Filed under: Taxes, Charity, Personal Finance, IRS, Tax Laws
Making a donation to a charity is a great way to fill up on feel-good energy, but there might be an additional benefit, too: tax savings. Donations made to qualifying charitable organizations can reduce your taxable income, which reduces your overall tax bill. But don't get too excited just yet: Not all donations can be deducted and not all charitable organizations qualify.
A qualifying charitable organization is a non-profit group that is approved by the IRS. In most cases, these non-profits are charitable, religious or education organizations, or volunteer groups. If you aren't sure if the charity of your choice qualifies, the IRS has a search tool that allows tax filers to enter the name and location of an organization and instantly see if it makes the cut. If it does, great news! Your contribution could be tax deductible.
The Tax Form You Need
In order to get the tax deduction, you must give to a qualified organization. Contributions made to specific individuals, political organizations and candidates don't count. Charitable contributions are filed using form 1040, and you can itemize the deductions on Schedule A. So, if you made three donations that tax year to three separate qualifying charities, you would use the total amount on 1040 and then list them separately on Schedule A.
How to Deduct Cash Donations
Cash donations to a qualifying charity are tax deductible, but if you received a benefit in exchange for your donation, like swag, tickets to an event or other material goods, the rules are a little different: You have to subtract the fair market value of the benefit from your deduction. There are general rules for determining the fair market value of the benefit, but it is generally the price of the property that would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
So, let's say you got a pair of baseball tickets for donating $100 to your favorite charity. And let's say the seats weren't great -- maybe they are in a section where the tickets normally go for $30 on the street. You would deduct the fair market value of the tickets ($60) from the deduction, which would lower your tax benefit to $40. Now, let's say the tickets were nicer -- maybe they have a $50 street value. Then it would be a wash -- the deduction would not exceed the fair market value of the goods.
How to Deduct Non-Cash Donations
This is one of my personal favorite deductions -- I regularly purge my closets and donate my gently used clothing to a local, qualifying charity that helps homeless women find work. I feel good knowing my donation is helping these women dress for success, and the additional tax benefit is just the icing on the cake.
Donations like this are considered non-cash property and are valued at the fair market value of the property. Non-cash property can cover a variety of goods, including stock, but any clothing or household items must be in good condition to be deductible. So, you can't just drop off your old, broken stereo and deduct $200 because that's what a restored one is selling for online. Sorry, but your beat-up stereo isn't in good condition, and it's definitely not worth $200.
How to Deduct Vehicle Donations
Even though vehicle donations are non-cash property, special rules apply. Publication 4303 from the IRS provides general guidelines for people who donate their cars to qualifying charities. The maximum amount you can deduct for your donation is the fair market value of the car.
But be careful: The fair market value doesn't necessarily equal the "blue book" value. A used car guide is a good starting point to determine the value, but the IRS might not agree with what the blue book says. For example, maybe you donated your old car to a local charity and the blue book value says it's worth $1,500, but it actually needs repairs and the exterior has some damage. After some internet searching, you find a car just like yours that is selling for $800. That is the fair market value of your car, not $1,500.
What Records to Keep to Write Off Charitable Donations
To deduct any monetary contribution you must keep records, regardless of the amount. You can use bank or payroll statements or a written communication from the organization that includes the date and amount of the contribution as tax receipts.
For text message cash donations, where you text a specific code to donate to a qualifying charity, a telephone bill will meet the record-keeping requirement as long as it shows the name of the receiving organization, as well as the date and amount of the contribution.
If any cash or property you are donating is worth $250 or more, you will need two documents: 1. a bank or payroll deduction record or a written acknowledgement from the qualifying organization showing the amount of the cash or a description of any property contributed and 2. whether the organization provided any goods or services in exchange for the gift.
If your total deduction for all non-cash contributions is over $500 for the year, you must complete and attach IRS Form 8283 to your return. Taxpayers who have donated more than $5,000 will also have to complete Section B of Form 8293, and might need to secure an appraisal from a qualified professional.
Special Rules
The types of qualifying charitable donations outlined in this article are general guidelines. There are many special circumstances and rules that apply to tax deductions, and charitable donations are no exception.
For example, donations to public charities, colleges and religious groups can't exceed 50 percent of your adjusted gross income and the limits go down for gifts of appreciated property. Additionally, taxpayers who donate to colleges and universities and then receive the right to buy tickets to school athletic events can only deduct 80 percent of their donation.
When in doubt, consult a tax professional to make sure you are following the proper procedures when deducting charitable donations. You don't want to lose all that feel-good energy to an audit.
