Generous Gifts, Costly Mistakes: 10 Pitfalls to Avoid Before December 31

You can be completely sincere about a gift and still lose the deduction. The best intentions can’t save a deduction from missing paperwork or missing the deadline. Worse than that, some mistakes come with penalties as well. With year-end close, here are ten pitfalls to avoid. 

Inflated valuations

Not everything is as easy to value as cash or public stock. Art, real estate, private company stock, conservation easements, and crypto are commonly overvalued assets when it comes to charitable gifting. These also happen to be red flags for the IRS. If you claimed 150% or more of the correct value, there’s a 20% penalty on underpaid tax; at 200% or more, it’s 40% (on top of the tax itself, of course). For noncash gifts over $5,000 (other than publicly traded stock), a qualified appraisal isn’t optional. The law requires one. So find a credentialed, reputable, and well-referenced appraiser before making that gift. 

Missing paperwork

A deduction can be denied in full even when the gift was real. Any single gift of $250 or more needs a written acknowledgment from the charity that says whether you received anything in return, and you need it in hand by the time you file. A canceled check isn’t enough. Noncash gifts totaling more than $500 require Form 8283, and for gifts over $5,000 that form needs signatures from both the appraiser and the charity. Courts have thrown out large deductions over missing or incomplete paperwork, so keep everything.

Missed year-end deadlines

A gift is completed in the year it actually occurs, not the year it’s started. A stock transfer must hit the charity’s account by December 31st. A check counts in the year you hand it to the charity or mail it (postmarked by 12/31), as long as it clears afterward. For those using Qualified Charitable Distributions from an IRA, make sure the custodian pays the charity by the 31st as well. The year-end dash creates bottlenecks at custodians, so start in early December or November. 

Using a donor-advised fund for your own benefit

A donor-advised fund (DAF) is a great tool, but once the money goes in, it belongs to charity (which is the DAF sponsor). DAF grants can’t pay for event tickets, memberships, or anything else that gives you or your family more than an incidental benefit. A 125% excise tax applies to the amount that benefited you personally.

Private foundation self-dealing

Families with private foundations face strict rules about dealing with their own foundation. Paying family members more than reasonable compensation, loans from the foundation to family members (or interest-bearing loans to the foundation), or personal use of foundation assets all trigger excise taxes. Foundations are often a great tool to get the family involved. Develop strict policies and procedures as well as a strong family governance plan. 

Gifts that buy something

A gift has to be a gift. If a donation to a private school gets your child admitted, or a gift to a hospital gets someone a faster appointment, the deduction can be reduced or lost entirely. The IRS is focused on what you receive. 

Time, services and use of property

While everyone’s time is valuable, time volunteering doesn’t earn a charitable deduction. Neither does letting a charity use your vacation home or office rent-free. What you can deduct is out-of-pocket costs and mileage related to volunteering. This is not substantial, so make sure you’re following the rules around how much is allowed. 

Value received in return

Deducting that gala ticket? Silent auction wins? Careful. Only the amount above the fair value of what you got is deductible. This is another area where valuation is tricky. Make sure you have rock solid standing when making cost above value deductions. 

Gifts limited to cost basis

Some gifts are only deductible up to what you paid (i.e., your cost basis). This can include items with steep gains. Stock held less than a year, business inventory, and art given by the artist who made it only receive a deduction of basis. Tangible items the charity doesn’t use for its mission, like a painting it will later sell, are also limited to basis.

Cars and used goods

A vehicle deduction is often limited to what the charity actually sells it for, which can be much less than its listed value. Clothing and household items have to be in good used condition or better to count.

The bottom line

None of this should discourage giving. Most charitable gifts are simple, and the deduction is still valuable. The problems tend to show up with unusual assets, unusually large deductions, or gifts that blur the line between generosity and personal benefit. If a strategy sounds too good, or you’re giving something other than cash, talk with your adviser before year-end. A short conversation in November is a lot easier than one with the IRS later.

Composition Wealth, LLC (“Composition Wealth”) is a registered investment adviser. Advisory services are offered only to clients or prospective clients where Composition Wealth and its representatives are properly licensed or exempt from licensure. This communication is for general informational purposes only and should not be considered investment, financial, tax, or legal advice. It should not be treated as a solicitation to buy or sell securities and does not consider individual investment objectives, strategies, tax status, or horizon. Please consult your own tax, legal and accounting advisors before making any related decisions.