In the spirit of the holidays, many American give to those in need. The average charity receives about 40 percent of its annual contributions between Thanksgiving and New Year’s Day, according to Charity Navigator, a not-for-profit watchdog organization.
Charitable Deductions: IRS Gift to Taxpayers
One of the biggest reasons people decide to open their pocketbooks at year-end — beyond the altruistic spirit of the holidays — is that charitable gifts are tax deductible if you itemize on your tax return. You may generally deduct up to 50 percent of your adjusted gross income — without regard to net operating loss carrybacks — but 20 percent and 30 percent limitations apply in some cases.
If you want a contribution to reduce your 2013 tax bill, you need to act before you ring in the New Year, however. A donation paid by credit card is deductible in 2013 as long as it posts on your statement before Jan. 1, 2104 — even if you don’t actually pay the bill until later in 2014. Payments by check can be deducted in 2013 as long as they’re postmarked by December 31, 2013.
Securing Your Deduction
If you’re audited by the IRS, the tax agency will probably scrutinize your charitable deductions. So, always keep copies of all supporting documents. For example, cash contributions require a bank record or written communication from the charity that details the name of the charity, as well as the date and amount of the contribution. Bank records include:
- Canceled checks,
- Bank or credit union statements, and
- Credit card statements.
If you donate cash or property worth $250 or more, ask the charity for a contemporaneous written acknowledgement (in other words, a receipt) that describes the nature of the donation and a good faith estimate of the value of the goods or services.
The value of cash gifts is easily determined, but the value of other goods and services is less clear. All clothing and household items (such as furniture, electronics, appliances and linens) must typically be in “good used” condition (or better). If not and you deduct more than $500 for the item, you must include a “qualified appraisal” with the return.
Deductions of non-cash items worth more than $500 require you to attach a completed IRS Form 8283 with your return. Non-cash property worth more than $5,000 requires you to obtain a qualified appraisal. If an item’s worth more than $500,000, attach a copy of the qualified appraisal to your tax return. Special rules apply for donations of vehicles, boats and planes.
You also can deduct only the fair market value of a donation to the extent that it exceeds the benefits you receive with the donation (for example, if a contribution entitles you to admission to a charity ball or a sporting event).
Additional Due Diligence
Before writing a check or donating new or used items, visit the IRS website to confirm that the recipient is a “qualified” exempt organization. If not, your contribution isn’t tax deductible. Contributions made to foreign organizations — except donations made to certain Canadian not-for-profits — are generally not tax deductible either.
To protect your donations from bogus charities — such as the disaster relief frauds discussed in the above sidebar — also research these three attributes about your preferred charity:
Accountability and transparency. The charity should make it easy for you to research its good deeds and spending habits. Be skeptical of charities that don’t openly share information — including financial records — with stakeholders.
Fiscal health. Charities that know how to effectively solicit donations (think, cash inflows) and are efficiently run (think, cash outflows) have money left over to pursue their goals and reach more of those in need.
Results. Charities have good intentions, but the proof is in the results, not the mission. Talk to volunteers. Visit the organization’s website. See how many activities they’ve organized and people they’ve served over the last year. Testimonials speak volumes about the difference a charity is really making.
Consult your tax adviser regarding any questions you have about your year-end charitable gifts.