Americans are a notoriously generous people who help just about anyone when disaster strikes. As a result, the U.S. government offers tax deductions to reward charitable giving.
Since tax code changes constantly, it’s important to stay abreast of the applicable rules to avoid earning a slap on the wrist from the Internal Revenue Service (IRS). Here are five tips for making deductible charity donations.
DISCLAIMER: Consult a tax professional before filing your tax return. This article only provides general information, which might not apply to you.
1. ASK THE WATCHDOGS
TIP: Don’t donate a thing without checking up on the charity
Several different organizations rate charities.
Your smaller gifts are usually simple and straightforward as far as the tax guys are concerned. You declare a nominal value for your donation and get a receipt. It only gets complicated when you give larger amounts to national and international organizations.
Naturally, you should do some research on the organizations that will benefit from your generosity. That is where the “charity watchers” come in. CharityNavigator.org and CharityWatch.org, for example, evaluate charities based on fiscal health and efficiency. The universally applied financial ratios and performance benchmarks are posted online.
Americans love to give.
Charities’ tax returns (IRS Form 990), and other available data, are fed into the scoring and rating systems of various watchdog groups, which focus on three main factors:
- Operating efficiency (includes evaluation of overhead and amounts given to intended recipients)
- Growth capacity (rates the charity’s ability to carry on in the current economic climate)
- Overall fiscal health (overall “grade” for the charity’s fiscal responsibility)
2. RECORD KEEPING RULES CHANGED IN 2007
TIP: Check current laws and filing requirements on a regular basis
The IRS has lots to say about charities and deductions.
New guidelines for donations were promulgated in the last few years, often as legislation tacked-on to other kinds of bills. For instance, as part of the Pension Protection Act of 2006 (which has been revisited a few times since), the IRS toughened up reporting requirements. Instead of using bankbook entries, diaries, or notes from the time of the donation, taxpayers had to meet new levels of proof starting in 2007.
You now need bank records, not your own register notation, including canceled checks or a letter stating the name of the charity, plus the donation and its date. Credit card statements must show the same information.
A second form of corroboration would be a letter from the charity with the same data. The third option is for corroborating donations made through payroll deductions, where the same data as usual must be presented.
Get the paperwork right or your deductions may be denied.
Written or audio-recorded logs, diaries, or notes made the time of donation are no longer considered proof of a donation’s value – or even that the donation occurred. Improper paperwork and simple, avoidable filing errors cause the rejection of a large number of otherwise allowable donations. If you need help filing, by all means get it!
3. IRS IS CLAMPING DOWN ON OVERVALUED SOCKS
TIP: Be very careful assigning “fair market value” to non-cash donations
It is better to give…
Despite all the talk about money laundering, and people’s suspicions about cash transactions, non-cash donations are the ones that are a problem for the IRS and state tax authorities. Socks and underwear are several of the “low-value” donations that Congress gave the IRS “broad authority” to curtail in recent years. Donations of $250 or more in cash and property require backup paperwork – and if non-cash donations exceed $500, Form 8263 must be filed.
The IRS booklet, “Publication 561: Determining the Value of Donated Property,” is essential if you want to get the numbers right for donations of linens, electronics, clothes, furniture, appliances, etc.
You can deduct the “fair market value” (FMV) of an item at the time of donation, but for each one over $500 you must identify the recipient and give complete details including cost, adjusted basis, and present value.
There are many more safeguards in place to surpress those pesky used underwear donations.
Generally speaking, all items must now be in “good” condition or better to be a charitable deduction. For items in lesser condition that are valued over $500, you must obtain and submit an appraisal, as well.
It is far more difficult now that it has ever been to game the system and take unearned deductions from your tax return. As always, honesty is the best policy which will not only keep you out of trouble but also prevent audits.
4. KNOW THE LIMITS AND STEER CLEAR OF PROBLEM DONATIONS
TIP: Learn the “50/30/20 rule,” and watch out for problems with vehicles
Done right, your charitable giving can really help.
Donations of cars were popular for years, until rampant abuse led to a revision of the tax code, as well as other federal laws. You can still donate a car, van, truck, plane, boat, or other vehicle, but you need a written statement from the recipient, prepared according to IRS regulations, before you can legitimately take the deduction. If it (or any other property you donate) is worth more than $5,000, then you also need an appraisal of the item’s FMV.
There are other limits on charitable contributions, as well as (sometimes) overlapping limits on itemized deductions. In what is occasionally referred to as the “50/30/20 Rule,” the following general limitations apply:
- You can normally deduct cash gifts in full up to 50% of adjusted gross income (AGI).
- You can usually deducted property donations in full up to 30% of AGI; and
- You can typically deduct gifts of appreciated assets in full up to 20% of AGI.
There are many good charities helping all of Earth’s creatures.
You must always consult an expert preparer, accountant, or tax attorney concerning your own unique situation. Generally speaking, however, if you make charitable contributions beyond the annual limits you can carry them over to the next tax year. Excess contributions can be carried forward this way for a maximum of five years – but, again, get professional advice.
5. TAKE CERTAIN THINGS OFF YOUR LIST ENTIRELY
TIP: Don’t even waste a second of your time on the surefire ‘no’
The Salvation Army is probably the most recognizable American charity.
According to the IRS, people continue to take deductions for donations that are clearly not approved. Although the tax agency publishes precise instruction in Publication 526: Charitable Contributions, people still risk penalties, interest, and possible audits, by deducting political contributions or traffic tickets. If you itemize taxes and make donations regularly you should have Publication 526 on hand to help you figure out what counts as a deduction.
There are many entries in the “no-go” donation list, but the following are the biggies. You cannot deduct any contribution that you make to:
- individuals (except as gifts under other tax sections);
- politicians, political parties, campaigns, or political action committees (PACs);
- professional organizations;
- labor unions, chambers of commerce, or business groups;
- for-profit hospitals and schools;
- foreign governments;
- local or state governments in the form of fees, fines, or assessments; and
- non-profits based on the value of your time, talent, or efforts.
BOTTOM LINE
The purpose of tax deductions is to encourage people to make donations for the benefit of others, not themselves. If you need some extra cash for your old stuff have a yard sale rather than pretending to be generous with the intent to milk the tax cow.
DISCLAIMER: WePay is not a tax advisor and this post is not intended as legal or tax advice. Please consult an accountant and/or attorney before making tax decisions.
Image URLs:
1. http://www.theclaycenter.org/shared/content/photos/logos/charity%20navigator.JPG and http://www.huntercpa.com/Portals/53264/images//Charity.jpg
2. http://www.iplanretirement.com/retirementblog/wp-content/uploads/2008/04/irs.jpg and http://nh-cpa.net/images/charitable-donations.jpg
3. http://www.trinityroslyn.org/img/charity.jpg and http://www.taxsoftware.com/sa/images/MPj03168680000%5B1%5D.jpg
4. http://www.wpromote.com/blog/wp-content/uploads/2009/02/charity.jpg and http://www.chocolateinspirations.com/media/catalog/category/Chocolate_for_Charity.jpg
References:
http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=35
http://www.money-zine.com/Financial-Planning/Tax-Shelter/Charity-Gifts-and-Taxes/
http://taxes.about.com/od/deductionscredits/a/CharityDonation.htm
http://www.irs.gov/publications/p526/ar02.html#en_US_2010_publink1000229693
It is a very good idea when donating your money to find out more about the organization through a third party company as mentioned above. Often times donors are surprised to see that a larger % of the donation then they had hoped or intended is used in admin or other costs. This means not as much of the donation goes directly to benefit those in the program.