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Required Minimum Distributions and Charitable Contributions

For those who are required to take a minimum required distribution (“RMD”) from an IRA, charitable donations may be the answer. An individual can offset the tax liability from an RMD by making a qualified charitable donation if he does not need the cash at the time of the distribution.

If an individual takes the RMD in a normal situation, the distribution goes towards taxable income. By using charitable donations, individuals can avoid receiving funds subject to tax while also avoid jumping into a higher tax bracket from the taxable distributions. If the funds are transferred directly to the charity, then the individual does not have to pay tax on the distribution, and the individual’s taxable income does not increase either.

Also, if individuals donate appreciated capital assets, they can avoid paying the capital gains tax and reduce taxable Required Minimum Distributions. Rather than donating plain cash, if individuals donate appreciated securities, they do not have to pay the tax on the gains and still receive the benefit of the fair market value of the donation because this offsets the RMD, and therefore the tax liability associated with the distribution.

There may be timing benefits that could result in major tax savings for 2021 due to COVID-19 that are the exception to the general rule. The government has suspended the requirement for people to take the required IRA payouts for 2020. In other words, you do not have to take your required minimum distribution for 2020 as a way to combat the economic impact of the coronavirus.

This may mean major tax savings for people who typically donate from their IRA to charities. Since there is no RMD for 2020 due to the CARES Act and charitable donations count towards the required distribution, it may be best for individuals to post pone donations until 2021 or later. In other words, rather than donating cash or capital assets in 2020 and having no RMD to offset, individuals could wait and make a larger donation when they are required to take RMD again. This way, taxpayers are able to reduce taxable income when the RMD comes due.

RMD will be required again in 2021 (in all likelihood), but perhaps it may be best to hold off even longer on making qualified charitable donations. For instance, individuals should make the largest donation when the taxable income outside of RMD is the highest. This way, taxpayers are able to take advantage of avoiding an increase in taxable income by offsetting the RMD and avoid reaching an even higher tax bracket.

This strategy to donate a higher dollar value donation may help reduce taxes in 2021 simply by holding off a little bit longer until mandatory distributions kick back in next year.  Please remember this article is not intended to be tax or legal advice and you should always consult directly with your tax attorney or tax advisors.  You can contact the McGuire Law Firm to speak directly with a tax attorney regarding any of your tax issues.

IRS Form 8283 and Charitable Contributions

The IRS lays out specific requirements and qualifications in order to properly take the charitable contribution deduction. For taxpayers, including individuals, partnerships, and corporations who want to take a deduction for noncash charitable contributions over $500, they must file Form 8283. Form 8283 should accompany the taxpayer’s return for the year they contributed the property and take the deduction. If a taxpayer fails to attach Form 8283 to his return, then the IRS will typically disallow the charitable contribution deduction completely and readjust the tax liability.

Who qualifies as a recipient of a charitable contribution in order to take the deduction?
One must keep in mind that contributions to an individual are not deductible. Rather, charitable contributions are only deductible if made to a qualified organization. According to the IRS and § 170(c), qualified organizations include a government possession, a corporation, trust, fund or foundation organized or created in the US, church or other religious organization, veteran’s organization, nonprofit fire company, civil defense organization, domestic fraternal society, or a nonprofit cemetery.

What else do I need to include with Form 8283?
According to § 170(f)(8)(A), in addition to filing Form 8283, a taxpayer must include a contemporaneous written acknowledgement of the contribution by the donee organization in order to take a deduction. An acknowledgement is contemporaneous if the taxpayer obtains the acknowledgement on or before the date when the taxpayer files a return for the taxable year in which the contribution was made or the due date for the return.

What information do I need to include on the contemporaneous written acknowledgment?
The contemporaneous written acknowledgement, according to § 170(f)(8)(B), must also contain certain information including the amount of cash and a description of the property contributed, whether the donee organization provided any goods or services in consideration, and an estimate of the value of the goods or services if any were provided.
Typically, more attention is paid to the appraisal procedure and requirements than other aspects of the charitable contribution deduction because the appraisal actually quantifies amount of the deduction. However, the contemporaneous requirement is just as stringent as the appraisal because the tax code specifically lays out each requirement that is procedurally necessary to take the deduction, as discussed below in detail.

What if I fail to comply with the contemporaneous written acknowledgment requirements?
Taxpayers who fail to comply with the contemporaneous written acknowledgement requirements may try to use the “substance over form” argument, but this is unlikely to prevail since the specific elements are clear in the code.

One exception to this argument stems from the case Bond v. Commissioner . Here, the taxpayers technically did not meet all the requirements necessary to obtain the charitable contribution deduction because while they attached Form 8283, they failed to attach the appraisal report to the return. Therefore, the taxpayers argued that they substantially complied with the tax code and were entitled to the deduction. The court applied a “directory and not mandatory” standard and found that by nature of the requirements, the taxpayers were in fact entitled to a deduction because they actually provided all the necessary information but simply failed to attach the document. The court referenced Taylor v. Commissioner in order to highlight the fact that this substantial compliance applies when the taxpayer satisfies the elements necessary that relate to the substance or essence of the law.

In contrast, the court in French v. Commissioner of Internal Revenue acknowledged the importance of following the strict requirements of the tax code. The court in French noted that a taxpayer is not excused from compliance with contemporaneous acknowledgement even if he substantially complied with the law because the requirements are so clearly stated in § 170(f)(8). The fact that the tax code identifies these requirements illustrates the importance of the rule.

In French, the taxpayers failed to attach a required letter at the time the amended return was due. Unlike the taxpayer in Bond where the actual appraisal had been completed, the taxpayers here did not even obtain the letter until nearly two months after the return was due. The key distinction is that the taxpayers in Bond actually performed the requirements whereas the taxpayers in French did not complete the necessary steps in the appropriate amount of time. Therefore, the court in French found that the taxpayers were not entitled to the charitable contribution deduction because they failed to meet the strict requirements of a contemporaneous acknowledgment.

This article was prepared by a tax attorney at The McGuire Law Firm. If you have any questions related to charitable contributions, Form 8283 or other tax matters, please feel free to contact our firm to speak with a tax attorney.

Article on Deducting Charitable Contributions by Denver Tax Attorney

Can I deduct contributions to charities?  What charitable contributions are Denver Tax Attorney Denver Tax Lawyer IRS Tax Attorneydeductible?  These are common questions an individual taxpayer may ask their tax accountant or tax attorney.  The article below has been drafted by a Denver tax attorney at The McGuire Law Firm to provide some information regarding charitable contributions.

 

Gifting to charities can be a great way to obtain a tax deduction on your 1040 individual income tax return.  The gift or donation must be to a qualified charity if you want to deduct the gift.  Gifts given to individuals, politicians and certain organizations cannot be deducted on your tax return.

To deduct the gift, you must file a 1040 individual income tax return and be able to itemize your deductions on a Schedule A.  If you cannot itemize your deductions or would not want to because the standard deduction js greater than your itemized deductions, the gift would not be deducted on your tax return.  The deduction can also be limited if you receive any benefit for your contributions.  You can only deduct the amount of the gift you gave that is in excess of any benefit you may have received for making the gift.

When gifting, if you gift property, the amount you can deduct is generally the fair market value of the property at the time of the gift.  Fair market value can be defined as the amount a willing buyer would pay and a will seller would receive in an arm’s length transaction for the property, on an open market.

If you are deducting more than $500 for non cash gifts, you need to file Form 8283 with your 1040 individual income tax return.  You also must keep records to verify and prove the contributions you have made during the taxable year in which are deducting the gifts or contributions on your 1040 individual income tax return.

If claiming a deduction for cash or property of $250 or more, you will need a written statement from the organization of which you made the donation.  The statement must show the amount you donated and a description of the property.  The statement must also provide information as to any goods, services or benefits you received in return for donating the property.

You can speak with a Denver tax attorney at The McGuire Law Firm regarding any tax questions or issues that you have.  A tax attorney can assist you with many tax matters from personal tax planning to business issues and tax planning.

Contact the McGuire Law Firm to schedule your free consultation with a tax attorney.  Offices in Denver, Colorado and Golden, Colorado.

 720-833-7705 or John@jmtaxlaw.com