Making charitable contributions is one of the ways to decrease US expat tax liability. American expats living abroad can make a charitable donation to a wide range of US and foreign charities. However, it is essential to follow several IRS rules to make sure that charity donations are tax deductible.
This is an email from one of our clients, American expats living abroad. “I donated $1000 to my friend who rescues dogs and cats. Also, I made charitable contributions to United Way. However, I have just learned that I cannot deduct $1,000 on my expat tax return. I would like to understand the rules of claiming charitable contributions.” The purpose of this article is to review a summary of IRS rules that American expats should follow to deduct charity donations.
IRS Rules for Claiming Charitable Contributions for American expats on US tax return
Rule 1 – Choose a charity approved by the IRS to claim a tax-deductible donation
American expats can donate to various educational, religious and charitable organizations. However, only charitable contributions to qualified nonprofit organizations are deductible. It means that donations to foreign charities do not qualify as an itemized deduction on US expat tax return. To confirm whether a charity is approved by the IRS, US taxpayers should check the IRS website for a list of Exempt Charities. Making contributions to individuals, political organizations and candidates does not qualify for deduction on US expat tax returns.
Rule 2 – Keep records of all charitable contributions
One of the most important rules of deducting charitable donations is to keep a good record of all contributions. American expats must maintain a cancelled check, bank record or any communication with the charity name, the date and amount of contribution. In case of donations over $250, a US taxpayer must keep a bank record, payroll deduction record or a letter from the charity with the details of charitable contributions. Additionally, in case of donations over $500, American expats must file form 8283 and attach it to US expatriate tax return. A separate appraisal is required if the donation is more than $5,000.
Rule 3 – Deduct Charitable Contributions Timely
American expats must be aware that they can deduct charitable donations in the year that they were made. For example, if a taxpayer makes a charity donation on December 21, 2013 by using a credit card, s/he can still deduct it on 2013 tax return even in spite of the fact that s/he will pay a credit card balance in January 2014 because the charity organization received his/her donation in 2013.
Another example. An American expats decided to set up several charitable contributions in 2013. However, the final donation in the amount of $600 is made on January 1, 2014. In this scenario he cannot deduct $600 in a tax year 2013, however, he will take a write-off in a tax year 2014. Another thing to remember is that making a pledge does not qualify as a charitable contribution because this is just a promise.
Rule 4 – Calculate the maximum amount of deductible charitable contributions
There are several important tips to remember.
- American expats cannot deduct a contribution for the benefit received. For example, a taxpayer decides to attend a black-tie event and buys a ticket for $500. However, the cost of dinner is $200. Also, the gift card in the amount of $100 is included in the ticket cost. In this scenario a US taxpayer can take only $200 deduction on US expat taxes.
- US taxpayers cannot deduct more than an appreciated value of property. For example, an American living abroad bought the shares of Google five years ago for $1000. Currently the value of these shares is $100,000. The taxpayer can deduct the entire $100,000 on US expat tax return since this is an appreciated value of stock.
- American expats cannot deduct more than a fair market value of used goods. For example, a taxpayer paid $500 for a coat two years ago. However, the fair market value of this coat is only $100 now, although, the coat is still in a very good condition. In this scenario the taxpayer can deduct only $100 on Schedule A. Another thing to remember is that clothing and household items must be in good used condition to be deductible.
- US taxpayers can take a deduction for volunteer services too. For example, an American expat provides free lessons to kids at the church. S/he can deduct the cost of materials, supplies, parking, tolls and driving expenses to the volunteer site. However, s/he cannot take a write-off for the services provided. In other words, s/he cannot deduct the value of the lessons on US expat tax return.
Rule 5 – Take the charitable donation on Schedule A
In order to deduct charitable contributions, an American expat must file Form 1040 and itemize his/her deductions on Schedule A.
Rule 6 – Calculate the limit of charitable deduction
Charitable contributions to qualified nonprofit organizations cannot exceed 50% of Adjusted Gross Income. If taxpayers make gifts of appreciated property, then the total amount of deduction cannot exceed 30% of AGI. If US expats make gifts to colleges and universities and receive the right to buy tickets to college sport events, then they can deduct up to 80% of entire donation.
Although, American expats live abroad, they can still deduct qualified charitable contributions. They have to follow the IRS rules to make sure that they can take a deduction on US expat tax return. It is essential to check whether the charity is approved by the IRS to avoid any surprises. American expats with additional questions about various deductions and exclusions should contact a CPA that provides expatriate tax services. International tax experts at Artio Partners will be pleased to assist with various expat tax issues.