How to Leverage Charitable Contributions on Your Tax Return
Charitable contributions are a great way to simultaneously help people in need and give yourself a tax break. Although the Internal Revenue Service has strengthened its restrictions on what counts as a tax-deductible contribution, you can still write off almost anything you give to an eligible charitable organization.
There are many tax restrictions on charitable contributions. You can't simply write off every gift you give to any organizations. Items you donate, such as clothing, must meet certain standards, and organizations must be eligible to receive tax-exempt donations. There are also limitations on how much of a contribution can be deducted on your tax return.
Charitable contributions can be more than just money. You can write off donations of vehicles, useful household items and furniture. You can also deduct expenses incurred while performing volunteer work for an eligible organization or foundation.
On the pages that follow, you'll learn about tax restrictions on charitable contributions. You will also see some examples of charitable contributions. First, we will tackle the tax restrictions.
Not Tax-DeductibleYour contributions to this year's presidential candidate are not tax-deductible. Neither can you write off contributions to a needy individual, such as your old college roommate who has hit hard times. Give them all the money you want, no problem. You just can't get a tax break from these acts of generosity.
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Tax Restrictions on Charitable Contributions
There are many tax restrictions on charitable contributions. The restrictions are primarily based on the kind of contribution, the type of organization or foundation that's receiving it and its tax-deductible value.
On August 17, 2006, the Internal Revenue Service's Pension Protection Act made changes to the revenue code to crack down on the artificial inflation of charitable contributions. For example, taxpayers making vehicle donations often overvalue the vehicle by not taking into account the vehicle's condition. A rusty 1967 convertible with no engine or doors is not technically worth the fair market value.
The IRS's changes to the revenue code also strengthened the burden-of-proof requirements for charitable contributions. If you're audited, you had better have receipts and/or documentation of your charitable contributions. The IRS may nullify the contributions you can't justify and then penalize you for underpaying your taxes.
So, when you make a charitable contribution that you expect to deduct, ask the receiving organization for a receipt that shows -- at least -- the value of the contribution, the date of the contribution and the name of the organization. The statute of limitations on audits is three years, so it's best to hang on to those receipts for at least that long. You can also use a bank statement, canceled check or credit card statement as proof of the value and the name of the recipient.
The type of organization affects how much of your donation you can deduct. Public charities, such as United Way, depend on money from the public to conduct their operations.
You can deduct 50 percent of the value of your contributions to public organizations, or 30 percent if your contribution is something that could show capital gain. If you donated some stock, which could rise in value (a capital gain), you could deduct 30 percent of the value of the stock.
Private organizations, such as the Rockefeller Foundation, depend on money from private investments and gifts to conduct their operations. You can deduct 30 percent of the value of your contributions to private foundations, or 20 percent if your contribution is something that could show capital gain.
Those caps may seem like serious limits on your deductible contributions. But you can write off another 50 percent, 30 percent or 20 percent on next year's return. You can continue to do this for five years. So, you're limited in what you can deduct in a single year, but you can write off the contributions over time.
To find out whether an organization is eligible for a tax-deductible donation, download the IRS's Publication 78 "Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986." Or you can use the IRS website to search for an eligible organization.
Next you'll read about different types of contributions to charitable organizations.
501(c)(3)?A 501(c)(3) is a tax-exempt nonprofit organization. Almost any donation you make to a 501(c)(3) organization is tax-deductible [source: BBB Wise Giving Alliance].
Examples of Charitable Contributions
There are three basic types of tax-deductible charitable contributions:
Money: You can write a check or make a cash contribution to an eligible charity. If you receive goods or services for your cash donation, you must subtract the value of these goods or services from your donation. The result is the amount you can write off. For example, if you go to a fundraising benefit and receive a voucher for a free massage in exchange for your donation, you must subtract the value of the massage from the value of the donation you make.
Items: Clothing, vehicles and furniture are donations of items. You can write off the value of these items on your tax return. When you want to write off over $500 in items, you must include IRS Form 8283 "Noncash Charitable Contributions" with your tax return.
If an item is worth $250 or more, you must get a receipt or similar documentation that shows the value of the item. If an item is worth $500 or more, you must have an appraiser come out to appraise the item. The appraiser must meet certain IRS qualifications.
Donating junk, torn-up clothes and other ruined goods will not get you a tax deduction. Shoot a picture of your donation to record its condition, especially if it's worth over $500. Remember -- the burden of proof is on you.
The IRS has become increasingly alert about vehicle donations. Usually, used vehicles aren't sold at fair market value, but many donors try to claim the fair market value for their deduction when they donate a car. Unless the organization simply keeps the car for its own use -- or spiffs it up to fair market condition -- you should be wary of writing off the fair market value of a vehicle. You can, however, write off the amount of money the charity receives if it sells the car.
Volunteer Work: To deduct charitable volunteer work, you have to incur expenses while doing the work. For example, if you buy materials to make posters to decorate the charity's main office, you can write off the value of the materials you buy. Or, if you shuttle people in your own car as part of your volunteer service, you can write off your travel expenses.
To learn more about charitable contributions, volunteering and related topics, follow the links on the next page.
Appreciated Personal PropertyIf a contribution appreciates in value after you donate it, you can deduct the appreciated value only if the receiving organization keeps it for its own use. The revenue code requires the organization to tell both you and the IRS if it sells the item. If the item is sold, you can only deduct what you yourself paid for it. For example, if you donate your collection of rare stamps to the ABC Stamp Collectors Nonprofit Organization, you could deduct the appreciated value of the collection if the ABCSCNO keeps the collection for its own use. [source: Ebeling]