Another year is quickly coming to an end, which means it will be everyone’s favorite time of year—tax planning for the end of the year! OK, perhaps not everyone is excited for this part of the upcoming season, but there are some things to keep in mind when preparing this year’s tax return. As you may know, if you itemize deductions on Schedule A of your tax return, you may be able to take advantage of deducting charitable contributions.
It sounds simple- give to charity and deduct the amount you donated, right?
Not necessarily. Rules for charitable giving can be confusing, so you must be careful before entering that deduction.
1. Types of donations- What kind of donation will you make this year?
The maximum amount you can deduct on your tax return depends on whether you make a cash donation or a donation of property. The amount that you are allowed to deduct also depends on the type of charity- donations to public charities, private operating foundations, and private non-operating foundations may be different. Keep in mind that the maximum for any donation is 50% of your Adjusted Gross Income (AGI) for the year. However, donations to certain organizations may only be deductible up to 30% of your AGI. As a result, consult a tax professional to understand the maximum you will be allowed to deduct for your donations.
2. Qualified organizations- Who do you want to donate to?
The IRS requires that donations be given to a qualified organization in the United States in order to be deductible. Many major charities fit the criteria to be a qualified organization, but it is a good idea to double check that your organization of choice is on the list. Just because it claims to be tax-exempt, does not mean the donation is deductible. Fortunately, the IRS has a convenient search feature to look for organizations that qualify for deductible contributions. This search can be found at this IRS website: http://www.irs.gov/Charities-&-Non-Profits/Search-for-Charities.
3. You may not know:
Some donations are never deductible: Bibles, gifts to individuals, and donations to political parties or candidates, are the common ones that will not likely benefit your tax bill. Services provided are also not a deductible donation; your donation must be physical in nature (whether the donation is cash or property).
For deductible cash donations, the IRS requires standard documentation of a bank record, payroll deduction, or written communication from the qualified organization with the name of organization, date and amount of contribution regardless of the amount donated. For all donations (cash and property) over $250, you must show the above stated documentation, plus a written acknowledgement that the amount of donation and whether any portion of the donation was in exchange for goods or services.
These few reminders only skim the surface of charitable giving, as there are many other rules to follow. To get the best possible tax benefit this year be sure to discuss with a tax professional.