About this time of year, we all sit around and prepare our tax returns. One of the ways of lifting your spirits is to give to charity and claim a tax break for doing so.
The Shulhan Aruch states that a person should give a 10th of his earnings to charity. If someone is struggling himself, he should not give a 10th. But the one-10th rule, or maaser, is an established practice among Jews.
For Israeli tax purposes, charitable contributions by individuals to institutions approved under Section 46 of the Income Tax Ordinance qualify for a tax credit of up to 35 percent if they exceed NIS 300 in 2009, but the contributions will not be recognized if they exceed NIS 7.5 million or 30% of taxable income, whichever is lower.
Those organizations have to file annual returns to the Israel Tax Authority. Although they are exempt, an 8% wage tax applies if payroll costs exceed a certain amount (NIS 160,000 in 2009). Such an organization doesn‘t have to be Israeli, but it usually is.
US citizens and green-card holders residing in Israel may have a dual reporting obligation: to the Internal Revenue Service and the Israel Tax Authority. Fortunately, the IRS has provided some tax advice regarding charitable contributions from the US side.
On March 26, 2010, the IRS issued IRS Tax Tip 2010-60, titled Ten Tips for Deducting Charitable Contributions. Here are some interesting excerpts:
TIPS FROM THE IRS
‘‘The IRS has put together the following 10 tips to help ensure your contributions pay off on your tax return.
1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.
2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
3. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.
5. Clothing and household items donated must generally be in good used condition or better to be deductible.
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 donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution and the amount given.
7. To claim a deduction for contributions of cash or property equaling $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.
8. 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.
9. 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 requires an appraisal by a qualified appraiser.
10. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.‘‘
When it comes to qualified organizations for US tax purposes, IRS Publication 526 (last issued December 16, 2009) clarifies that most organizations must apply to the IRS for recognition. Publication 526 goes on to say this about Israeli charities: ‘‘You may be able to deduct contributions to certain Israeli charitable organizations under an income-tax treaty with Israel. To qualify for the deduction, your contribution must be to an organization created and registered as a charitable organization under the laws of Israel. The deduction will be allowed in the amount that would be allowed if the organization was created under the laws of the United States, but is limited to 25% of your adjusted gross income from Israeli sources.‘‘
Suppose most of the income is from US sources? Consider contributing to recognized ‘‘Friends of Israeli Charity‘‘ institutions in the US, with a view to qualifying for a deduction for US purposes and a tax credit for Israeli tax purposes on contributions of up to 25% of US-source taxable income, under additional special rules in the US-Israel Tax Treaty.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.