What can you do before the end of the year to improve your tax situation? Learn the ins and outs of the tax benefits and rules of charitable contributions.
As the year comes to a close, the most common question I am asked by my clients is “What can I do before the end of the year to improve my tax situation?” One of the easiest strategies to employ is increased charitable giving. In this blog post, I will respond to the most frequently asked questions regarding the IRS rules related to, and tax benefits of, charitable donations.
Q: Who can benefit from charitable giving?
A: Besides the warm, fuzzy feeling we all get from supporting an important cause, some taxpayers are able to deduct charitable donations on their tax returns. If you file a Schedule A for itemized deductions, you can deduct qualified charitable contributions.
Q: How much can I donate?
A: There is no limit to how much a taxpayer can donate, but there is a limit to how much can be deducted. Depending on the type of charity, up to 50% of the taxpayer’s adjusted gross income for the year is deductible. (Certain organizations and certain types of donations further limit the deduction to 20% or 30% of the adjusted gross income.)
Q: What is a “qualified organization?”
A: Only donations made to a “qualified organization” are deductible. The organization should be able to tell you whether or not they are qualified. Most churches, educational organizations and nonprofits are qualified. Donations to individuals, corporations, political organizations or candidates, and nonqualified organizations, are not deductible. There is a great tool on the IRS website to search for qualified status (http://www.irs.gov/Charities-&-Non-Profits/Search-for-Charities).
Q: What types of donations are deductible?
A: Donations of cash and property are deductible. Used property must be in good condition or better, except under certain circumstances. You may also deduct mileage when traveling to charitable events or volunteering.
Q: How much can I deduct for donating used property?
A: Generally, the fair market value of the property is deductible. This is sometimes referred to as the “thrift store value” - how much would it sell for at a thrift store? If the value is more than $5,000, you must have a qualified written appraisal stating the value.
Q: Do some donations have special rules?
A: Yes! Donations of stocks and mutual funds, vehicles, artwork you created yourself, conservation property, patents, and many other items have special rules.
Q: Is there anything I cannot deduct?
A: Of course! You cannot deduct a contribution from which you benefit. For instance, you cannot deduct amounts you pay to a qualified educational organization that are considered tuition. Or if you buy a ticket to a concert sponsored by a nonprofit, you cannot deduct the value of the concert. Also, you cannot deduct the value of your own time or services.
Q: I bought toys through an adopt-a-family program at my church. Is that deductible?
A: If your church is a qualified organization, and you receive a written acknowledgement directly from the church stating the value, then the donation is deductible.
Q: What records do I need to keep?
A: For a donation of cash, check, or credit card, you must keep either a bank record or a receipt from the organization. If the contribution is over $250, you MUST have a receipt from the organization (other types of documentation will not be accepted by the IRS). For donations of property, a written acknowledgement from the organization is required, and there are very specific rules that apply to the acknowledgement format.
As with all tax rules, there are many particulars and exceptions to the information detailed above. Please note that this is not specific tax advice, but a general guideline.
If you still have questions about charitable contributions, I am happy to talk to you about your particular situation. Happy Holidays!