One of the nicest things you’ll find as you plow through your tax return is the right to take a deduction for charitable giving. It’s sometimes hard to believe that the IRS doesn’t have an ulterior motive, other than encouraging you to support organizations that do good things.
It makes sense, though. If enough taxpayers support charitable organizations, the government can focus its spending on big-ticket items such as fighting terrorist attacks.
Here’s how the deduction works: If you give $1,000 to charity and take a deduction for the full amount, you reduce your taxable income by $1,000. If your highest tax rate is 28 percent, you get a tax benefit of $280–$1,000 x 28 percent. Therefore, it only cost you $720 to make a $1,000 contribution–$1,000 minus $280.
Your limit for charitable giving is, for the most part, 50 percent of your adjusted gross income. Any unused contributions can be carried forward for as long as five years and applied to your AGI each year until you use them up.
To qualify as charitable, your contribution must be to a tax-exempt organization recognized by the IRS as a charity. If you have any doubts about the tax-exempt status of the organization to which you are donating, ask. The organizations know whether they qualify. You also can call the IRS to find out.
If you have a computer with on-line capability, you can search to see if a particular organization qualifies as charitable in the eyes of the IRS. Go to http://www.irs.ustreas.gov/prod/search/eosearch.html and search through the IRS’ vast list of qualified exempt organizations.
It’s up to you to keep track of what you give and to whom. Keep canceled checks and receipts from the organizations receiving your contribution. When receipts are not practical, keep written records.
You must have a receipt from the charitable organization for contributions of more than $250. In figuring whether a gift constitutes $250 or more, do not combine separate donations. For example, if you gave your church $25 each week for a total of $1,300, you should treat each payment as a separate gift.
The better your records, the more likely it is that the IRS is going to accept them should your tax return be examined.
If you stay on top of this all year, you’ll save yourself a lot of time and aggravation at tax time trying to recall every group to which you donated money during the year. At the end of the year, add up all your cash contributions and report the total on line 15 of Schedule A.
Be careful about taking deductions for events. You may purchase tickets to a church social, school carnival or symphony concert–events that are considered fundraising events by the organization sponsoring them–but if you benefit from your contribution by receiving a meal or some entertainment, then the amount you paid is presumed to represent the cost of the food or the entertainment and is, therefore, not deductible, unless you can show that the payment exceeds the fair market value of the event.
The cost of raffle tickets is not deductible. Just like gambling expenses, raffle tickets are not treated as deductible items, even though the money goes for a worthy, even charitable, cause. You bought the chance to play a game, and that chance is considered to be worth the cost of the ticket.
Probably the most common form of property contribution are items that are worn out, outgrown or have outlasted their usefulness to you. There are plenty of churches and service organizations that will take unneeded clothing and household goods off your hands and put them into the hands of others who can use them.
You are entitled to a charitable contribution for these contributions. If the value of your non-cash contributions exceeds $500, you must attach Form 8283 (Charitable Contributions) to your tax return and list on this form the particulars of what you donated and to whom.
When making non-cash charitable contributions, you must keep detailed records of what you contributed, to whom and when. If a contribution is worth at least $250, you must obtain a signed receipt from the recipient. This receipt should state that you received nothing in return for your donated items.
As with all other deductions you claim, the better your records, the happier the IRS will be. Although you don’t have to attach to your tax return a detailed list of the items you donate, you should keep one for your records.
Most organizations that receive clothing and household goods for charity rely on you to place a value on the items. The best way to value your donations is to do some comparative shopping. Some service organizations publish a list itemizing their pricing procedures.
In addition to donations of cash, you can take a deduction for the value of artwork, stock certificates, antiques and other types of property that appreciate (you hope) over the years.
To take a donation for the appreciated (increased) value of property, you have to have owned the property for at least one year, and it has to be property that would generate a taxable gain for you if you sold it.
Donations of appreciated securities result in a double benefit: Not only do you get to take a charitable-contribution deduction for the full appreciated value of the securities, but also you don’t have to pay tax on the capital gain. If you sell the securities first and contribute the cash, you still get the contribution deduction, but you pay tax on the gain.
When you donate tangible property that has increased in value, make sure the organization puts the property to its intended use and doesn’t turn around and sell it for cash.
For example, if you bought a painting from an unknown artist for $100, and 10 years later the artist is the talk of the town and her paintings are selling for $10,000, your donation of the artwork is worth $10,000 and that is the amount of your charitable contribution.
What’s more, you don’t have to pay tax on the gain, as you would if you sold the painting. If, however, the organization sells the property for cash instead of displaying, studying or putting the property to its intended use, your deduction is limited to your basis in the property–generally, your cost.
Donated property gets reported on Form 8283 and then carried to line 16 of Schedule A. If the property is valued at more than $5,000, you’ll need to fill out the back page of Form 8283–Section B–and have an appraiser sign the form attesting to the value of the property.
If you donate your time to charitable organizations, you do it out of the goodness of your heart and, although the IRS may admire your efforts, there is no tax deduction waiting for you when you come home.
Meanwhile, if you incur out-of-pocket expenses related to your benevolent behavior, such as mileage, parking, postage or supplies, you can take a charitable contribution for the amounts you spend, but not for your time. The mileage deduction has been increased to 14 cents per mile for 1998.
