Is your favorite nonprofit up-to-date on requirements for the federal income tax charitable deduction? You want to be able to ensure your donation maximize benefits for both you as a donor and the charity. Consider the following considerations and requirements.

Save $$$ and help your favorite charities even more

I always say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.

A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. The out-of-pocket cost of your charitable gift is reduced by your tax savings.

Break it Down: Tax Savings

For a discussion of tax brackets, see my post called bracketology. In short, currently there are seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Because the U.S. has a progressive federal tax system you’re going to fall into one of those brackets.

The charitable deduction can result in significant tax savings. For example, let’s say a donor in the 33% tax bracket gives to her favorite qualified charitable organization a donation of $100. The charity still receives the full gift of $100. But, for the donor the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.

Let’s take this example and apply it to all tax brackets and see the savings which result:

federal income tax deduction table

This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?

Well, the charitable deduction requires you to be organized in your giving and maintain records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep.

man typing on computer

Basics of Substantiation of your Charitable Deduction

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement from the donee
  • Total deductions for all property exceeds $500 — you need to file IRS Form 8283
  • Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

Wait, you ask, is it really that simple? Actually, no, not really. For the sake of your favorite nonprofit, let’s go through these categories and dig deeper.

Substantiation requirements for monetary gifts less than $250

A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates 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.

Meaning of “monetary gift”

For this purpose, the term “monetary gift” includes, of course, gifts of cash or by check. But monetary gift also includes gifts by use of:

  • credit card;
  • electronic fund transfer;
  • online payment service;
  • payroll deduction; or
  • transfer of a gift card redeemable for cash.

wallet with cards

Meaning of “bank record”

Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee (charity). The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.

Meaning of “written communication”

The term “written communication” includes email. Presumably it also includes text messages. The written communication, whether paper or electronic, must show:

  • the name of the donee;
  • the date of the contribution; and
  • the amount of the contribution.

Substantiation of gifts of $250 or more

For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement” both have very specific meanings to the IRS in this context

Requirements of written acknowledgment

The written acknowledgment must include:

  1. The date of the gift and the charity’s name and location.
  2. Whether the gift was cash or a description of the noncash gift.
  3. A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
  4. A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
  5. A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

“Contemporaneous”

For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.

Non-cash Gifts of More than $500

If you make a total of more than $500 worth of noncash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.

You’ll only have to fill out Section A of Form 8283 if:

  • the gifts are worth less than $5,000, or
  • you’re giving publicly traded securities (even if they’re worth more than $5,000).

Otherwise you’ll be required to fill out Section B of Form 8283 and all that entails.

yellow flower in hands

Non-cash gifts of more than $5,000

If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, Non-cash Charitable Contributions.

An appraisal is required whether you donate one big item or several “similar items” that have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.

Requirements for “qualified appraisal” and “qualified appraiser”

Again, non-cash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.

Qualified Appraisal

A qualified appraisal is a document which is:

  1. made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
  2. timely;
  3. does not involve prohibited appraisal fees; and
  4. includes certain and specific information.

Let’s further examine each of these four requirements:

Qualified Appraiser

Appraiser education and experience requirements

An appraiser is treated as having met the minimum education and experience requirements if s/he is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.

Further requirements for a qualified appraiser include that s/he:

  1. regularly performs appraisals for compensation;
  2. demonstrate verifiable education and experience in valuing the type of property subject to the appraisal;
  3. understands s/he may be subject to penalties for aiding and abetting the understatement of tax; and
  4. not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.

Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:

  1. the donor;
  2. the donee;
  3. the person from whom the donor acquired the property [with limited exceptions];
  4. any person employed by, or related to, any of the above; and/or
  5. an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.
Timing of appraisal

The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions).

Prohibited appraisal fees

The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.

Specific information required in appraisal

Specific information must be included in an appraisal, including:

  1. a description of the property;
  2. the physical condition of any tangible property;
  3. the date (or expected date) of the gift;
  4. any restrictions relating to the charity’s use or disposition of the property;
  5. the name, address, and taxpayer identification number of the qualified appraiser;
  6. the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
  7. a statement that the appraisal was prepared for income tax purposes;
  8. the date (or dates) on which the property was valued;
  9. the appraised FMV on the date (or expected date) of contribution;
  10. the method of valuation used to determine FMV;
  11. the specific basis for the valuation, such as any specific comparable sales transaction; and
  12. an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.
Appraiser’s dated signature and declaration

Again, a qualified appraisal must be signed and dated by the appraiser.  Also, there must be a written declaration from the appraiser she is aware of the penalties for substantial or gross valuation

The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Also, all Iowans are unique, so be sure to contact the appropriate tax professional for personal advice and counsel.

calligraphy pen on white paper

All of this can be, well, a lot. Don’t hesitate to contact me for nonprofit staff and board training on charitable giving basics! Whether you’re on the board of directors, are a nonprofit employee, or are a dedicated volunteer, your favorite nonprofit MUST have these rules down cold, and be able to communicate with donors about them. Contact me now to schedule training on charitable giving basics for your board and staff.

Blue journal on desk

Estate planning can be a huge relief for you and your loved ones. A quality estate plan means a sense of security that your family and other important people in your life will be provided for at the time of your death.

You’ve worked hard for what you have, but the saying is all too true: you cannot take it with you when you die. So, you may as well pass along your assets through an airtight estate plan to people you care about, as opposed to the government.

To that point, there are important, not-so-obvious benefits of an estate plan, such as avoidance of specific taxes and fees.

 

Person holding phone at table

Here are several ways to get the best benefits out of your estate planning:

Federal estate tax 

The federal estate tax applies to high net worth individuals; for 2018 the estate tax exemption is $11.2 million/individual (up from $5.49 million in 2017 due to the new tax law). What does that mean exactly? It means that any one individual could leave up to that amount to heirs and pay no federal estate tax. For married couples, the limit is $22.4 million. These are important rates to know because estate taxes can be as high as 40 percent. (Which is pretty harsh!) The good news is that smart estate planning strategies exist to legally avoid the federal estate tax.

Customized estate planning

Without a customized estate plan, you and your estate may end up paying more in the long run in professional fees, court costs, and taxes. A customized estate plan is essentially a thorough plan that takes these potential future charges into consideration. It includes elements such as a managed distributions, which can help alleviate much of the tax burden on your beneficiaries.

A customized, smart, up-to-date estate plan can mean your estate avoids court costs almost entirely. Optimally you want to avoid the worst case scenario (aka litigation) with certain estate planning provisions.

 

Professional fees can include costs for services provided by accountants and lawyers. Using a flat rate with an attorney will be much more straightforward and to your long-term economic advantage. Why? Paying someone on the front end means less work and hassle down the road when your family is coping with your passing.

Allocating charitable contributions 

This is my favorite strategy for avoiding a large brunt of taxes and fees. Mutually beneficial for both nonprofit organizations and estate beneficiaries, charitable contributions are a way to secure a lasting legacy, make a tangible community difference on the way out, and secure helpful tax deductions.

There is no one-size-fits-all approach to estate planning, and a legal professional can help you identify financial advantages and benefits. (Yet another reason why you need a reputable attorney to craft your estate plan.)

Have questions? Need more information?

Click here to download my free, no-obligation Estate Plan Questionnaire or feel free to reach out any time. You can contact me by email at Gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077.

Dandelion blowing in wind

If a charitable contribution is made to a foreign organization, the donor generally cannot deduct the contribution for income tax purposes. Exceptions may apply in very limited situations; specifically, the U.S. has tax treaties with Canada, Israel, and Mexico. Generally, though, if the donee is a foreign charitable organization an income tax deduction is unavailable. Interestingly enough, both the estate and gift tax charitable deductions are available for gifts to foreign charitable organizations.

So, assume Jill Donor wants to help Charity X, which is organized and operated in Paris, France. If Donor made the gift during lifetime then no income tax deduction would be allowed because gifts to foreign charities normally are not deductible for federal income tax purposes. Note, however, that the lifetime gift removes the asset from Jill’s estate, so the gift would have the same effect as a charitable bequest from Donor’s will.

 

Woman looking out from balcony in Paris

It is important to know where the charity is organized and operated. If the organization is operated organized in a foreign nation – such as our example charity organized and operated in Paris, France – donations to such organizations are not eligible for the federal income tax deduction. This is true regardless if donations to a similar organization in the U.S.–such as a similar organization organized and operated in Paris, Texas–would be eligible.

A donor in doubt about a deduction can seek information from the charity, of course. And, a donor can search for the charity using the IRS’ “Select Check” online search tool.

Of course, if concerned about deductibility, a potential donor should also seek advice from a professional advisor. I’m happy to help, so don’t hesitate to reach out via email (gordon@gordonfischerlawfirm.com) or by phone (515-371-6077) if you’re considering making a donation to a foreign-based charity.

I’m excited to present an upcoming Expert Edge Seminar hosted by the Iowa City Area Chamber of Commerce. The presentation topic, Succession Success: Business Planning in Six Simple Steps, is super important and relevant for entrepreneurs and business owners. 

Iowa City Area Chamber of Commerce Logo

Why? Because taking calculated risks in business is often smart, but taking risks with the future of your business is a gamble you don’t want to chance.

Business owners should certainly have a personal estate plan, but also a business succession plan as well.

Through my practice I’ve worked with many business owners (and nonprofit leaders) on the “what, why, and how” of planning for a lasting legacy. My (interesting, engaging, and not boring) presentation will include the important elements:

  • What is a “business will?”
  • Why do you need a business succession plan?
  • How can your small business support your favorite charities and your retirement simultaneously?
  • Six essential steps for succession success

Take some time out of your work day to invest in your future; I would love to see you at the presentation on Wednesday September 13, 11:30 a.m.-1 p.m. The cost includes lunch and is $15 for members and $25 for non-members. The location will be at the beautiful BioVentures Center, 2500 Crosspark Road, Coralville.

Definitely save your spot for what should be an informative, interesting, and even fun lunch hour. Click here to register on the Iowa City Chamber of Commerce website.

Power of attorney signing

The September issue of The Iowa Lawyer magazine is out, including my piece on the practical application of Iowa’s new succession planning rule for lawyers and law firms. The article is part of a series of four that will run in subsequent issues. This month’s ISBA publication also includes features on: State Court Administrator David Boyd, who is retiring after 40 years with the Iowa Judicial Branch; the opioid epidemic in the legal profession; challenging excessive court fees in probate; and, tips for pre-mediation planning.

Iowa Lawyer front of magazine

The Iowa Lawyer is the Iowa State Bar Association’s official publication. The magazine features information on legal developments, legislative news, Bar history, “views from the bench,” profiles of legal community leaders, and ISBA events.

If you would like to read my article, click here and scroll to page 18. I would love to hear your thoughts and feedback on the piece either in the comments below, or via email at gordon@gordonfischerlawfirm.com.

Football

This upcoming weekend college football fans in Iowa will all seem to converge in the annual colossal clash of Hawkeyes versus Cyclones. (It’s a tradition that dates back to 1977 and has been extended through 2023.) Even the University of Northern Iowa fans tend to take sides in this match-up that has the energy of a statewide holiday.

cyclones vs. hawkeyes

Talking tailgating and reviewing the predictions got me thinking that although this game is huge in the ongoing (usually fun) banter battle between Iowa and ISU fans (and coaches), it represents just a small part of the season. Both teams endure grueling pre-season training and both have a long regular season ahead of them, not even counting any playoff games. Plus, a lot can happen over the course of a football team’s season. Star players can get hurt, strategies can change, and unexpected variables get tossed into the mix. But, great coaches have solid plans in place for when the game changes.

And, that’s why if you can understand even the basics of football you can understand estate planning!

Just like every football season eventually comes to an end, your (hopefully long and healthy) season will also come to a close. When it does, you need a special kind of playbook for the rest of your team…AKA an estate plan. In this analogy an experienced lawyer is the great coach who is going to help you put plans in place for when the game changes unexpectedly or the stadium lights turn off for the last time. And, just like so much can change over the course of a season, a lot will happen over the course of your lifetime. That’s where annual reviews and revisions after significant events fit in.

football stadium

While it is often difficult for people to ponder their unavoidable exit off their own fictitious field, preparation for what happens after your season is over can be one of the most comforting aspects of financial and legal planning.

The Main Players

Let’s take this analogy a bit further and put some estate planning terms into football speak.

  1. Estate – An estate is the whole playbook, containing the following documents: your will; healthcare power of attorney; financial power of attorney; disposition of personal property; and final disposition of remains. (Go more in depth with this blog post.)
  1. Will – A will deals primarily with the distribution of assets and care for minor children. You need to make certain the will is well drafted, solid, and can stand up in court. Keep in mind though, important assets such as a life insurance policy payouts, retirement assets, and investment accounts may well contain beneficiary designations that trump your will.
  1. Trust – You have lots of different options with this player. A trust can dictate how your assets will be dispersed, the timeline and manner in which they are dispersed, and who’s overseeing the process.

Mid-Season Starting Lineup Adjustments

Just as a coach may switch up who’s starting partway through the season, you’ll may need to make adjustments to your estate plan as things inevitably change over the course of your life. Big events like marriage, birth of a child/grandchild, moving to a different state, a large change in financial status, divorce, and other significant changes are good reason to review your “playbook.”

No ‘I’ in Team

Your loved ones and close friends are all a part of your team; part of being a strong team player is including them on the plays you’re making. Discuss important aspects of your estate plan with the people it involves to avoid any confusion or conflict when it comes times for them to carry out your wishes. For instance, if you have minor children (under age 18) you’re going to want to establish legal guardianship if the worst happens and you’re no longer around to care for them. You’ll want to discuss with your chosen guardians ahead of time to make sure they’re willing and available to carry out the responsibility.

referee

Final Score

There are probably at least a few more good football analogies I could tie into the conversation of why you need an estate plan, but the most important takeaway is that you never know when the game is going to change. So, you need to have your “playbook” written out ASAP. The best place to start is with my free, no obligation Estate Plan Questionnaire. You can also shoot me an email or give me a call at 515-371-6077 to discuss your situation (or football).

Gordon Fischer working hard to make sure a proper estate plan is in place for you and your family