The end of the year is coming soon. With year end planning often comes consideration of final charitable contributions and planning for their tax benefits. While most folks are not happy with the economy and most have not recovered from the market meltdown and recession, there may be an inclination to overlook or pass on what might until recently had been a year end tradition of charitable giving. Remember, charities are hurting too at a time when the services and help they provide are desperately needed. Perhaps a tad of tax planning to squeeze some tax bennies out of your donation will motivate you to do the good deed. Consider the following.
1. Ask First
If you're planning a donation speak to your CPA and investment adviser. Some minor changes in what you do could provide a significant net of tax cost for a donation. Example: Have your financial adviser select appreciated securities and cherry pick those for donation rather than writing out a check.
2. Qualified Charity Required to Get Deduction
Charitable contributions must be made to qualified organizations to be deductible. You cannot give to a person in need, it won't qualify. Also, you have to exercise caution in giving to causes that are noble, but which have not gone through the formalities of qualifying as a charity. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can ask for a copy of their tax exemption letter from the IRS (if the donation is significant you should). In addition, you can also look up any qualified charity in the IRS Publication 78, Cumulative List of Organizations. If the charity you want to give to is not listed, your gift won't qualify for a contribution deduction. You can check the list easily on line at www.IRS.gov
3. You Must Itemize
To obtain an income tax benefit for a donation, your charitable contributions have to be deducted as an itemized deduction on your personal income tax return Form 1040, Schedule A.
4. How Much Can You Deduct
You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charitable organization. Special restrictions apply to several types of donated property, including clothing or household items, cars and boats. Generally, if you are planning on donating property review the IRS publications listed at the end of this article and make sure you comply with the stringent rules or you might jeopardize any tax deduction. If the dollars are significant, you should consult with your CPA before making any donation of property. The rules are not only complicated, but they are not always intuitive and the limitations are tough to estimate without projections.
5. Reduction for Benefit Received
If your contribution entitles you to receive merchandise, goods, or services in return - such as admission to a charity banquet or sporting event - you can deduct only the amount that exceeds the fair market value of the benefit received. The charity will generally inform you of the value of the goods and services you will be given in the advertisement for the event and in the receipt (see below) that they give you. If you record your check register on computer split the transaction when you write a check to the charity for an event ticket listing the portion that is deductible as a donation and the rest as "dining" or whatever other category is appropriate. That way, your computerized records will automatically reflect the amount you will report on your tax return and save the difficulty of reconciling later.
6. Keep Records
Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you should maintain a record of the contribution. This could be a bank record like a cancelled check (electronic image or physical check). If you paid by credit card, then the credit card statement should be maintained. Also, a written receipt from the charity containing the date and amount of the contribution and the name of the organization, or a payroll deduction record. If you make a lot of small contributions over the course of the year consider scanning these receipts and hold them for any future audit.
7. Payment Not Pledge Required for Deduction
Only contributions which you actually make during the tax year are deductible. If you pledged an amount but don't pay it during the year, it won't be deductible for income tax purposes until the later year in which you actually make the payment. For example, if you attend a charity dinner and pledge $500 in September but paid the charity $200 in December and the balance in January of next year, your current year's income tax contribution deduction would only be the $200 paid. The rule is a bit different for credit cards. If you charge a contribution (but remember the charity might have to pay a fee to get the money from the credit card issuer) you can deduct the credit card charges in the year the charge is made even though you may not pay the credit card bill or have your bank account debited until the next year.
8. Charity Must Acknowledge Donation
For any contribution of $250 or more, you must have written acknowledgment from the charitable organization to substantiate your donation. This written proof must include the amount of cash and a description and good faith estimate of value of any property you contributed, and whether the organization provided any goods or services in exchange for the gift. While this is the charities responsibility to provide to you, if you don't receive it follow up since if you face an audit you'll be asked for the receipt.
9. Property Donations Require Special Form
To deduct charitable contributions of property items (e.g., furniture, art, etc.) valued at $500 or more you must complete an additional tax reporting form, Form 8283, "Noncash Charitable Contributions", and attached it to your income tax return.
10. Appraisal May be Required
An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.
11. What's A Charitable Bequest Worth
This year there is no estate tax so a charitable bequest under a will provides no federal tax benefit, a donation while alive or a request that your heirs donate will provide an income tax benefit. Next year, if the law as it stands is not altered all assets over $1 million will generate an estate tax and the federal marginal rate will be 55% and higher if your state has an estate tax. Wild swings in benefits.
12. For more information see
- IRS Publication 526, Charitable Contributions.
- IRS Publication 561, Determining the Value of Donated Property.
- IRS Publication 78, Cumulative List of Organizations.