Most of us know that we can make tax-deductible donations to our favorite charities. However, many people are a bit fuzzy on the details. As a result, they miss out on tax-saving deductions... often on donations they are already making.
The rules are pretty complicated. However, here are the basics:
- The organization must be qualified. In order to deduct your charitable contributions, you must make them to a qualified organization. Generally, qualified organizations are those that are organized and operated only for religious, charitable, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals. Examples of qualified organizations include many churches, schools, the YMCA, Girl Scouts of America, museums, public television, the Red Cross, Salvation Army, etc. If you are not sure of an organization's status, ask the organization or peruse the IRS's official web site .
- Know how much you can deduct. You can deduct contributions of money or property that you make to a qualified organization. If you contribute property, you can generally deduct the fair market value of the property at the time of the contribution. Your deduction is generally limited to 50% of your Adjusted Gross Income (AGI). In some cases, the limit is 20% or 30%. Contributions that you cannot deduct in a year because they exceed your AGI limit may be carried over and deducted over the next five years, subject to certain limits. Please see IRS Publication 526 for more details.
- Keep records. You must keep records to prove the amount of contributions you made during the year. For each cash contribution that is less than $250, you must keep either your cancelled check, a receipt from the charitable organization, or a written statement that shows the name of the organization, and the date and amount of the contribution. For cash contributions of $250 or more, you can claim a deduction only if you have a written acknowledgment of the donation from the organization. Your cancelled check is not considered sufficient proof. In determining whether your contribution is $250 or more, do not combine separate contributions to the same organization. For example, if you gave $200 per month to your house of worship, that does not add up to a single $2,400 contribution. Additional record-keeping requirements apply to contributions of property. Please see IRS Publication 526 for more details.
- Know what you cannot deduct. You cannot take a deduction for a contribution if you receive or expect to receive a benefit in return. For example, you cannot take a deduction for the cost of raffle tickets. However, you can deduct the amount of your contribution that exceeds the fair market value of the benefit you receive. For example, if you pay $75 for a ticket to a church fund-raising event that includes a meal and/or entertainment, and the ticket has a $25 fair market value, you can deduct $50 as a charitable contribution.
You also cannot deduct dues or fees paid to country clubs and other social organizations, or contributions to political action committees. Finally, you cannot take a deduction for your time, no matter how valuable it may be. However, you can deduct mileage when driving your vehicle while helping a qualified organization (14¢ a mile).
- You can deduct expenses associated with volunteer work, such as the cost of travel and lodging and food if you take the youth group out of town.
- Know the true value of items you donate. With used items, your deduction is limited to their fair market value, which is usually much lower than the purchase price. For example, the fair market value of used clothing is the price that buyers of used clothing pay in thrift shops.
- You can get a double benefit by giving certain appreciated assets. If the donated property has gone up in value since you bought it, you can generally (A) get the charitable deduction for the fully appreciated value and (B) avoid paying tax on the capital gain. If you had sold the asset first and gave the cash to the charity, however, you would owe tax on the gain. So, many people give gifts of appreciated stocks or mutual funds. Everybody wins. Please see IRS Publication 526 for more details.
- You can donate that old car or boat and get a deduction. With a car, for example, you can deduct the fair market value, which can be open to question if not carefully documented. There are also special forms to submit.
Caution: If the organization turns around and sells a tangible gift (such as art or a collector car that has appreciated in value) shortly after you donate it, you can only deduct your cost basis, not its fair market value. This does not apply to appreciated stocks.
Reminder: If you are like most people, you give to charities and other non-profit organizations because you want to benefit a worthy cause. By being aware of the above guidelines, however, you can do good and potentially save taxes at the same time.
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