Giving to your favorite charity can pay off at tax time as long as you know and follow IRS rules.
The first requirement is that you itemize. If you claim the standard deduction, which most taxpayers do, your generosity will benefit your favorite charity, but it won’t help reduce your tax liability.
Next, make sure you give to an IRS-qualified charity. A running list of authorized groups is contained in IRS Publication 78, with a searchable version on www.IRS.gov. You also can verify an organization’s tax-exempt status by asking to see its IRS authorization letter, or by calling the IRS toll-free at 1-877-829-5500.
You also need to be aware of potential limitations. In most cases, as long as your total donations don’t exceed half of your adjusted gross income, you’re OK. If you plan to contribute unusually large amounts, check with your tax adviser and the charity about any possible tax implications.
Now to the actual giving.
You can contribute cash or goods. In tax talk, “cash” includes not just currency, but also checks, electronic transfers, money orders and charge payments.
The tax code now requires that all monetary donations be substantiated by a bank record or written receipt from the charity. A canceled check will serve as the requisite record; so will a credit card statement. Many charities already provide receipts for monetary gifts, regardless of the amount. If your favorite nonprofit doesn’t automatically do so, ask for one when you donate. For donations of $250 or more, you must get an official receipt.
You don’t have to send in the documentation with your return, but if the IRS asks and you can’t produce acceptable verification, your gift could be disallowed.
If your contribution entitles you to merchandise (for example, the CDs and such that PBS stations offer during pledge periods) or admission to a special event (such as a charity ball), you can deduct only the amount that exceeds the fair market value of the benefit you receive.
Record-keeping requirements for noncash gifts depend on the value of the contributed goods. The major consideration here is donation of items valued at more than $5,000. For these higher-priced gifts, you generally must obtain a written appraisal of the property.
In addition to specific documentation rules, the IRS has certain deduction and filing requirements for donated goods.
You must fill out Section A of Form 8283 if your total deduction for all noncash contributions is more than $500. When your donated property amount exceeds $5,000, in addition to an appraisal, you also must complete Section B of Form 8283.
As for the property itself, tax law now requires that any donated household items be in good or better condition. If they’re not, the IRS could disallow your contribution. The key here is to use the true fair market value of your gift. There are several software programs that can help you figure this out, as well as IRS Publication 561. Also check online auction sites for the going price for an item you plan to donate.
The condition-of-goods clause was added in 2006 to eliminate two problems:
- Taxpayers using charitable groups as de facto garbage dumps.
- The loss of government money because of overvalued donations.
The obvious question is how will the IRS know the condition of your donated goods? An auditor won’t, but he or she will look closely at claims, and the law now gives examiners more leeway to ask questions if they see what they deem is an usually large charitable contribution amount on a Schedule A.
Tax revenue lost to overvalued donations also was why lawmakers toughened vehicle donation rules.
You no longer can automatically deduct the Kelley Blue Book value of your donated jalopy. Instead, you must take into account the value of your auto, as well as what the charity does with it. The organization has to let you know how the vehicle was or is used and, if it was sold, at what price.
Most vehicular donations are autos, but these contribution rules also apply to boats, airplanes and other motorized vehicles. When you give a charitable group any of these machines, you’ll need to file Form 1098-C with your tax return.
There are several other tax-deductible ways to contribute.
You can write off the cost of gas and oil used in going to and from an organization at which you volunteer. If you prefer, rather than track actual costs, you can deduct 14 cents for each mile. You also can deduct travel expenses incurred while you were away from home performing services for a charitable group.
The cost of buying and cleaning uniforms used in volunteer work is deductible. So are some out-of-pocket expenses, such as stationery and stamps you purchased so that your favorite nonprofit could send out a mailing.
If you own appreciated stock that no longer fits your portfolio goals, consider giving it to a charity. Not only will you get to deduct the equity’s value at the time it was donated, but also you will avoid capital gains on its appreciated value.
Contributions you can’t deduct
You already know that donations must be made to IRS-qualified groups to be deductible. The IRS also has some specific instances when giving isn’t deductible. You cannot write off contributions to individuals, such as a fund to help a family experiencing hardship. Neither can you deduct the value of your time spent volunteering or services you provided the group at no cost.
Timing is everything
Finally, remember that your donations are deductible in the tax year in which you make them.
For example, if you pledged $500 to a charity in September but paid only $200 by Dec. 31, your deduction for that tax year is $200. You can deduct credit card charges and payments by check in the year they are made or mailed, even if you do not pay your credit card bill or your check doesn’t clear your bank account until the following year.
Donations of goods, however, must be in the charity’s possession by the end of the tax year.