Gifts to charity are one of the best tax saving opportunities available. Not only does the charity recipient benefit, but the taxpayer receives a tax deduction. As with most government benefits, there are limits to charitable contributions. When donating to charity, and claiming the charitable deduction, investors, financial advisors and tax specialists should consult the Internal Revenue Service (IRS) government publication 526 for questions and clarification.
There are many charities and ways to contribute. Below are a few tips to help clarify this confusing topic.
Deductions and Contributions
The charity must be qualified in order to deduct the contribution. You can’t give Aunt Linda $50 and deduct it as a charitable contribution. Neither can you deduct political contributions.
Not everyone can deduct their charitable contributions. You must file IRS Form 1040 and itemize deductions on Schedule A to claim the charitable deduction. Some charitable contributions come with benefits. If you buy a T-shirt "for a cause" the entire price of the shirt isn’t deductible, only the contribution value, on top of the worth of the T-shirt can be claimed. So if it costs $40 and the stated value of the T-shirt is $20, then the deductible amount of the gift is $20 ($40 - $20). (For more insight, read about how to maximize your tax deduction.)
Many folks donate clothes, household items and more to Goodwill, the Salvation Army and other similar charities. This is a great way to declutter and help others. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition, and there are additional regulations that apply to vehicle donations. You can’t claim the new value for a noncash donation but must use the item’s fair market value. That price is similar to a thrift store value.
Some tax preparation programs include a calculator to help determine items’ value. When donating noncash charitable contributions, if your total deduction is greater than $500, you must file IRS Form 8283. Additionally, if you give cash or property worth more than $250, you need a written acknowledgment from the organization as well. IRS Publication 561 is a useful resource to help you decide the value of your noncash contributions.
There is a limit to the amount of all charitable contributions allowed during a tax year. Your total charitable deduction can’t exceed 50% of your adjusted gross income (AGI). As with many government programs, there’s a caveat; certain qualified conservation contributions are eligible for a higher limit. To further complicate the matter, there are certain types of organizations that qualify for the 50% limit. These organizations include churches, educational institutions, hospitals, and others as defined by the IRS. (For more insight, explore the little-known tax deductions and credits.)
There is a lower 30% limit to charitable contributions for certain types of organizations. The 30% limit applies to veterans’ organizations, fraternal societies, nonprofit cemeteries, and certain private foundations.
Your word is not good enough for the IRS. The taxpayer must keep detailed records to support the contributions. In order to claim a deduction for cash, you must have a written record, canceled check, letter from the organization, or bank/payroll debit. (For more insight, read about how to donate stock to a charity.)
The Bottom Line
Don’t let the rules and regulations deter you from claiming the charitable deduction. Download a copy of IRS publication 526 and Form 8283 (for noncash charitable donations) for easy reference. To clarify any potential charity contribution limits, visit the www.irs.gov website. By claiming this deduction you help others as well as yourself. Additionally, by claiming all IRS allowed deductions you save money and avoid paying the government any more than is legally required. (For related insight, read about the value of giving versus receiving.)