Charitable deductions remain a great way to lower your tax bill while supporting your favorite good cause. There have been a lot of fraudulent charitable contributions reported, however, and the IRS is cracking down on it. As a legitimate charitable contributor, you want to make sure you get the deduction you should. Here are some things to remember:
The Organization Must Qualify As a Charity for Tax Purposes
Charitable contributions are only deductible if the organization you are contributing to is deemed a qualified charity by the IRS. Examples of valid charitable organizations are churches, schools, nonprofit hospitals, organization for the prevention of cruelty to children or animals, and many more. The IRS has a list of charitable organizations on its website if you have a question. Some charities have lost their status in the past two years because they have failed to file a tax return with the IRS.
Beware of donations to political organizations, political candidates, civic organizations, unions, and specific individuals. These do not qualify as charitable organizations, so your donations are not deductible. Another watchout is donations to fraternal organizations; and police, fire department, and sheriff’s private organizations. (This gets complicated so bear with me. Donations directly to the city or county to further the civic duties of the police, fire department, sheriff’s office, etc. are deductible.) Some of these private organizations are qualified charities, some are not, and some are broken up into bits that are and bits that are not. Donations for a social event, such as the Shriners’ Winter Ball, are not deductible, but donations to benefit their Children’s Hospital are deductible. In these cases, ask the organization if your donation is deductible or not, and get it in writing.
Documentation to Support Your Donation is Essential
All donations should be supported by a receipt, a check stub, a pay stub, or something in writing.
Cash or property donations of $250 or more must be supported by records that show how much you contributed, and something saying whether any goods or services were received in exchange for the donation and the value of those goods/services. The best support for a donation is a written acknowledgement from the charity describing exactly in detail what was donated, the value of the donation, a statement describing whether or not you received anything in exchange for the donation and the value of what you received. If you are missing this documentation and your tax return is audited, the deduction will probably be disallowed.
If you receive something in exchange for a donation, the deduction is the net amount contributed minus the value of what you receive.
If you donate several things to a charity, make sure they acknowledge each item with a value, and they do not issue a general “thank you for your donation of cash and/or goods” statement.
Charitable organizations should know how to write a donation acknowledgement properly. However, this not always the case. Make sure you check the letter closely. The IRS has disallowed charitable deductions because the wording of the acknowledgement was not complete.
Some Donations Have Special Rules
- Donations of stock are valued at the fair market value as of the date donated, not the value that is your basis. Therefore, it is usually best to donate appreciated stock to maximize the value to the charity, maximize your deduction, and eliminate your taxable gain. If you want to donate stock that has decreased in value, you are better off selling it, taking the capital loss as a subtraction from your income, and donating the proceeds as cash.
- Donations of clothing and household goods are only deductible if the items are in good condition. The value of these items is usually much less than what you originally paid for them.
- Donations of automobiles, boats, and other vehicles must be reported on Form 1098-C issued by the charity, with exceptions for a couple special circumstances I won’t mention here.
- Donations of your time and services, while probably the most valuable donation, are not deductible. However, you can deduct reasonable expenses associated with your contribution of time. Reasonable expenses include mileage, travel and meal expenses, materials, books, etc. used in your charitable work.
- Donations of items valued at $5,000 or more generally require an appraisal. Unfortunately the cost of the appraisal is not deductible as a charitable contribution.
- Donations of items that have increased in value, such that you would have taxable income if you sold them, may require an adjustment in their fair market value. This is due to the principle that you can’t get a double benefit. In this case, you can’t both avoid tax on income, and reduce your tax via a deduction. So, your charitable deduction will probably be equal to the original, unappreciated values of the items.
Limits on Charitable Donations
First of all, bless you for giving so much that you hit your limit. The world needs more generous people like you!
- 50% Limit
You can deduct up to 50% of your adjusted gross income for charitable contributions to churches or church associations, schools, hospitals, medical research organizations, state and municipal colleges, U.S., state and tribal governments, foundations that are publicly supported, and certain qualifying private foundations.
- 30% Limit
You can deduct up to 30% of your adjusted gross income for qualified contributions to veterans’ organizations, fraternal societies, nonprofit cemeteries and certain private foundations.
- Special Limit on Capital Gain Property
When you donate capital gain property (stocks, property, etc.) you can either 1) take a charitable donation for the FMV of the property and report the capital gain, 2) take a charitable donation for the basis of the property, or 3) limit your donation to 30% of your adjusted gross income (if this is a 50% limit organization. It’s 20% for 30% organizations).
If you use up your limits, you can carry over your excess contributions for 5 tax years.