3-13-09
What Did You Contribute?
Like so many English words, “contribution” is wonderfully flexible. It can be literal or metaphorical. It can be psychological or financial. It can refer to a simple oral statement or a formal academic paper. And if one does not dissect context carefully, it can be ambiguous and confusing.
The language of taxation differs a lot from the ordinary conversation of people in the arts, or the artistic literature with which they work. Its many nuanced uses of “contribution” and the related verb and adjective forms can easily mislead those not fluent in this dialect.
Giving to Yourself
Tax law most commonly speaks of contributions to retirement plans (such as traditional IRAs, Roth IRAs, and 401(k)s) and certain other tax-advantaged slush funds. The word also has many other technical uses that you would not recognize at all, involving corporate capital structure, trusts and partnership assets.
In just these familiar areas, “contribution” is used over and over and over as they address such issues as definitions, maximum and minimum allowable amounts (often articulated with filing status and income levels), deadlines for moving money, taxpayer eligibility or ineligibility, and qualifications of those holding the money. Trust me, none of these discussions are succinct, simple or anything you would want to read on a beach. I read them because I have to.
Some of these points come up in my office during tax season, with questions like, “What is my maximum deductible IRA contribution this year?” Worse, the discussion might be, “You have to remove the Roth IRA contribution you already made, because you are over the income limit.”
Do ask before you act. It is much easier than cleaning up afterwards.
Giving It Away
The more familiar tax use of “contribution” involves giving something to a good cause—usually money, but not always. People tend to assume that any contribution in this context is tax deductible, but that is not the case.
This year more than most years, I’m seeing clients who want to deduct political contributions. That is scarcely surprising, considering the excitement and energy of last year’s presidential election as well as the massive amounts of money spent. After giving to the Obama campaign or the Clinton campaign or the “No on Proposition 8” groups, many people had the same warm feeling that comes from rescuing a kitten. “We were doing good,” people think. “Surely, that must be rewarded at tax time.”
Unfortunately, the answer is no. You would not feel that way about the campaign contribution you give your alderman hoping that he will help shut down the obnoxious bar near your home. From a tax standpoint, the two situations are indistinguishable.
Even acts of pure charity may not be tax deductible. You cannot deduct the money you give to the panhandler on the El, or to the fund for a family that has suffered some horrific tragedy. A deductible charitable contribution must be made to an organized not-for-profit which has been formally recognized by the IRS as qualifying under Section 501(c)(3) of the Internal Revenue Code.
There are good public policy reasons for this. It helps ensure accountability, and eliminates any ambiguity as to when a gift is charitably motivated and when it is just Christmas. Similarly, the contribution must be to an American charity. That rule involves both chauvinism and accountability, as the IRS has no way to oversee foreign organizations. Bigger overseas charities generally have a U.S. affiliate through which they funnel funds, such as the Royal Shakespeare Company America, Inc., or Oxfam America.
Giving It Value
Instead of money, you might give other stuff—“in-kind contributions” as they say in non-profit accounting, or “non-cash contributions” in tax argot. Old clothes and used cars are common examples, but marketable securities, rare books, works of art and real estate are often given. Their utility to the recipient is usually obvious. The amount of the contribution deduction rarely is.
The theoretical amount is “whatever it was worth when you contributed it.” Contributed automobiles that are sold by the recipient organization are easy. By law, the group must send you an IRS form saying how much the car sold for, which is the amount you can deduct..
Similarly, if you give shares in a publicly traded company or mutual fund, the market value on the day of the contribution is readily available.
The value of any other non-cash contribution is necessarily an estimate. The IRS certainly knows that people will tend to be, uh, generous in estimating the value of their own gifts, so there are restrictions.
If your non-cash contributions come to more than $500 in a tax year, you have to attach a schedule showing what you gave, when and who received the gift. If any single contribution is over $5,000, the value must be supported by an appraisal from an IRS-approved appraiser. That is still an estimate, but at least it comes from a presumed expert. (And by the way, you must pay for the appraisal; the donee organization, by law, cannot.)
The deduction for typical contributions of used clothing and household items is supposed to be based on “Thrift Shop Value.” Some organizations publish lists of how they price commonly-donated items, and commercial software programs based on national surveys are available. And while I cannot say it is officially condoned, many people just figure out what they paid for it, and claim a modest if arbitrary percentage of that.
Giving of Yourself
One tax deduction you cannot take is for contributing your own services. What you gave away must have either cost you money, or had value when you received it as a gift or bequest. Just enjoy the warm feeling.
Giving It Away
That’s what I’m doing with my “Checklist of Potentially Deductible Items...” for those in the arts, just call my office, or send an e-mail to checklist@gregmermel.com.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel (www.gregmermel.com) is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.