As everyone knows, you can deduct charitable contributions on your taxes. That’s why December is such a great month for charities, as everyone is in the holiday spirit and gets ready for tax season!
But even beyond writing a check, there are many ways to help the less fortunate while lowering your tax bill. The IRS gives generous allowances for many types of donated items, but it’s up to you to know how much you’re entitled to deduct and have the right records.
We’ll discuss how to deduct, what to deduct, and what records you’ll need to deduct for charitable giving.
The Basics
Organizations that Accept Tax-deductible Donations
For your donation to be a valid tax deduction, you must be contributing to an organization on the IRS’s list of qualified charities. It’s not enough that you’re just giving to a “tax-exempt” organization; they’ll need to be approved by the IRS and comply with some other rules. Most major charities and religious groups are on the list, but if you donate to a smaller group and you’re not sure if your contributions are legitimately tax-deductible, check the IRS database of qualified charitable organizations. It’s a surprisingly robust search engine that will allow you to be sure that your donations qualify.
Note that you can never deduct donations you made to foreign charities, but you’ll find that many foreign charities have an American branch to which you can contribute a tax-deductible donation.
Donation Maximums
Of course charities will appreciate your donations in any amount, but the IRS does have maximums on how much you can deduct from your taxes. You are allowed to take a deduction from your donations worth up to half of your adjusted gross income for most charities. For some private organizations like fraternal societies, the limit is 30% of your adjusted gross income.
If you’re planning on making a large contribution, you can ask the organization, or check their deductibility code in the IRS database. If you donate more than this limit, you can carry over the extra to the next year’s taxes and deduct it there.
Deductibility Codes
The IRS may list one of eight specific deductibility codes to let you know of any specific rules that apply to donations to a particular organization. If there’s no deductibility code listed, then the organization is a public charity to which donations of up to half of your adjusted gross income are deductible.
- Code 1 indicates an “umbrella” organization that has other charities under it, and all of its subordinate charities can give you tax deductions for your donations. The specific subordinate charities will have their own deductibility codes.
- Code 2 is for fraternal lodges and similar organizations, and you can deduct contributions made to these groups only if they are used for other charitable purposes (such as donating to the Shriners Hospital). Donations up to only 30% of your adjusted gross income are deductible.
- Code 3 applies to private foundations, to which 50% of your adjusted gross income can be donated and deducted.
- Code 4 means that the donations to the private foundations can only be deducted up to 30% of your adjusted gross income.
- Code 5 is used for charities that have not yet applied with the IRS, so the donations are not tax deductible until the charity reaches approved status.
- Code 6 indicates a private foundation that isn’t necessarily a charity but has 170(c) status, meaning you can deduct donations up to 30% of your adjusted gross income.
- Code 7 is the designation for organizations that indirectly provide donations to the government, and 50% of your adjusted gross income is deductible when your donation is used in that way.
- Code 8 means that the organization has a foreign address and donations are not eligible for tax deductions.
The Process
To deduct your charitable contributions, you’ll need to itemize your deductions. If you only make a few donations per year, you may find that it’s not worth the time it takes to itemize, particularly because you’ll often find yourself with lower tax liability without itemizing.
If you choose to itemize, you’ll fill out Schedule A (lines 16, 17, and 18) to deal with charitable donations:
- On line 16, add together all of the cash donations you made to any qualified charity throughout the year. Make sure you have records of all cash donations, even if they were under $250.
- On line 17, add together the value of any non-cash donations that you made, like household goods, cars, or stock. If the total value of those items was over $500, you’ll need to fill out a Form 8283 with specifics about what you donated to which organizations and how much the items were worth. If you didn’t donate anything valued over $500, just hang on to your receipts. (Don’t send them to the IRS – just keep them with your other tax documents.)
- On line 18, add in any amounts that you had donated last year but weren’t able to deduct because of income limitations.
- The sum of the amount on all three lines is your charitable donation deduction for the year.
Records to Keep
If you ever donate $250 or more at a time, you’ll need a receipt from the organization. If not, your canceled check or other documentation is all you need. For example, if you give a regular weekly donation of $25, you don’t need a receipt even though your eventual contribution is far above $250, as long as you have some kind of record. You can certainly ask for a receipt for any amount donated, and many organizations will send you a total at the end of the year.
When you get a receipt, make sure it has the total amount you contributed or a description of any item you donated along with the value of it. If you receive anything in return, have that included on the receipt as well. The charity might have to handwrite the receipt, and if they do, ask them to record their official name (the one they’ve registered with the IRS) and their address. You may need this information when you file, and it’ll be easier to have it all in one place. Though it seems like a fresh memory at the time of the donation, it’s easy to forget the details when you’re compiling information in April with the tax filing deadline approaching.
If your contribution level is below $250, you still need to keep some records of your own. Keep your canceled check, credit card receipt, or written record from the charity, or just draw up your own simple record for your file. Include the date, official name of the charity, and the amount. If you’re donating to an event like a 5K or walk-a-thon, make sure you get the name of the organization, not the individual event. If you made a donation via text message, keep the phone bill that lists the charge for the donation.
Simply keep these records with your personal tax paperwork; you don’t need to send all of these receipts and files to the IRS.
Receiving Items in Return for a Donation
Everyone loves free stuff, but when NPR offers you a tote bag in return for making a donation, you must subtract the value of the tote bag or any other items from your charitable donation. The charity can usually tell you the value of the items you received, and they’ll likely include it on your receipt. If, for example, you attend a fundraising dinner and pay $100 per ticket, your receipt will show your $100 donation, minus the value of your dinner. Only the part of your donation that didn’t pay for your dinner or tote bag is tax deductible.
If you receive any intangible religious benefits, like admittance to a ceremony or having a reading performed for a relative, you should also make a note, but there’s no subtraction from your donation.
Non-Cash Donations
With text message services and online donations making it quick and easy to donate cash, it’s easy to forget the many other ways of supporting a charity or cause. Sometimes it’s a little harder to quantify the value of non-cash donations, especially items of personal value. But often these non-cash donations are the most important ones an organization can receive, and they’re usually still tax deductible for you.
Clothing and Household Items
When you donate household items or assorted clothing, only items that are still in good condition or better can be deducted, unless you want to pay for an appraisal fee. To determine the value of your donation, you have to use the price that the items will raise in a thrift store, not what you paid for them. While rips and dents don’t mean that a charity can’t put your items to good use, clothes and appliances that are damaged beyond repair don’t have any value when it comes to deductions. If your clothes or household items aren’t in good condition but are worth more than $500, you’ll need a professional appraisal.
Before you donate, lay out the items and make a list of what you’re going to contribute. For example, how many dress shirts and how many t-shirts; how many sneakers and how many fancy shoes. You can visit a thrift store to see the prices of similar items, or use Goodwill’s online valuation guide or check with the Salvation Army to get general guidelines on prices. Be honest about the condition your items are in and what kind of prices they might get.
Once you have this accurate inventory, you’re ready to take your donation to a drop-off center. The employees there won’t necessarily do an inventory for you or spend a lot of time on a detailed receipt, so make sure you have a good record before you leave the house. If you think your total donation is worth more than $250, ask them for an official receipt and show them your estimate of what your donation is worth. The IRS isn’t going to count how many socks you donated, but they will notice if your estimates are always overly optimistic.
Stock or Mutual Funds
Many large charitable organizations will be more than happy to accept shares of stock or mutual funds. When you donate an asset, you need a record of the value on the day that you donate it – that’s the day you mail it or complete an electronic transfer. If it’s a stock that had a particularly volatile day, take the average of the lowest and the highest price for the day.
In many cases, donating a stock that has increased in value is a better tax move than contributing the same amount of cash. You’ll avoid capital gains tax and net a bigger deduction because you can write off the entire value of the stock, not just what you paid for it. For example, if you bought a share at $10 and watched in go up to $100, then your donation is worth a $100 deduction. If you sold the stock and donated the profit, you’d have to pay capital gains tax first, and you’d only have about $86.50 remaining. By transferring the share before selling, you can deduct more, and the charity gets a more valuable contribution.
Remember that you can only transfer shares and get a deduction of their current value after you’ve held them for at least a year. If you donate assets that you’ve held for under twelve months, then you can only deduct your original purchase price.
Cars, Boats, or Airplanes
If you have a car, boat, plane, or other vehicle to donate, you can get a pretty nice tax deduction for doing so. These donations are more straightforward than other non-cash contributions. When you donate a vehicle to a qualified organization, you’ll receive a Form 1098-C within thirty days if your vehicle is worth $500 or more. This form will list the value of the car and the date of the donation, which is all you need for your tax paperwork. If your vehicle is worth less than $500 and you don’t get a 1098-C, the IRS will take your best guess at its value.
If the organization uses a car for its own purposes, sells it, or donates it to another needy person, then you can use the private party value from the Kelly Blue Book to figure out the fair market value. If, on the other hand, they choose to participate in an auction or sell the vehicle to someone who isn’t needy within 30 days of you donating it to them, then whatever price the vehicle gets is the new fair market value, and that’s how much you can deduct.
Art, Jewelry, Antiques, or Collectibles
Donating collectibles or jewelry can be tricky, because their value is very subjective. If you consider your items to have a value of $500 or more, you will need to obtain some kind of proof of their fair market value. Three common forms of proof are:
- A catalog listing the price of a similar item
- Information about a recent sale of a similar item, on eBay for example
- A professional appraisal
While an appraisal is expensive, if you’re trying to get a donation of $1,000 or more, it’s worth the price to get the official assessment and the documentation that comes with it. And for an art collection that’s valued at $20,000 or more, you’re required to get an appraisal for your Form 8283. If you have individual pieces worth at least $20,000, include a large color photo with your Form 8283.
Mileage and Reimbursements
If you did volunteer work for a charity and used a personal vehicle or took public transportation solely for volunteering, you can deduct mileage or the cost of your public transportation as a donation to charity. The mileage you can deduct for 2010 is 14 cents per mile, and you can also deduct tolls and parking fees. Any other items that you purchase for a charity while you are volunteering for them are considered a donation, such as if you purchase pens or painting supplies that the charity needs for a project. However, the value of your personal time is not tax deductible, even if you are performing a service for them that they would otherwise have had to pay for.
Planning Ahead
When you’re planning your charitable contributions with tax deductions in mind, remember that you’ll only see a tax benefit if you itemize your deductions. If you don’t have a lot of other deductions on your Schedule A, like mortgage interest, real estate taxes, medical expenses, or student loans, you probably won’t have enough deductions to make it worthwhile.
For 2010, your standard deduction is $5,700 if you file as single or married filing separately, $11,400 for married filing jointly or qualifying widower, and $8,400 for filing head of household. If your total deductions from your Schedule A don’t add up to more than those amounts, you’re better off taking the standard deduction instead of using Schedule A to itemize.
But if you’re pretty close to those amounts, you can maximize your benefits by lumping your donations into one year. For example, if you file as single, and you have mortgage interest of $4,000 per year and you always donate $1,000 per year to your favorite charity, your total itemized deductions would add up to $5,000, which is less than the $5,700 you can deduct when you use your standard deduction. However, if you donated the next year’s $1,000 on December 31, rather than waiting until January, your total deductions will be $6,000, making itemizing worthwhile and getting you a better deduction.
The following year, you probably will go back to the standard deduction, but the year after that, you could implement the same plan. Saving a little bit on taxes every two or three years is better than not saving at all, and being smart about the timing of your donations can help you make sure you get the most tax-saving value out of your charitable contributions.
Final Word
Charitable contributions help you do good for the world and for your tax bill. The rules can be complicated, but it’s worth your time to know what you’re entitled to deduct and get your maximum refund.
Have you made any donations this year, or are you planning to make any next year? What charities do you like to support and how have your contributions affected your tax liability?
(photo credit: Shutterstock)
