It’s the New Year and a new tax season. As the celebrations end and the holiday decorations are put away, the process begins for tracking down and organizing important tax return data. Contributions to charitable organizations often make up a substantial portion of this data. The deductions from these contributions can be instrumental in reducing a taxpayer’s bill in April. But with the increases to the standard deduction and the limitations on the state and local tax deduction brought by the new tax law, those looking to itemize their deductions may have to dig a bit deeper into their charitable activities to find deductions they may have missed. Luckily, there are some expenses that are common, albeit less obvious, that taxpayers can consider.
Starting with the most obvious, cash donations are a popular way to support charitable causes and land a tax deduction to match. The new tax law provides expanded opportunities for those who make their donations solely in cash. Individuals who only make cash contributions can deduct donations to public charities up to an amount that is 60 percent of their adjusted gross income (AGI). The previous limit was 50 percent. For those who donate cash and property, it isn’t yet clear whether they will be able to take advantage of the 60 percent limit; the law currently suggests that the 50 percent limit will still apply.
Services for a Charitable Cause
But cash and property contributions are not the only source of charitable deductions. When performing services for a charitable organization, certain expenses related to those services may also be deductible. When it comes to the value of your time or services that are contributed to a charitable organization, the rule is that this value cannot be deducted. So an attorney who donates his or her time to a charitable organization cannot deduct the hourly rate that would have been charged. And an electrician can’t deduct the value of the time spent wiring up a local church’s Christmas spectacular light show. However, oftentimes volunteers incur expenses related to their charitable activities, and these expenses are deductible.
So, if the attorney in our example also spent $1,000 out of pocket for getting a public notice printed in the local newspapers regarding the charitable organization’s zoning project, he or she could deduct that $1,000 even though this amount was not paid directly to a charity. Or, the electrician in our example could deduct the cost of supplies that he or she used in the lighting project. These are some common examples of deductible expenses related to charitable services. But there are other more unusual examples of expenses that taxpayers have successfully deducted that illustrate how far this rule can go.
In a previous ruling, a woman who fostered cats in her home was permitted to deduct the cost of food and veterinary services related to the cats because she was performing the fostering services in conjunction with a charitable organization that assisted with stray and abandoned cats. In another animal related case, a taxpayer was able to deduct the costs that he incurred in keeping a horse that he used as a volunteer member of the local sheriff’s civilian reserve unit.
Also, costs related to the maintenance of property used for volunteer activities of a charitable organization are often deductible. For example, a pilot was permitted in one case to deduct some of the cost (fuel, maintenance, and repairs) related to an airplane that he used as a volunteer for the Civil Air Patrol. Similarly in another case, an amateur radio operator was allowed to deduct costs for his equipment used to provide services to the Military Affiliate Radio System (MARS). And in another case, volunteers for the Volunteer Income Tax Assistance Program (VITA) were allowed to deduct the cost of advertising and office supplies related to the services they provided to VITA.
These types of deductions must be carefully scrutinized, however. The subtleties about the ultimate beneficiary of the expenses (and whether the taxpayer also benefits) can lead to a denial of a deduction. For example, a coach who bought uniforms and equipment for a sports team in a tax-exempt organization’s league was not allowed to deduct the cost because the players on the team benefited and not the organization itself. On another occasion, a taxpayer was not allowed to deduct the cost of a babysitter while the taxpayer performed volunteer services for a charitable organization, as the babysitting expense benefited the taxpayer and not the charity. Similarly, a taxpayer who was training as an ice skater could not deduct the cost of lessons because the lessons benefited the taxpayer personally, even though the competition was hosted by an exempt organization.
So when looking back at the past year for all of your charitable contributions, don’t overlook the costs incurred in conjunction with the services you provided to a tax-exempt organization. Be mindful of the ultimate beneficiary of such costs, however. Also, the new 60 percent AGI limit for cash contributions provided by the new tax law will help certain taxpayers. In any case, be prepared to substantiate your expenses with receipts. Recent regulations establish stricter substantiation rules for charitable contributions.
There are many ways to secure deductions for expenses associated with charitable activities. For more information about how to make the most out of them, please contact your local tax professional.
Published on January 15, 2019