Giving to charities makes us feel great, but it can lead to confusion during tax season about deductions for income tax purposes. Following are answers to common questions that arise during tax season about income tax charitable deductions.
1. Does everyone qualify for income tax charitable deductions? Charitable contributions are deductible only if you itemize deductions on Schedule A of Form 1040. In most cases, people who don’t own homes don’t itemize because their standard-deduction amount of $5,950 for single taxpayers or $11,900 for married taxpayers (2012) will exceed their total itemized deductions. So unless your total itemized deductions for this year, including any charitable contributions, will exceed the standard deduction threshold, you won’t get any tax benefits for your charitable donations. Also, contributions must actually be paid in cash or other property before the close of the tax year to be deductible in that tax year.
2. How do I know whether the organization is a charitable organization? To be deductible, charitable contributions must be made to qualified charitable organizations. Payments to individuals are never deductible. Also, keep in mind that many “nonprofit” organizations are not charitable organizations eligible to receive charitable contributions for income tax purposes. IRS Publication 78 has a master list of qualified charitable organizations. It’s updated quarterly and can be found in many public libraries. You can now perform a search at the Internal Revenue Service web site to determine whether an organization is a qualified charity. Finally, you only get an income tax deduction for donations to qualified charitable organizations in the United States, although the organization can have overseas activities that benefit from your donation.
3. How do I know how much to deduct if I received something of value as part of my charitable contribution? If your contribution entitles you to merchandise, a meal or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received. Your deduction should be the net amount of your gift. The charity typically assigns a value to anything it gives donors.
4. What documentation do I need to keep for cash donations? For cash contributions of less than $250, you either need a written acknowledgment from the organization showing its name, the date and amount of the contribution and the amount given or you can save any canceled checks or bank records that prove your deduction. For contributions of $250 or more, canceled checks or other evidence from you alone isn’t sufficient to prove the gift. Instead you must get a written acknowledgment from the charity including the name of the organization, the date and the amount of the contribution.
5. What documentation do I need to keep for donated property? You can generally deduct the fair market value of any other property (other than cash) you donate to a qualified charitable organization. For any contribution of $250 or more, you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified charitable organization indicating the description of any property contributed. The acknowledgment must also include whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services.
In addition, if your deduction for a noncash contribution is more than $500, you must fill out Form 8283 and attach it to your return. Finally, if you claim a deduction for a contribution of noncash property (other than marketable securities) worth $5,000 or more, you will need a qualified appraisal. For more information refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining the value of your noncash contributions, refer to Publication 561, Determining the Value of Donated Property.
6. What are the rules for donating used clothing and household items? The rules for obtaining an income tax deduction for used clothing and household items changed recently. To obtain an income tax charitable deduction for donations of used clothing and household items, the items must be in “good” condition or better. “Household items” include furniture and furnishings, electronics, appliances, linens, and similar items. However, you are allowed a deduction for any single item, regardless of its condition, that is appraised at over $500 in value.
7. How much can I deduct this year? Depending on the type of charity (i.e., public charity or private operating foundation) and whether you contribute cash, appreciated assets or other items, your write-off can potentially be limited to 30% or 50% of your adjusted gross income (AGI). Contributions that exceed your AGI can be carried over for up to five years and deducted in those future years.
The AGI limitation rules are quite complicated, but they normally affect only large contributors. In general, the following rules apply:
- Gifts of cash, short-term (held less than 12 months) capital gain property, and ordinary income property to public charities and private operating foundations are limited to 50% of AGI; and
- Gifts of long-term (held 12 months or more) capital gain property to public charities and private operating foundations valued at fair market value are limited to 30% of AGI. However, donors may use the 50% of AGI limitation, instead of the 30% limitation, where the amount of the contribution is valued at its basis rather than the fair market value of the property.
Please contact us to discuss the most tax-effective way to make charitable gifts to accomplish your goals.