Maximum charitable contributions

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28fe6
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Maximum charitable contributions

Post by 28fe6 » Mon Dec 02, 2019 9:35 am

I'm "bunching" charitable contributions this year. So I plan to give something like 30% of my gross income. I'm worried that this will either end up being non-deductible for some reason I don't know about, or else it will be legal but will be an audit flag. I read up on limits and found I should be able to deduct up to 50% of AGI. I don't know my AGI yet but I think I will be well within it. Do others have experience donating large sums in a single tax year and has it ever hit a limit or caused audit scrutiny?

oldfatguy
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Re: Maximum charitable contributions

Post by oldfatguy » Mon Dec 02, 2019 9:36 am

No need to worry about an audit as long as your deductions are legitimate and you have the necessary documentation.

AlohaJoe
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Re: Maximum charitable contributions

Post by AlohaJoe » Mon Dec 02, 2019 9:52 am

Who cares if you get audited?

Do you know what an audit is? The IRS sends you a letter saying "please send us your receipts". Then you send then your receipts. End of audit.

You're scared of having to photocopy some receipts and put them in an envelope?

jebmke
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Re: Maximum charitable contributions

Post by jebmke » Mon Dec 02, 2019 9:59 am

I have had two schedule A reviews by the IRS over the years. In each case, I have a pretty good idea that a large deduction is what triggered it. Once was a large donation of appreciated securities to a DAF. The other was a large Claim of Right deduction. In the first case, the documentation I provided quickly settled the matter. Note that when they flag a specific item they will typically do a sweep and ask for documents on every entry on the Form. In my case they also asked for all documentation related to Form 8889 - that was the same year I did a large catch-up reimbursement from my HSA.

If you have all the documentation in order it isn't a big deal. Keep in mind that they will typically send you a letter asking for a response in 30 days. The 30 days started from when they dated the letter, not when you get it. So having all your paperwork organized will save you a scramble to meet their timetable.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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dmcmahon
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Re: Maximum charitable contributions

Post by dmcmahon » Mon Dec 02, 2019 10:09 am

28fe6 wrote:
Mon Dec 02, 2019 9:35 am
I'm "bunching" charitable contributions this year. So I plan to give something like 30% of my gross income. I'm worried that this will either end up being non-deductible for some reason I don't know about, or else it will be legal but will be an audit flag. I read up on limits and found I should be able to deduct up to 50% of AGI. I don't know my AGI yet but I think I will be well within it. Do others have experience donating large sums in a single tax year and has it ever hit a limit or caused audit scrutiny?
Yes I’ve done this with large amounts, and so far haven’t been audited. Although an audit would be a headache, my returns are 100% honest so, really, I’m not worried. Especially under the new tax law, bunching makes a lot of sense.

The rule is that you can not deduct more than 50% of your income (AGI, I think, but check with your accountant or the IRS) with cash gifts. You are limited to 30% for a gift of appreciated shares. I did a Donor Advised Fund at Schwab 2 years ago, and gifted appreciated shares. Any portion of the deduction you cannot claim due to the 30% rule can be carried forward up to 5 years in total. Gifting appreciated shares allows you to avoid paying capital gains tax. The DAF lets you lump up several years of donations and yet still make them over the years just as you would have done. Lumping may also be useful if you are pairing it with a high-income year, as I did.

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 10:14 am

28fe6 wrote:
Mon Dec 02, 2019 9:35 am
I'm "bunching" charitable contributions this year. So I plan to give something like 30% of my gross income. I'm worried that this will either end up being non-deductible for some reason I don't know about, or else it will be legal but will be an audit flag. I read up on limits and found I should be able to deduct up to 50% of AGI. I don't know my AGI yet but I think I will be well within it. Do others have experience donating large sums in a single tax year and has it ever hit a limit or caused audit scrutiny?
If you give cash to a 501c3 public charity, you can deduct up to 60% of your AGI this year (and excess deductions spill over to future years, and can be carried forward up to five years.)

If you give appreciated securities to a 501c3 public charity, you can deduct up to 30% of your AGI (and again excess deductions spill over to be used in future years.)

(Donations to private foundations have lower limits, but I will assume you are giving to regular public charities, which can include Donor Advised Funds. Also combinations of appreciated securities and cash donations in the same year have a somewhat different math. Also the 60% rule is new under TCJA and is scheduled to expire and revert to 50% when the rest of TCJA does.)

Last year I gave more than 30% of my AGI in appreciated securities. I will be claiming the excess this year. And after factoring in this year´s donations, I will also be carrying over an excess to next year.)

I am aware that my general pattern of giving is higher than usual and I fully expect to be audited on this sooner or later. (I have been audited on other issues, e.g., claiming a dependent and ACA issues.) It was not a big deal. I had my documents organized, I photocopied and mailed and waited. I have also been audited by my state and that was even easier. They allow me to respond by uploading PDFs of my documents to their secure server.

One reason I like donating via my Donor Advised Fund is that it greatly simplifies my record keeping. If and when I am audited, I don´t need to dig up every individual receipt from every individual charity I supported, just a few letters from my DAF documenting my gifts. And if I lose my copies of those letters, they are permanently archived on my DAF´s website.

All of the above said, if you are serious about ¨deduction bunching¨ (and alternating with claiming the standard deduction), the excess deduction carryforwards can mess with that strategy. In my case, I decided that I don´t need to do deduction bunching. However, I do plan to use up my itemized deduction carryforwards before I become old enough to do QCDs.

Dottie57
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Re: Maximum charitable contributions

Post by Dottie57 » Mon Dec 02, 2019 10:29 am

AlohaJoe wrote:
Mon Dec 02, 2019 9:52 am
Who cares if you get audited?

Do you know what an audit is? The IRS sends you a letter saying "please send us your receipts". Then you send then your receipts. End of audit.

You're scared of having to photocopy some receipts and put them in an envelope?
I didn’t know it was that easy.

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 10:30 am

jebmke wrote:
Mon Dec 02, 2019 9:59 am
I have had two schedule A reviews by the IRS over the years. In each case, I have a pretty good idea that a large deduction is what triggered it. Once was a large donation of appreciated securities to a DAF. The other was a large Claim of Right deduction. In the first case, the documentation I provided quickly settled the matter. Note that when they flag a specific item they will typically do a sweep and ask for documents on every entry on the Form. In my case they also asked for all documentation related to Form 8889 - that was the same year I did a large catch-up reimbursement from my HSA.

If you have all the documentation in order it isn't a big deal. Keep in mind that they will typically send you a letter asking for a response in 30 days. The 30 days started from when they dated the letter, not when you get it. So having all your paperwork organized will save you a scramble to meet their timetable.
Agree that keeping all documentation in order and responding promptly is key. I strongly recommend mailing responses at the Post Office with evidence of timely mailing. (The IRS is drowning in paper and could lose your response, so you want to be able to show you did respond timely.) You can also request additional time to gather additional documents if needed but make your request within the specified limits.

As for being audited on every entry on the form, my experience has been different. Generally, our family´s audits have focused on narrow specific issues each time, though even those can be a pain. (I can remember getting audited on travel expenses on a business return and my husband had traveled on business in other countries, so we had to get hotel receipts translated and document how we had converted currencies and explain that Europeans use commas and periods the opposite of the way we do in the US.)

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 10:32 am

Dottie57 wrote:
Mon Dec 02, 2019 10:29 am
AlohaJoe wrote:
Mon Dec 02, 2019 9:52 am
Who cares if you get audited?

Do you know what an audit is? The IRS sends you a letter saying "please send us your receipts". Then you send then your receipts. End of audit.

You're scared of having to photocopy some receipts and put them in an envelope?
I didn’t know it was that easy.
Most (though not all) audits these days are correspondence audits, so yes, they can feel intimidating but they are not a big deal as long as you have your records organized to support the deductions you took. Office audits (where you have to go in person) are rare and field audits (where the IRS visits you at your home or business) are even rarer.

That said, I once had a field audit by the state workers comp insurance agency. It was a very positive experience. The nice lady from the agency seemed very impressed by the organization and completeness of our records, complimented me on them, and it took very little time for her to conclude that we were indeed entitled to a substantial refund of workers comp premiums paid.
Last edited by dodecahedron on Mon Dec 02, 2019 10:58 am, edited 1 time in total.

jebmke
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Re: Maximum charitable contributions

Post by jebmke » Mon Dec 02, 2019 10:43 am

dodecahedron wrote:
Mon Dec 02, 2019 10:30 am
Agree that keeping all documentation in order and responding promptly is key. I strongly recommend mailing responses at the Post Office with evidence of timely mailing. (The IRS is drowning in paper and could lose your response, so you want to be able to show you did respond timely.) You can also request additional time to gather additional documents if needed but make your request within the specified limits.
Indeed.

On the second case of mine, the Claim of Right, it was a longer process. The Claim of Right deduction was based on prior year activity so a reconciliation was needed. When I finally responded, about 60 days transpired and the IRS finally admitted that in the process of moving my file from one district to another, the entire file was lost. I ended up having to send them a complete package with two years of returns, all the docs etc. This was for my 2009 tax return. I got my refund in June, 2012. Part of the problem was that it was handed to an agent that was not very familiar with Section 1341 and the timing difference involved ex-pat payments over the two prior years so it took a while to get this resolved.

I volunteer with a former agent. His advice is always make it easy for the agent to follow your entries (reconciliations, labeled receipts etc.). If you appear organized, the agent is more likely to make a cursory exam and accept everything you provided. If you make it hard (box of receipts), so will they. This is the same as I found over the years with statutory audits in business.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 11:08 am

jebmke wrote:
Mon Dec 02, 2019 10:43 am
I volunteer with a former agent. His advice is always make it easy for the agent to follow your entries (reconciliations, labeled receipts etc.). If you appear organized, the agent is more likely to make a cursory exam and accept everything you provided. If you make it hard (box of receipts), so will they. This is the same as I found over the years with statutory audits in business.
Definitely agree with this. I typically have a cover sheet with a table of contents listing all the items I am enclosing with a description of each item and either a page number or Attachment A, B, ... (I.e., Sometimes I will categorize groups of receipts into separate attachment and list them on the cover sheet as ¨Attachment A,receipts for trip to X, dates, business purpose¨ Ättachment B, receipts for trip to Y, dates, business purpose" etc.)

I always make and save a PDF of exactly what I sent to the IRS (or NYS) so that in a phone followup discussion or correspondence it is easy to be sure we are on the same page. (Also, if they lose what I sent them, it is easy to reprint and resend.)

AlohaJoe
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Re: Maximum charitable contributions

Post by AlohaJoe » Mon Dec 02, 2019 11:26 am

dodecahedron wrote:
Mon Dec 02, 2019 10:30 am
I strongly recommend mailing responses at the Post Office with evidence of timely mailing. (The IRS is drowning in paper and could lose your response, so you want to be able to show you did respond timely.)
You can also fax things to the IRS. Don't even have to leave your home. (I can only imagine how big their fax machine must be.....)

tomd37
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Re: Maximum charitable contributions

Post by tomd37 » Mon Dec 02, 2019 11:36 am

It is my understanding the Tax Cut and Jobs Act of December 2017 increased the cash contribution limit from 50% to 60% of AGI.
Tom D.

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 11:46 am

tomd37 wrote:
Mon Dec 02, 2019 11:36 am
It is my understanding the Tax Cut and Jobs Act of December 2017 increased the cash contribution limit from 50% to 60% of AGI.
That is correct, as I noted above. It is scheduled to revert to 50% when TCJA sunsets after 2024.

However, if you give both cash and appreciated securities in the same year, there is an interaction that effectively reduces the 60% limit. See The Disappearing 60% Deduction: New Charitable GIving Limits are not as Generous as They Appear.

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dodecahedron
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Re: Maximum charitable contributions

Post by dodecahedron » Mon Dec 02, 2019 11:50 am

AlohaJoe wrote:
Mon Dec 02, 2019 11:26 am
dodecahedron wrote:
Mon Dec 02, 2019 10:30 am
I strongly recommend mailing responses at the Post Office with evidence of timely mailing. (The IRS is drowning in paper and could lose your response, so you want to be able to show you did respond timely.)
You can also fax things to the IRS. Don't even have to leave your home. (I can only imagine how big their fax machine must be.....)
Yes, I worry that the IRS fax machine could be a black hole. I like having PO official documentation of date of mailing.

My state tax department (in NY) allows you to upload PDFs to a secure server that is accessible to you (so you can see that the document made it there) and to any tax department employee authorized to work on your audit case. I like that much better than faxing, because you can log into your account and see exactly what they have (and it is time/date stamped as to when it was uploaded.)

Shallowpockets
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Re: Maximum charitable contributions

Post by Shallowpockets » Mon Dec 02, 2019 1:10 pm

Maybe if you are worried that some of your donations may not be deductible, then perhaps the charity aspect of your donation is not as clear cut.

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