 and welcome to the session in which we will discuss itemized deduction that goes on Schedule A and specifically we're going to be discussing charitable contribution. Once again I know I keep repeating myself but it's important to emphasize that Schedule A deductions are deductions from AGI and what does that mean? It means on your 1040 you have a line called adjusted gross income any deduction that's listed before adjusted gross income is called 4 AGI and any deduction after adjusted gross income is a deduction from AGI. Schedule A deductions are deductions from AGI so what are Schedule A deductions? Schedule A deductions are personal expense in nature you could be also an employee incurring those expenses or you could have some investment interest but they are personal it means they don't belong to a business if they belong to a business then you have a Schedule C. Again those deductions I know I keep repeating from other sessions they only make sense they are only beneficial if the itemized deduction are greater than the standard deduction so you would add up all of your itemized deduction and let's assume they add up to 22 000 then you compare this to your standard deduction what's a standard deduction it's a number given by the government based on your filing status basically a deduction given basically a free deduction if this deduction happens to be for you 25 000 well you don't use the itemized deduction if your standard deduction for your filing status it changes every year is 17 000 then you would use the itemized deduction now the itemized deduction is being used less and less because miscellaneous expense deduction is suspended from the year 2018 to 2025 I know you're sick of me saying this but it's very important to remember this it's suspended and the standard deduction overall the government increased the standard deduction so to be specific in this session we're going to be looking at gifts to charities and gift to charities you could give many types of gift to charities you can give cash or check for less than 250 you could give other other than buy cash or check if it made a gift of 250 or more you must attach for 80 to 83 if the gift is over 500 so notice you could give many things you could give cash you can give clothing you can give property and because you could give so many different things we have to be aware of the different roles matter of fact this is going to be the charities a gift to charities I'm going to break it into two recordings because it's going to be it's going to have a lot of details to cover let's go ahead and get started before we proceed any further I have a public announcement about my company farhatlectures.com farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as becker roger wiley gleam myles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today so what is the big idea of a charitable contribution well it's simply put the government wants to encourage you to do what to donate why because if you donate if you donate you are serving the public good and basically you are taken away this this tasks from the government and government loves to be helped so basically you're helping the government indirectly because you're helping others otherwise the government will have to take care of that whatever that issue is so individual and corporation may deduct contribution made to a qualified domestic organization now individuals can make contribution and corporations now when we discuss the corporations which is a separate recording there are different rules different limitation for corporations and this session will focus on individuals and what do we mean by qualified domestic organization in other words you cannot give this money to your needy neighbor that's really nice of you if you if you're helping someone but to take the deduction you have to give this money to a qualified domestic organization how do i know it's a qualified domestic organization if you're not sure go to the irs website and there's a list of all qualified domestic organization most churches synagogue mosques as well as many other organization you just they have to be registered with the irs the gift have to be the contributor must have a donative intent what is what does that mean to gift someone it means you are not expecting anything in return and this is important so you're giving this gift and you say i don't want anything in return because if you get something in return then it's going to reduce your it's going to reduce your contribution so if the contributor receive a tangible benefit some sort of a benefit well the fair market value of such benefit reduces the amount of the charitable contribution so if you are making a charitable contribution and you don't expect anything in return to a domestic qualified organization you can deduct this amount however if you made a contribution and you get some tangible benefit in return well you have to reduce your contribution by that benefit let's take a look at an example sarah purchases a ticket for a special performance of the local symphony which is a qualified charity she paid the ticket is priced at 150 while the regular symphony concert ticket is 50 so she paid 150 the price she paid the 150 but the regular price is 50 okay according to the rules sarah is only allowed to deduct 100 because the regular price is 50 so she paid 150 so of that 150 would say 50 is the benefit because she's getting the ticket and 100 is the extra that she paid she can get a deduction for it this means she can only deduct 100 even though she paid 150 it doesn't matter if sarah attends the concert or not you know that she's limited to 100 how can she how can she get the whole 150 not to accept the ticket altogether she would say here's 150 for the tickets keep it i don't want the ticket don't don't give me the ticket back then she can deduct the full 150 but if she paid 150 and the the value of the ticket is 50 now why did she pay 150 because she wants to encourage she wants to encourage the local symphony she paid extra more than when they are what they are asking if she want to deduct the 150 don't take the ticket just say here's 150 i paid one price but i don't want it once she takes it the deduction is 100 state credit for a charitable contribution this is fairly a new a new deduction that the irs is kind of making sure it doesn't happen several state offer tax credit for taxpayer who donate the specific states or local fund or public charity so in certain states if you donate money they'll give you a tax credit on the state level okay to address the concern about potential abuse because remember your local and state taxes you could only deduct up to 10 000 so here's what you are doing here you make a you make a contribution to a charity to a charity and in return you get a benefit in terms of local and state tax credit well what does that mean it means you are reducing when you get a benefit you are reducing your state taxes so you're you're getting benefit from that charity indirectly and as a result you are reducing your local taxes so what the government says is this according to these rules if a taxpayer receives a state or local tax credit that exceeds 15 of their payment so if you get a tax credit you know 15 percent if you pay the thousand dollar and you get 150 up to 15 percent their charitable contribution will be reduced their charitable deduction might be reduced by that credit let's take a look at an example so in 20x 2023 alex a resident of state ax donated seven thousand dollar to state ax education fund okay this donation makes alex eligible for 40 percent state income tax credit which is if he paid 2800 if he paid 7 000 the state is given him a 40 percent tax credit it means alex can reduce his state taxes by 2800 so he made a donation to the state and he did get a benefit in return but the benefit can have a sneaky benefit and a sense that you're getting a benefit from the government 2800 this state credit can use to lower the overall state income tax for alex by making this contribution what the irs is saying alex is attempting to convert a state income tax payment subject to 10 000 limit per year into a charitable contribution which has a limit of 30 percent of adjusted gross income this is what they're saying you are making an attempt to lower your income taxes which is and to benefit more however when alex filed his 2023 federal income tax he must reduce the charitable contribution by 2800 because the tax credit exceeds 15 of the payment made because you received so too much credit as a result the contribution for the 7 000 7 000 minus 2800 he can deduct as charity for federal income tax purposes 4200 so simply put you cannot make a contribution get a tax credit or a tax benefit which is a tax credit a benefit on the local level then use the same contribution and get a benefit on the federal level that's what they're saying if you get a benefit and they allow you to get a 15 percent tax credit anything above that they would recapture it contribution of services let's assume you want you you volunteered your time you went down to the local red cross you volunteered your time well that's fine but your time is not deductible your time is not deductible contribution of services to a qualified charitable organization are not deductible that's your time however if you incur expenses unreimbursed expenses now you are paying something to those to those services then it's deductible what could be expenses well you might have to buy a certain uniform for performing the service that might be deductible also you might incur transportation cost sometimes you might have to travel and stay in a hotel lodging you might incur meals while away from home for the purpose of performing the donated service that's different than your time you're paying separately now you could also instead of itemizing your actual automobile cost you could take a standard mileage rate of 14 cent which is subject to change every year but so when you when you travel you'd say okay i'm gonna keep track of my mileage i'm gonna multiply them by whatever government standard rate happens to be or you can keep track of your actual cost for transportation expense now travel expenses are not deductible if if there's a significant personal element of pleasure so if you really enjoy doing this and you're doing this for your own enjoyment then it's not the travel is not deductible why because there should be nothing in return when you make a charitable contribution personal pressure recreation or you went there to volunteer and it's also you're taking the vacation at the same time you can't do that it's basically there's an element of personal pleasure pleasure it means you are getting something in return an example would be sara a delegate representing her church in austin taxes travels to a two-day national conference in chicago after the conference she spends a week exploring the city just you have to be very careful in chicago in this situation none of the transportation meals or large and are deductible because the travel included a significant personal element of pleasure recreation or vacation so she she's a delegate to her not-for-profit organization her church that's great but the transportation expense cannot be deducted because there's she spent that week vacationing in chicago you have to be aware of certain contributions that are non-deductible that they try to trick you on the exam for them certain items are not deductible dues fees bills paid to country clubs lodges fraternity order or similar groups they are not deductible cost of raffle bingo or lottery ticket now why because you are expecting to get some benefit also when you buy a lottery ticket you may not win but there's the expectation cost of tuition if you pay someone's tuition that's that's that's not deductible sometimes they try to to trick you well you did not give them cash you paid the tuition that's not charitable contribution payment for the right to purchase tickets for seating an athletic event in a university stadium you're getting a benefit be careful value of blood giving to a blood bank that's not deductible donations to homeowners association not deductible gifts to individuals you know gifts to individual basically the same thing as paying for tuition rental value of property used by a qualified charity let's assume you have a van or a truck and you tell them go ahead use it for a day or two basically it has a rental value you cannot deduct this and when it comes to cheer charitable contribution substantiation is an important factor with substantiation it means you have to show evidence evidence to support your deduction to claim a deduction taxpayer must have a proper documentation and substantiation now what about evidence you should have well it all depends at the amount the amount of the contribution and whether it was made in cash or non-cash because again you can give cash you can give clothing you can give a used car you can give stocks you can give bonds you can give a plane you can give a boat you can donate so many different things so different rules might apply to gifts of specific types of property such as use automobile due to past instances a taxpayer abused identified by congress and this is gets abused used to gets abused a lot and i'll give you a personal story i used to be one of my customers was a used car dealer and and he used to abuse this abuse it i don't know if abuse whether it's illegal or not but it was abused okay so just now the congress what they started to do they put more restriction on specially used car therefore additional guidelines are in place for such donation now we're going to go over these guidelines briefly for each type of donation to give you an idea how restrictive are charitable contribution if you contribute cash to claim a deduction for cash you must possess a receipt could be a canceled check or a written statement from the charity containing the charitable organization name contribution date and amount like for example if you belong to a church and you contribute money via a check at the end of the year they'll give you this a list of this payment if the payment exceeds 75 and include both a contribution of goods and services a written statement is necessary at that point the statement should include the estimated value of the goods or service received by the donor okay so you want to make sure you're aware of this two non-gift non-cash gifts for non-monetary gifts and here service is not for your time by the way for non-monetary gift what could be non-monetary gift again clothing property anything that you will give for non-monetary gift non-monetary means not money a receipt from the charity must be retained okay clothing or household item can be deducted they have to be in good used condition or better when donated in other words if they are not and the charity cannot use them you cannot take a deduction for them if an item you happen to contribute an item the value of that item is more than 500 and it's not in good condition a deduction if possible if a qualified appraiser is included with in the return now what's a qualified appraiser usually the person working at that charity will tell you and will give you a paper and it's accepted that's that's who would that's the appraiser so someone will tell you what's the value of it how do they how do they know the value because charities they might run stores or they might sell these items on regular basis so they would have an idea how much it's worth how about if you donated a boat an airplane or a used car the deduction for donating those items is typically limited to the amount the charity received from its sale now this is important this is a change of rules because before before the change of rules your the value of the donation was the fair value of that vehicle of that used vehicle whatever you think the fair value is they change the rules they'd say okay we're gonna wait until the charity sells this item and how much they will get is your deduction so taxpayers should obtain a statement from the charity to document the sales price if the deduction claimed is more than 500 then you have to fill out a form called 1098 contribution of motor vehicles both an airplane must be included with the tax return and as i mentioned earlier one of my customers one of my clients was a used car dealership and i started to fill a lot of those because i remember when the tax rule changed and congress became more restrictive now let's talk about cash or non-cash gift of 250 or more now you're just getting over 250 to deduct a cash or property contribution of 250 or more taxpayers require a contemporaneous written acknowledgement cwa from a charity including if you also have a payroll deduction gift it means you are deducting from your paycheck on a regular basis the cwa must obtain for donation of 250 or more in out-of-pocket expenses incurred while providing services to a charity now you need this cwa it should contain the contribution amount property description details on any goods or services received and their estimated value and this must be obtained by the earlier of the tax return filing date or the due date including x tensions non-cash gift now we're talking about more than 500 so 250 we talked about 250 more than 500 additional substantiation is needed again the higher the amount the more you need to show the evidence including details on how the property was acquired and its basis now if you're contributing cash it's easy cancel check will do and their seat from the charity but if you're contributing other than a check money then you need to provide what's the basis of that if non-cash contribution exceeds 5000 now you need a qualified appraiser now you need to get a specialized person that's going to appraise this asset whatever that asset that you are contributing to to substantiate how about if you contributed antiques painting jewelry and other tangible personal property to deduct donated property it depends on the charity uses and its tax exempt purpose and we'll talk about this now we are getting into this the next session if the charity uses the property for the related purpose the deduction is based on the appreciated fair market value so if you donated a painting to a museum well the painting to a museum is it's going to be used in the museum it's for the related purpose then you can deduct the fair market value how about if you donated this painting to the Red Cross then or to the Salvation Army then it's not then you have to use the cost otherwise the deduction is limited to the property cost again we're going to talk about more about this type of property in the next session also the taxpayer should obtain a statement from the charity to document the property's use so you have to kind of get it get a statement saying how am i going to be using it am i going to be using it for my purpose or am i going to sell it because it makes a difference if they use it for their purpose you could use the fair market value if not you are limited to the cost basis valuation again now we're getting into the next session evaluation means how much how much did you contribute you have to assign a dollar amount property donated now if it's money it's easy if you're donating money there's it easy to evaluate cash right cash is cash property donated typically valued at fair market value this is what we're going to be discussing first when the gift is made what's the fair market value when we say fair market value is the price of which the property would be exchanged between a willing buyer and a willing seller with reasonable knowledge and no obligation to buy or sell that's what the fair market value is charitable contribution do not provide fair market value so it's the taxpayer responsibility now for something clothing they might tell you it's the fair market value because they are considered qualified appraiser but if we're looking at something else they may not be expert in that so you have to provide written evidence of the donation the taxpayer responsibility to obtain written evidence of the donation from the charity and determine the appropriate value so it's your job to do so because you're taking the deduction do not again clothing for something less than 500 they can do it for you but something larger you have to you have to take care of that what should you do now go to far hat lectures and work mcqs to do what to understand the concept of schedule a charitable contribution in the next session it's going to be part two for charitable contribution what i talk about the different type of property that you can contributed and what are the limitations because you have again there's always a ceiling congress is a generous to a point good luck study hard and stay safe