Here is a conversation that I have had with clients many, many times over the past 35 years –
RDF: What can I claim for contributions to church and charity?
Client: Ahhhh – what are you allowed?
RDF: You are allowed whatever you gave.
Client: (looks up at ceiling and then back at me) Ahhhh – same as last year.
Beginning with tax year 2007 this conversation will no longer apply! What I reported in my Friday, September 8th posting bears repeating as we begin 2007:
“Effective with ‘tax years beginning after August 17, 2006’ - for most of us calendar year taxpayers that means beginning with 2007 - you must have a hard-copy receipt for every single dollar you contribute to a church or charity in order to claim a tax deduction on Schedule A that will stand up to IRS audit!
The law effectively says that charitable contribution deductions will not be allowed for any monetary contributions by cash or check unless the donor maintains a record of the contribution. The record must be in the form of an actual cancelled check, a bank record (i.e. a copy of the front of the check included on your monthly bank statement), or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.
The record can also be an entry on a bank or credit card statement indicating a credit or debit card charge.
You can no longer tell the IRS that you put a five or ten dollar bill in the collection plate each week. You must write a check to the church for the $5.00 or $10.00 each week or you must take advantage of the church's ‘envelope’ system, which will provide you with a written receipt at the end of the year.
The law does not say that all contributions of more than $50.00 or more than $100.00 must be documented, like the previous requirement for a written receipt for a single contribution of $250.00 or more. It says that all cash contributions must be documented. So if you give the the DAV a dollar for a poppy you must get a receipt!”
Actually, as I read it, the new rule does not exactly say you cannot deduct an undocumented contribution. However, if you are audited the deduction will not be allowed.
Let’s face it, over the years taxpayers, and some tax preparers, have been, to say the least, “generous” in estimating the deduction for contributions to church and charity. If every dollar ever claimed as a cash contribution on every tax return was actually donated to charity there would be no more hunger, no more homeless, and every disease would have been cured by now!
I remember reading a story – I think it was in a book titled HOW TO C*H*E*A*T ON YOUR TAXES by “X” CPA (I will ignore the urge to comment on the fact that the author of the book was a CPA) from 1983 – about a creative church-going businessman. One Sunday after the service the businessman told the pastor that he was concerned about leaving the loose cash from the collection plate in the church office overnight. He also said that, as a retail store owner, he needed cash for the registers in his store. He had a solution that would benefit both parties. Each Sunday, after the cash in the collection plate was counted, he would write a check to the church and take the cash home for use in his store.
When preparing his 1040 the businessman included the total of the checks written to the church each Sunday for the loose cash as part of his contribution deduction on Schedule A. He wasn’t worried about being audited because he had all the cancelled checks!
Congress has been cracking down on charitable contributions lately - first donations of motor vehicles (cars, motorcycles, boats, etc) and now cash contributions and non-cash contributions of used clothes and household items (after August 17, 2006 only donations of used items in "good" condition can be deducted - Congress has not defined "good").
While audits of charitable contributions have been rare in the past, the IRS may pick up on Congress’ recent concerns and conduct more audits of contributions in the future.
Beginning this year I will be including in my annual January mailing to clients a Contributions Worksheet (along with the Medical Expense Worksheet) and asking clients to write down a total for both cash and non-cash (used clothing, books, household items) contributions for the year. My clients do not need to send actual receipts or provide a detailed listing for cash contributions - I just need numbers.
FYI, I have recently written a special report titled DEDUCTING CONTRIBUTIONS: ALMOST EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT DEDUCTING CONTRIBUTIONS ON YOUR 2006 AND 2007 TAX RETURN. It is a detailed analysis of what you can and cannot deduct as a contribution on Schedule A, and includes all the changes to the rules enacted by the Pension Protection Act of 2006. Check out yesterday’s posting for a special offer.
TTFN
RDF: What can I claim for contributions to church and charity?
Client: Ahhhh – what are you allowed?
RDF: You are allowed whatever you gave.
Client: (looks up at ceiling and then back at me) Ahhhh – same as last year.
Beginning with tax year 2007 this conversation will no longer apply! What I reported in my Friday, September 8th posting bears repeating as we begin 2007:
“Effective with ‘tax years beginning after August 17, 2006’ - for most of us calendar year taxpayers that means beginning with 2007 - you must have a hard-copy receipt for every single dollar you contribute to a church or charity in order to claim a tax deduction on Schedule A that will stand up to IRS audit!
The law effectively says that charitable contribution deductions will not be allowed for any monetary contributions by cash or check unless the donor maintains a record of the contribution. The record must be in the form of an actual cancelled check, a bank record (i.e. a copy of the front of the check included on your monthly bank statement), or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.
The record can also be an entry on a bank or credit card statement indicating a credit or debit card charge.
You can no longer tell the IRS that you put a five or ten dollar bill in the collection plate each week. You must write a check to the church for the $5.00 or $10.00 each week or you must take advantage of the church's ‘envelope’ system, which will provide you with a written receipt at the end of the year.
The law does not say that all contributions of more than $50.00 or more than $100.00 must be documented, like the previous requirement for a written receipt for a single contribution of $250.00 or more. It says that all cash contributions must be documented. So if you give the the DAV a dollar for a poppy you must get a receipt!”
Actually, as I read it, the new rule does not exactly say you cannot deduct an undocumented contribution. However, if you are audited the deduction will not be allowed.
Let’s face it, over the years taxpayers, and some tax preparers, have been, to say the least, “generous” in estimating the deduction for contributions to church and charity. If every dollar ever claimed as a cash contribution on every tax return was actually donated to charity there would be no more hunger, no more homeless, and every disease would have been cured by now!
I remember reading a story – I think it was in a book titled HOW TO C*H*E*A*T ON YOUR TAXES by “X” CPA (I will ignore the urge to comment on the fact that the author of the book was a CPA) from 1983 – about a creative church-going businessman. One Sunday after the service the businessman told the pastor that he was concerned about leaving the loose cash from the collection plate in the church office overnight. He also said that, as a retail store owner, he needed cash for the registers in his store. He had a solution that would benefit both parties. Each Sunday, after the cash in the collection plate was counted, he would write a check to the church and take the cash home for use in his store.
When preparing his 1040 the businessman included the total of the checks written to the church each Sunday for the loose cash as part of his contribution deduction on Schedule A. He wasn’t worried about being audited because he had all the cancelled checks!
Congress has been cracking down on charitable contributions lately - first donations of motor vehicles (cars, motorcycles, boats, etc) and now cash contributions and non-cash contributions of used clothes and household items (after August 17, 2006 only donations of used items in "good" condition can be deducted - Congress has not defined "good").
While audits of charitable contributions have been rare in the past, the IRS may pick up on Congress’ recent concerns and conduct more audits of contributions in the future.
Beginning this year I will be including in my annual January mailing to clients a Contributions Worksheet (along with the Medical Expense Worksheet) and asking clients to write down a total for both cash and non-cash (used clothing, books, household items) contributions for the year. My clients do not need to send actual receipts or provide a detailed listing for cash contributions - I just need numbers.
FYI, I have recently written a special report titled DEDUCTING CONTRIBUTIONS: ALMOST EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT DEDUCTING CONTRIBUTIONS ON YOUR 2006 AND 2007 TAX RETURN. It is a detailed analysis of what you can and cannot deduct as a contribution on Schedule A, and includes all the changes to the rules enacted by the Pension Protection Act of 2006. Check out yesterday’s posting for a special offer.
TTFN
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