If you make a qualified charitable donation, you will not only help your favorite charity but also receive a tax benefit. Here we look at what constitutes a deductible donation, what deduction ceilings you need to look out for and what records you need to keep when giving to charities.
Common Types of Donations
Cash - This is the most common type of donation and, not surprisingly, the easiest to value. A contribution by check is deductible in the year you give the check, even if it is cashed the following year. However, you can't deduct a cash contribution unless you keep a bank record (such as a canceled check or bank statement) of the contribution that includes the name of the charity, date of contribution and amount.
Intangible Assets - During the stock market boom, it was very common to see charitable donations of appreciated intangible personal property such as securities. These gifts allow you to remove an asset that has appreciated or that is otherwise taxable (if sold by you) from your estate. When donating intangible assets, the fair market value on the date of donation is typically used to determine the value of the donation.
Tangible Assets - Nowadays, real estate has become a popular donation; this type of donation also allows you to remove from your estate an asset that has appreciated or that would otherwise be taxable if you were to sell it.
Property such as furniture, clothes, and art are regularly donated items that many people overlook when filing their tax return. One reason for this might be that it can be difficult to put a price on the value of some donated property. For property such as cars, boats or other motor vehicles, the recordkeeping laws have become more stringent because many people have been busted by the Internal Revenue Service (IRS) for grossly overstating the value of donated vehicles. In addition, you can't take a deduction for clothes and household goods unless these items are in good condition.
When contributing to a qualified organization, your donation is generally deductible only to the extent that you intend to give more than the value of the benefits that you receive. For example, if you contribute $100 to the Girl Scouts of America and receive $20 worth of cookies, then your deduction will be limited to $80 (your donation minus the value of benefits received by you).
Deductible vs. Non-Deductible Donations
Now that you know some of the different types of donations that can be made, let's take a look at what the IRS views as qualifying organizations and what it considers non-deductible contributions.
Keep in mind that the information in this table is only meant as a general overview of what you can and cannot deduct; there are too many other qualifying organizations to list. In many cases, you can deduct not only the value of your donation but also any expenses incurred in doing charity work that have not been reimbursed. Be cautious in this area, however: the value of the volunteer work that you perform for a charity cannot be deducted.
Limitations on Deductions
Unless you're making donations that are very substantial in relation to your adjusted gross income (AGI), you probably don't need to be very familiar with deduction ceilings. What you need to know is that cash donations generally have a ceiling of 50% of your AGI. For example, if your AGI for the tax year was $40,000, then your maximum cash donation deduction for the year would be $20,000 (50% of your $40,000 AGI). For capital gain property donations (property held long-term or for more than one year), the deduction limit is generally 30% of your AGI.
Donations to special groups such as veterans' organizations and private non-operating foundations, to name a few, have a lower ceiling of 30% of AGI for cash contributions and 20% of AGI for a long-term capital gain property. Even if your charitable contributions are within the deduction ceilings, you'll need to keep in mind that your overall charitable deduction may be subject to the 3% reduction to itemized deductions if your AGI is over $145,000. The good news is that if you make donations that are not deductible because you have exceeded the 50%, 30% or 20% of AGI ceiling, you may carry the excess over the next five years.
In the event of a tax audit, you will have to substantiate your charitable donation deduction. The required recordkeeping typically depends on the donation amount and whether you are contributing cash or property. You should be fine if you remember these three rules:
- Contributions under $250 - A canceled check or dated receipt will suffice.
- $250 or more - Written acknowledgment from the charity is required.
- $500 or more - If you made non-cash gifts totaling more than $500 for the year, you must complete and attach IRS Form 8283 to your tax return. If you donated a car, boat, airplane or other motor vehicles, you must complete and attach IRS Form 1098-C (Contribution of Motor Vehicles, Boats and Airplanes) to your federal tax return.
Acceptable forms of written acknowledgment from a charity include email, postcards, computer-generated forms, and letters. If you are claiming a deduction exceeding $5,000 for an item or for a group of similar items (such as paintings, stamps, coins or books), you must also get a written appraisal from a qualified appraiser.
There are many things to know about charitable donations and the deductions associated with giving. Charitable giving is just one example of how you can help those who are less fortunate than you are. Whether you donate your services, personal property, money or time, you are making an important contribution to your community, which is also rewarding on a personal level. After all, when you are gone, all you will have left is your legacy, so why not make it one of generous giving to others?