claims to do good doesn’t mean it actually does. Begin your research with third-party evaluations and ratings at sites such as the Better Business Bureau’s Wise Giving Alliance, Charity Navigator and Charity Watch, which examine charities’ finances, governance and effectiveness.

Never send cash. The FTC recommends making donations by check or credit card for security and tax purposes.

In conclusion, what this blog is saying is BE CAREFUL and ASK lots of questions. Unfortunately, there are dastardly people out there who make a living off those with a kind and giving heart.

A disaster loss is a loss attributed to a casualty occurring in an area declared by the President of the United States to be a disaster area entitled to federal assistance. Thus, in order to qualify as a disaster loss, the loss must also qualify as a casualty. On the flip-side, however, a disaster loss is not a prerequisite to “casualty” status.

Taxpayers who incur losses as a result of a disaster in a presidentially declared disaster area have the option of declaring their loss on their prior year's tax return, thus allowing them to amend the return and receive an immediate refund as a measure of relief. (See “UPDATE” below.) The Federal Emergency Management Agency (“FEMA”) keeps an updated list of all eligible disaster areas and the years for which they qualify. See the updated listing at the FEMA website. Note that during the three year period ending in 2015 there were 258 disaster declarations!

As noted by FEMA, to be tax-deductible, a casualty loss (and disaster loss) must meet the criteria for the “sudden-event” test, which mandates the following:

• The loss must occur as a result of a sudden and unpredictable or unusual event.
• The event must be one that happens in a single instance, so to speak, such as a car accident, and cannot have happened over an extended period of time.
• There must be an element of chance or some sort of natural force involved.

Under this definition, losses due to the following events would qualify for deduction:

• Natural disasters, such as earthquakes, hurricanes, typhoons, tornadoes, floods, fires and avalanches. 
• Losses from civil disturbances, such as riots.

However, there are several types of losses that would not qualify for deduction:

• Those incurred due to long-term processes, such as erosion, drought, decomposition of wood or termite damage.
• Any loss that arises from what the Internal Revenue Agency (IRS) considers to be a "foreseeable" event.
• Losses that arise from negative public perception.

UPDATE - IRS Releases Rules for Deducting Disaster Losses:

On October 13, 2016, Accounting Today reported that in the wake of Hurricane Matthew, the Internal Revenue Service has released new rules and procedures for deducting disaster losses, as follows:

Revenue Procedure 2016-53 contains rules and procedures for the election under Section 165(i) of the Tax Code to deduct a disaster loss for the taxable year immediately preceding the taxable year in which the disaster occurred. The revenue procedure provides the procedures and requirements for making and revoking an election under Section 165(i).

Along with the revenue procedure, the Treasury Department and the IRS issued temporary regulations to extend the date by which a taxpayer must make a Section 165(i) election to six months after the due date of the taxpayer’s federal income tax return for the disaster year (without regard to any extension of time to file).The temporary regulations also extend the time for revoking a Section 165(i) election to 90 days after the due date for making the election.

Conclusion:

There are two key elements needed when qualifying an event as a disaster. First, the event must satisfy the definition of what is a casualty. Second, once the casualty loss definition is satisfied then there needs to be a Presidential declaration that the effected location is entitled to federal assistance.

For ages it has seemed that claiming the home office deduction on your tax return was a sure-fire invitation for an IRS audit. In fact, on many occasions, taxpayers had been advised to forego claiming this deduction even when they seemed to satisfy the IRS requirements to legitimately take the deduction. The IRS’s stance was based on the relative ease and susceptibility of abuse when it came to the home office deduction.

Over time, the IRS has recognized that advancements in technology had evolved to the point where it made it much easier to operate one’s business out of the home, rather than incurring the cost of maintaining a separate office and traveling to and from an offsite location. These advancements have made it easier and rewarding for business owners and employees to perform their profession in an efficient manner out of one’s home.

As US News notes, unlike more obvious deductions, many people aren't sure if they qualify to take the home office deduction. But with the large number of American small businesses based out of an owner's home–including more than half of all small businesses, according to theSmall Business Administration–those who qualify shouldn't hesitate to claim the home office deduction.

There are two approaches available that a taxpayer can follow to calculate a potential home office deduction. The first approach is referred to as the “simplified” option. The second approach is called the “regular” method.

The simplified option, a relatively new approach, can significantly reduce the recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses. Taxpayers using the regular method, instead of the optional method, must determine the actual expenses of their home office. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use, as explained by the IRS.

When you meet the requirements, as noted by Nerd Wallet, you can claim the deduction whether you’re a homeowner or a renter. You can also use the deduction for any type of home where you reside: a single family home, an apartment, a condo or a houseboat.

Requirements to Claim the Deduction

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction, as explained by the IRS:

• Regular and Exclusive Use

  You must regularly use part of your home exclusively for conducting business.

• 
  

  Principal Place of Your Business

  You must show that you use your home as your principal place of business. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use.

The primary authoritative support concerning the valuation and reporting and recordkeeping of charitable donations is addressed in the Internal Revenue Service -- Publications 526 and 561.

Publication 561 focuses on the topic of “Determining The Value Of Donated Property.” Publication 526 addresses basically all other relevant topics of concern regarding Charitable Donations. This article focuses primarily on Charitable Contribution issues other than valuation, such as reporting to the IRS.

Cash Contributions (IRS Topic 506)

For a contribution of cash, check or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the amount, and the date of the contribution. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.

Noncash Charitable Contributions (IRS Topic 506)

You must fill out Form 8283 (PDF), Noncash Charitable Contributions, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return. Special rules apply to donations of certain types of property such as automobiles, inventory and investments that have appreciated in value. For more information, refer to Publication 526, Charitable Contributions. For information on determining the value of your noncash contributions, refer to Publication 561, Determining the Value of Donated Property.

As this CPA Gardens article notes, personal goods given to charity must typically be in good repair or better to qualify as a tax deduction. Any home good or clothing that a tax filer takes as a deduction and exceeds $500 is not required to meet this standard when the tax filer attaches a qualified appraisal of the item with the tax return. Special rules apply to vehicle donations. Unique reporting guidelines usually are applicable to auto contributions, and taxpayers who intend to claim said contributions are required to adhere any mandatory records to their tax return. The deduction for an automobile, sea-craft or airplane given to qualified charities are typically limited to the gross proceeds from its sale. This law is applicable if the total claimed value is greater than $500. Form 1098-C or a similar statement, has to be given to the contributor by the charity and adhered to the contributor's tax return.

The IRS has published the following tips to help ensure your contributions are deductible (IRS Tax Tip 2011-57):

1. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
    
2. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the recordkeeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
    
3. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
    
4. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, refer to Form 8283, as well as Publication 526, Charitable Contributions.

It’s not unusual for a family member to provide financial assistance to another family member by giving the recipient money to meet a need -- i.e. to help purchase a home, pay for medical expenses, etc.

What If You Classify It as a Loan?

The parties might want the transaction be structured as a loan. However, the IRS is known to police such transactions in order to verify that there is no “sham” transaction happening.

One of the terms that the IRS will be looking for is the existence of an interest rate. The IRS will expect to see the presence of an applicable interest rate as well as a pattern of interest that is actually being paid by the creditor. Put another way, the IRS will be looking for substance, not just form, to verify the true existence of a loan.  

In the loan scenario, the recipient, or debtor, gets to claim a deduction for the interest expense he or she paid. The lender, on the other hand, will have to recognize the interest income received from the lender.

What If the IRS Decides It’s Not a Loan?

It is quite possible, however, that upon examination the IRS might discover that the parties did not provide for an interest factor when making the loan. In this case, the IRS will nullify the transaction’s characterization as a loan, and then “reclassify” and treat the transaction as a gift. The tax payers are “forced” to abide by this re-characterization and its consequential tax impact.

What Happens When It’s a Gift, Not a Loan?

In the gift scenario, one party transfers property to another party without payment of full consideration in return. There are no tax consequences to the done; the donee pays no taxes and has no reporting responsibilities.

If the gift is more than $14,000.00, a gift tax return would have to be filed by the giver, and if the gift exceeded the lifetime exclusion of $5.43 million (on gifts made in 2015), then gift tax would have to be paid by the giver. By exceeding the gift tax limit, the giver could end up owing the IRS up to approximately 40% in tax!

Thus, a loan that “backfires” into a gift could end up being a costly gift!

So your friend was in a pinch and you thought they’d be good for it and they weren’t. It’s not all bad; you can lower your taxable income as a result.

Maybe you loaned money to a friend to help with a struggling situation. But now it’s beginning to look like you are never getting paid back.

The IRS is there to help you take the sting out of never seeing that money again. As long as the debt has zero value, you may qualify for a deduction up to $3000.

This is different than an investment. This type of loan is considered a “non-business” bad debt. Non-business bad debt is considered a short-term capital loss. You don’t have to wait until the payment is due to consider it worthless; you just have to be able to prove that there is a qualifying reason that it won’t be repaid. Also, you must claim the deduction in the year that it becomes worthless.

If you need help understanding whether or not you qualify for the deduction, we’ll be happy to help. Everyone has a unique situation and it’s always best to get advice from a professional that understands where you are financially.

Make the most out giving to charity by benefiting from all the available tax breaks you’re entitled to.

Maintaining diligent records is the cornerstone to being eligible for the entire charitable contribution deduction the law entitles you to. This comprises of making sure the IRS has collected the mandatory statements for two donation categories—each donation of a minimum of $250 as well as gifts of vehicles. Tax filers intending to claim charitable contributions should ensure they’ve obtained all records required before filing their taxes.

In order to claim a deduction for a charitable gift, the contributors are required to obtain a receipt from the charitable organization for any and all contributions of $250 or greater. This entails gifts—both money and property. For property donations, the receipt has to contain, as well as other items, a description of the goods donated.

Additionally, the IRS mandates tax filers possess all receipts prior to filing their taxes. These receipts do not get filed with the taxes—however, they are required to be retained by the tax filer in addition to any other tax records.

Also, unique reporting guidelines usually are applicable to auto contributions, and taxpayers who intend to claim said contributions are required to adhere any mandatory records to their tax return. The deduction for an automobile, seacraft or airplane given to qualified charities are typically limited to the gross proceeds from its sale. This law is applicable if the total claimed value is greater than $500. Form 1098-C or a similar statement, has to be given to the contributor by the charity and adhered to the contributor's tax return.

Only contributions to qualifying charities can be tax-deductible. Taxpayers have to additionally be certain any organization they’re donating to is a qualified organization. There are tools available on IRS.gov such as Select Check, which allows you to verify credible organizations that qualify to receive deductible donations. Additionally, places of worship and government agencies qualify even without being listed.

Taxpayers must itemize their deductions on Form 1040 Schedule A to be able to claim charitable donations. Therefore, taxpayers deciding on the standard deduction are not allowed deduct their charitable donations. This also comprises of anybody who files a short form (Form 1040A or 1040EZ).

A tax savings will only be present when the sum total of itemized deductions are in excess of the standard deduction. Use Form 1040, Schedule A to decide if itemizing is more advantageous than taking the standard deduction.

Besides Schedule A, tax filers who donate property to organizations are typically required to adhere a specific form for reporting asset contributions. If the total of the deduction for all asset contributions is greater than $500, a completed Form 8283 will be required.

In addition, specific rules are applicable to charitable donations of home goods, worn clothing, financial donations, and year-end donations.

Below are the rules for charitable contributions of clothing and home goods:

Personal goods given to charity must typically be in good repair or better to qualify as a tax deduction. Any home good or clothing that a tax filer takes as a deduction and exceeds $500 is not required to meet this standard when the tax filer attaches a qualified appraisal of the item with the tax return.

Below are the guidelines for cash contributions:

An individual has to have a bank document or a written statement from the organization to be able to deduct any contribution of money, no matter what the amount. The document must display the name of the organization as well as the total contribution and the date. Bank documents consist of canceled checks, and bank, credit union and credit card statements. Financial institution statements must display the name of the organization, the date, and the total paid. Credit card statements must display the name of the organization, the date, and the date the transaction posted.

Financial gifts consists of those paid by cash or check, electronic funds transfer, credit card and payroll deduction. If taking a deductions from payroll, the tax filer must retain a pay stub, a Form W-2 wage statement or other records provided by the employer displaying the withheld amount for the charity as well as with the pledge card displaying the name of the charitable organization.

Below are the guidelines for year-end gifts

Donations are deductible for the year they were made. Contributions charged to a credit card before the end of the tax year count towards that tax year, regardless of whether or not the credit card bill isn't paid until the following tax year. Also, checks count for the tax year they were postmarked in.