Making a donation to a charity, whether it is old clothes or money, may come with an additional benefit - a deduction on your federal income tax return. However, not every charitable contribution may be deductible, which is why it’s important to understand the rules and conduct proper tax planning. Let’s look at what charitable contributions qualify for beneficial treatment, how to value donated property, and how to handle these itemized deductions on your tax return.
You Must Itemize to Receive Tax Benefits from Contributions
On your federal tax return, you are presented with two choices on the Form 1040, Schedule A. You can either itemize your deductions or keep things simple and take the standard deduction, which is an amount set each year by the IRS. Itemized deductions include certain expenses and contributions such as charity, mortgage interest paid on a home, property taxes, union dues and certain medical expenses. If the sum total of all of those items is greater than the standard deduction offered by the IRS, then it makes sense to itemize your deductions. So if you make charitable contributions during the year, you’ll only recognize a tax benefit if you itemize deductions on your tax return. This is why it’s so important to begin your tax planning well before year end. Doing so you will help you anticipate whether you’ll be able to take advantage of giving larger and frequent charitable donations during the year.
What are Qualified Organizations?
Any entity seeking to be qualified for tax deductible donations must apply to the IRS for such status. Typically these entities are nonprofit in nature, concern the community and the public at large, and file under section 501 of the Internal Revenue Code (the “IRC”). You can confirm that the beneficiary of your donation is a qualified organization by asking an employee to show you a copy of the IRS letter than confirms its status. You can also check IRS Publication 78 or search the IRS Exempt Organizations Database. The IRS can be reached by telephone at (877) 829-5500. Alternative methods including searching charity organization databases at Charity Navigator, Great Nonprofits and GuideStar. Over one million tax deductible qualified organizations are listed.
What Charitable Contributions Are Deductible?
The Internal Revenue Service (the “IRS”) allows you to deduct donations of money or property to qualified organizations up to certain limited amounts. They generally include the following:
There are limits on donations to foreign or international charities. At the moment, tax treaties with Canada, Mexico and Israel may allow you to deduct contributions to certain charitable organizations to the extent that the donations can offset any income earned from sources in each respective country. See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information.
- Non-profit charitable organizations – IRS approved 501(c)(3) organizations (the United Way, the Salvation Army and the Red Cross);
- Religious organizations and places of worship such as churches, synagogues, temples, mosques and shrines;
- Nonprofit educational institutions (colleges, schools, museums), hospitals, and medical research facilities;
- A community corporation, trust, fund or foundation;
- Where a donor to a qualified organization receives a gift, only the amount to which the donation exceeds the value of the gift is deductible;
- Property donated to a qualified organization at the fair market value at the time of the contribution.
What Contributions and Donations Are Not Deductible?
Some donations may seem like charity that should qualify but do not. This shouldn’t stop you from doing a good deed, of course. The most common nondeductible contributions include:
- Time volunteered to provide services at a charitable organization;
- Charitable donations to a person in need (as opposed to an IRS approved 501(c)(3) nonprofit organization) which include a friend, relative, priest, rabbi or person on the street;
- For profit educational institutions, hospitals;
- Political candidates, groups and activists;
- Clubs or groups that don’t serve the community as a whole (which can include a social club, sports club, homeowners’ association and civics group) – see the strict rules regarding IRC 503(c)(4) organizations;
- Donations for raffle tickets, bingo games and lottery tickets – even those sold by charitable organizations.
Contributions of Cash / Money
Practically every organization accepts contributions made in cash and by bank or personal check. Many can also take donations by credit card or electronic funds transfer such as PayPal, Google Wallet and Moneybookers. The general rule is that cash donations, even large ones, can benefit taxpayers up to 50 percent of their annual adjusted gross income.
Many organizations accept donations of property, which can serve a triple benefit – you can help others, get a tax deduction and clear out your garage or attic space. The most frequent donations include clothing, furniture, cars and trucks, household goods, mutual funds, stocks and bonds. Unlike cash, there is no clear value so the process becomes more complicated.
It may be surprising but the IRS requires the donor to set the value for contributions of property, not the charity. The IRS has special rules and record keeping requirements. They are aware of inflated values that taxpayers will tend to assign to donated property, so don’t get any ideas about tax windfalls. The amount set must be the “fair market value” of each item. IRS Publication 561 defines it as the following, along with providing some relevant examples:
Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction. The IRS guidelines explain how to set the fair market value:
- The cost or selling price if the purchase or sale too place close to the valuation date in the open market and with an uninterested third party;
- The cost to replace the item;
- Recent sales of comparable items;
- Appraisals for valuable property such as real estate, vehicles and jewelry. (An appraisal by a qualified expert is required by the IRS where the value of the property value exceeds $5,000.)
Record Keeping and IRS Filing Requirements
In order to be able to deduct a charitable donation on your tax return, you must have a record of the transaction. It doesn’t matter how small the contribution. Records can include a cashed personal check, an official receipt provided by the organization for a cash donation or a bank record. Without a record, there is no proof of the contribution. A cash or property donation with a value greater than $250 requires a written receipt that meets three requirements and states the following:
Receipts are not required to be submitted with federal income tax returns. However, if the charitable contribution is property worth more than $500, you must file IRS Form 8283 (Noncash Charitable Contributions) which includes the amount donated, the date of the contribution, the method used to determine the value and other relevant information.
- The amount of the contribution or description of the property;
- That no goods or services were provided to the donor in exchange for the donation (or list them along with the amount of the benefits);
- That the receipt must be in the possession of the donor by the date the Form 1040 is filed with the IRS.
If you are considering donating a significant amount of money or property, you may wish to consult with a tax attorney or certified public accountant. You will want to make sure your contributions qualify for deductions and that the timing of your contributions result in the maximum amount of beneficial tax treatment.
Tax Returns How to Get a Tax Deduction for Charitable Contributions
By Michael M. Wechsler |
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