In the latest edition of the Ask the Editor series, Joy Taylor, Editor of The Kiplinger Tax Letter, addresses common inquiries about the rules governing charitable deductions. These insights are crucial for taxpayers planning to make donations and seeking to maximize their tax benefits.
Documenting Charitable Contributions
When taxpayers donate to charity, proper documentation is essential to substantiate their claims on tax returns. For cash donations, Taylor advises that donors should retain various forms of proof, including cancelled checks, electronic fund transfer receipts, credit card statements, or a written acknowledgment from the charity. Specifically, for cash donations of **$250 or more**, donors must obtain a contemporaneous written acknowledgment from the charity.
For property donations, the requirements vary. Donations valued below **$250** require only a letter or a receipt from the charity. For donations of **$250 or more**, a written acknowledgment is necessary. Donations exceeding **$500** must include Form 8283 with the tax return, and an appraisal is needed for property valued over **$5,000**. For more details, readers can refer to IRS Publication 526, which outlines the necessary substantiation rules.
Audit Concerns and Future Tax Implications
Many individuals worry about the possibility of an audit when claiming substantial charitable deductions. Taylor clarifies that while claiming large deductions does not automatically trigger an audit, significant discrepancies between deductions and reported income can increase audit risk. Maintaining accurate records and adhering to the substantiation rules is critical to mitigating this risk.
In light of upcoming tax changes, Taylor highlights the implications of the “One Big Beautiful Bill” (OBBB), which introduces new rules for charitable deductions starting in **2026**. Under these provisions, non-itemizers will be allowed to deduct up to **$1,000** in charitable cash contributions, with a higher limit of **$2,000** for joint filers. Conversely, itemizers claiming deductions will face restrictions, as the deductible amount will only apply to contributions that exceed **0.5%** of their adjusted gross income (AGI). For instance, if a taxpayer has an AGI of **$232,000** and donates **$14,000**, they could only deduct **$12,840** after applying the new limits.
Additionally, Taylor addresses the tax consequences of donating an annuity contract. Donors will typically recognize taxable income equivalent to the difference between the annuity’s cash surrender value and their initial investment. For example, if an individual donated a variable annuity worth **$43,000**—with an investment of **$20,000**—they would report **$23,000** as additional income while still being eligible for a charitable deduction based on the annuity’s value.
Another common query involves donating Series I savings bonds. Taylor clarifies that deferring tax on interest earned is not possible when donating these bonds before maturity. Donors will need to report all previously deferred interest as income in the year they make the donation, effectively accelerating tax liability.
As readers continue to navigate the complexities of tax regulations, Taylor encourages them to submit their questions for future discussions. The information shared in this series is intended for general informational purposes and should not replace professional financial or tax advice. Consulting with a qualified financial or tax advisor is recommended for personalized guidance.
For those keen on understanding the intricacies of charitable deductions and upcoming tax changes, Taylor’s insights provide a valuable resource, ensuring donors are well-prepared for the tax implications of their generosity.