How to give and save on taxes.
Most of us know that we can make tax-deductible donations to our favorite charities; many folks, however, are unaware of how to do so effectively. As a result, they tend to miss out on tax-saving deductions, even for the donations they already make.
To help ensure that you can both give (and save) as much as you can, we've compiled a list of the basics:
The organization must be qualified.
In order to deduct your charitable contributions, you must make them to a qualified organization; i.e., one that's organized and operated only for religious, charitable, educational, scientific, or literary purposes or for the prevention of cruelty to children or animals. Groups and organizations like churches, schools, the YMCA, the Red Cross, Girl Scouts of America, and the Salvation Army, as well as most museums, are all qualified organizations (you can always contact a group directly if you're unsure of its status). The IRS also maintains an official website for any questions you have regarding taxes and contributions (official website ).
Know what counts.
Expenses associated with volunteer work are also deductible: this can include the cost of food and lodging, as well as travel, provided you use your own vehicle when you aid a qualified organization.
Know the true value of items you donate.
With used items, your deduction is limited to their fair market value (i.e., how much someone would reasonably be willing to pay for your property). Typically, this will be lower than the price you originally paid; used clothing, for example, tends to have a FMV on par with its cost at a local thrift shop. Vehicles, on the other hand, such as cars and boats, require specific documentation to ensure that the fair market value is properly assessed, as well as an additional set of forms to qualify them for charitable deduction.
Be willing to contribute your appreciated assets.
If the property you donated has greater value now than when you bought it, you can both apply for a charitable deduction on the fully appreciated value and avoid paying tax on the capital gain for selling your property. Had you sold the asset first and then donated the money to a qualified organization, you would still owe taxes on the profit you made from the sale. Gifting your appreciated stocks and mutual funds are two of the more common ways to earn what is essentially a double benefit. For more details on how this is accomplished, you'll want to review the most recent IRS Publication 526.
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. If a qualified organization sells a tangible gift that you've contributed such as art or a collector car that's appreciated in value shortly after you donate it, you will only be allowed to deduct the original value of the property, rather than the appreciated one (appreciated stocks are the sole exemption).
Know how much you can deduct.
For the purpose of tax deduction, you can donate either cash or property; in the latter case, the amount you deduct is equal to the fair market value (i.e., what you could reasonably sell the item for) at the time of contribution. Keep in mind that you can only contribute up to a certain amount—usually 50% of your adjusted gross income or (AGI) in a given year (AGI here refers to what you earn less the cost of making that money). Depending upon your specific circumstances, the amount may be as low as 20-30%, so it's advisable to consult with a tax advisor before you make any significant contributions. If you do exceed the limit, you can always carry the deductions over to the next five years, within reason (for more details on this, please refer to IRS Publication 526).
Keep your records updated.
As with most elements of the tax code, you'll want to ensure that your information is thoroughly documented. Likewise, you should list each contribution as a separate entry, even if they're to the same organization. For example, if you gave $200 per month to your house of worship, you would need one document for each contribution, rather than the $2,400 total. For the specifics of documenting property donations, please refer to IRS Publication 526.
Be mindful of contributions that you can't deduct.
Any contribution that benefits you directly will not be considered eligible for a deduction. The raffle ticket you purchase at a local YMCA, for instance, will not count. If the amount you contribute is more than the fair market value of the benefit you receive, however, you are able to deduct the difference. The dues or fees you pay to country clubs and other social organizations, as well as any contributions to political action committees, are never deductible; likewise, neither is the time you contribute to these or qualified organizations.
Remember, charitable deductions are intended to benefit both you and the qualified organizations that you donate to, so it's important to know how to do so effectively.