As the year ends, US taxpayers are focusing on the activities that will help lower their 2011 tax bill. One good option that is in keeping with this “Season of Giving” is to make charitable contributions to qualified organizations. According to the Urban Institute, over 1 million public charities are registered with the Internal Revenue Service (IRS) and in 2010 total private giving reached over $290 billion.
8 Tips from the IRS
To help ensure that your contributions pay off on your tax return, the IRS has put together the following 8 tips:
- Give to a qualified organization. Charities will let you know if they have received their 501(c)(3) tax-exempt status. Some organizations are not required to obtain 501(c)(3) status from the IRS. These include churches and other religious organizations. If in doubt, ask your tax advisor.
- File Form 1040 and itemize deductions on Schedule A.
Giving to charity is a great tax planning strategy, but it only works for people who are eligible to itemize their deductions. Giving means an actual transfer of money or non-cash contributions – pledges don’t count!
- Subtract any benefit received from deduction. If you receive a benefit because of your contribution –such as merchandise, tickets to an event or other goods and services — then you can deduct only the amount that exceeds the fair market value of the benefit received.
- Deduct the fair market value of non-cash donations. Stock or other non-cash property is usually valued at the fair market value of the property. Clothing and household items must generally be in good condition to be deductible.
If you contribute a car, truck, boat, airplane, or other vehicle, and the vehicle is worth more than $500, you must receive a written acknowledgement from the non-profit before you can claim a tax deduction.
- Be reasonable when determining fair market value. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
- Keep Records! Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For gifts valued less than $250, a cancelled check or credit card statement usually is sufficient.
- And yet more records! Contributions over $250 cannot be deducted UNLESS specific records are kept. For these contributions you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
- High dollar items require a Form 8283. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
Limits on the Charitable Contribution Deduction
Your charitable contribution tax deduction may be limited. Some limits are specific to charitable contributions and others deal generally with itemized deductions.
50%, 30%, and 20% Limits on Charitable Contributions
For the most part, you can deduct:
- cash contributions in full up to 50% of your adjusted gross income
- property contributions in full up to 30% of your adjusted gross income
- contributions of appreciated capital gains assets in full up to 20% of your adjusted gross income
Charitable contributions in excess of these limits can be carried over to the following tax year. The excess contributions can be carried over for a maximum of five years.
Not everything is deductible
Contributions are not tax deductible if given to any of the following:
- Political parties, political campaigns, or political action committees.
- Contributions given to individual people.
- Fees or dues paid to professional associations.
- Contributions to labor unions, chambers of commerce, or business associations.
- Contributions to for-profit schools and hospitals.
- Contributions to foreign governments.
- Fines or penalties paid to local or state governments.
- The value of your time for services rendered to a non-profit.