US & UK tax tips for charitable contributions
When making a tax deductible charitable deduction for US income tax purposes, it is always good to seek advice. The following IRS tax tips outline the rules you must consider. Generally, for income tax purposes, the charity must be a US charity. Different rules apply for deductions for Estate and Gift Tax purposes. The IRS says:
“Charitable contributions made to qualified organizations may help lower your tax bill. The IRS has put together the following eight tips to help ensure your contributions pay off on your tax return.
1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations and candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
7. To claim a deduction for contributions of cash or property equalling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions.”
The United Kingdom has a different set of rules as personal tax relief, for charitable donations, is usually given through the Gift Aid system.
Gift Aid is designed to enable taxpayers to recognise the benefit of donation without necessarily having to file a tax return. This is achieved by transferring the 20% Basic Rate Tax Relief to the charitable organisation directly. This is often referred to as the ‘gross up’, for example, a donation of £80 is grossed up to £100 and the charity can reclaim the additional £20 from HM Revenue & Customs (HMRC).
Higher and additional rate taxpayers (40% and 45%) obtain further tax relief by extending their Basic Rate tax band by the grossed up donation amount. If an individual already files a tax return, they can claim the additional tax relief through their return. However, if the individual is not required to file a tax return, they can obtain the additional tax relief by submitting a repayment claim to HMRC or requesting an adjustment to their PAYE tax code.
Organisations qualify for Gift Aid if they are registered charities within the European Economic Area (EEA). It is not yet clear how Brexit will impact on the EEA scope of Gift Aid, but HMRC have not indicated any immediate changes. Community Amateur Sports Clubs usually also qualify for Gift Aid, as long as they are registered with HMRC.
If individuals do not pay UK tax, they should be cautious when making a donation under Gift Aid as it may trigger a tax liability equivalent to the gross up amount. In this circumstance, the donation can be made without the Gift Aid element.
Tax relief can also be given for donations of land, property, shares or gifts through a will. This is administered outside the Gift Aid system and the rules are complex. We therefore advise seeking professional advice if you are considering this type of charitable giving.
For US citizens or Green Card holders, who are subject to the UK tax system, there are donation routes which permit tax relief both in the US and UK. This is commonly achieved by making donations to an organisation which qualifies in both countries.
The National Philanthropic Trust (NPT) is set up to allow contributions to be deductible for both US and UK purposes. Charities Aid Foundation (CAF) and Anglo-American Charity Limited are similarly set up to facilitate deductible contributions in both countries.
Contact us to be guided through the complex rules applicable in both the US and UK.
(You can read a post we published subsequently, by John Canady, CEO of the NPT-UK, regarding donor-advised funds here.)