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Tax deduction - Charitable contributions and others

Federal tax reform approved in December 2017 changed many areas of federal income tax law. These laws may now conflict with state income tax law. One goal of federal tax reform was to simplify tax filing by increasing the standard deduction so some taxpayers will no longer need to itemize deductions on their federal tax return. Your client may take the increased standard deduction on their federal return, but they may still want to itemize on their California return.

Here are a couple items to keep in mind:

State and local taxes

  • Federal law limits your state and local tax (SALT) deduction to $10,000 if single or married filing jointly, and $5,000 if married filing separately.
  • California does not allow a deduction of state and local income taxes on your state return.
  • California does allow deductions for your real estate tax and vehicle license fees.

Mortgage interest

  • Federal law limits deductions for home mortgage interest on mortgages up to $750,000 ($375,000 for married filing separately) for loans taken out after December 15, 2017 and no longer allows interest on equity debt.
  • California allows deductions for home mortgage interest on mortgages up to $1 million plus up to $100,000 in equity debt.

Charitable contributions

  • Federal law limits cash contributions to 60 percent of your federal adjusted gross income (AGI).
  • California limits cash contributions to 50 percent of your federal AGI.

If your client received a benefit as a result of making a contribution to a qualified organization, the deduction is limited to the amount of the contribution exceeding the value of the benefit received.  This frequently arises when a contribution entitles the donor to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event.

Example: If your client buys a ticket to a charity dinner for $100, and the dinner itself is valued at $35, the donation will be limited $65 – the amount that exceeds the fair market value of the benefit received.

Remember to have proper documentation

Your clients must keep adequate records to prove the amount taken. Contributions of $250 or more to any single charity require written acknowledgment of the contribution by the charity (done) before claiming a charitable contribution. Written acknowledgement is required and must be contemporaneous. This means the donor obtains the acknowledgement from the charity on or before the earlier of the date the tax return is filed or the due date of the tax return (including extensions). The written acknowledgement must also contain:

  • Organization name
  • Amount of cash contribution
  • Description (but not the value) of any noncash contribution(s)
  • Statement that the organization did not provide goods or services in return for the contribution, if that were the case
  • Description and good faith estimate of the value of the goods or services, if any, that the organization provided in return for the contribution
  • Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits

Visit the IRS website for more information:

  • Charitable Contributions Substantiation and Disclosure Requirements (IRS Publication 1771)
  • IRS' online search tool Tax Exempt Organization Search (formerly Select Check). Find out if an organization qualifies as a charitable organization for income tax deductions

 

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Last Updated: 03.04.2019

 

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