Deducting Charitable Contributions

Strict rules govern how you can claim a charitable deduction.

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Do you have some old clothes hanging around in your closet that you think could save you on taxes if you donate them to charity? Well, read this first. Although charitable contributions can be a good tax deduction, most taxpayers cannot deduct charitable contributions. Even if you can deduct such items, there are strict rules you must follow.

You Must Itemize

First of all, you can deduct your charitable contributions only if you itemize your deductions on your tax return. This means you add up all your deductible personal expenses such as charitable donations and mortgage interest and deduct them on IRS Schedule A instead of taking the standard deduction. You should itemize only if it results in a larger deduction than the standard deduction.

Only about one-third of all taxpayers itemize. If you're not one of them, you can still donate to charity, but you'll get no tax benefit.

What Contributions Are Deductible

Subject to overall limits, you may take an itemized deduction for contributions of money or property to charity. However, not just anything qualifies as a charity. Only contributions to “qualified organizations” are deductible. These include:

  • churches, temples, synagogues, mosques, and other religious organizations
  • most nonprofit charitable organizations, such as the Red Cross and United Way
  • most nonprofit educational organizations, including the Boy and Girl Scouts of America, colleges, museums, and day care centers for working parents, and
  • nonprofit hospitals and medical research organizations.

Not all people or organizations asking for donations are legitimate charities—what the IRS calls “qualified organizations.” To become a qualified organization, most organizations (other than churches and governments) must apply to the IRS. You can ask any organization whether it is a qualified organization, and most will be able to tell you. They should have an IRS letter saying so—you can ask for a copy. You can also call the IRS at 877-829-5500 to find out if a charity is qualified; or check IRS Publication 78, which lists most qualified organizations. Not all qualified organizations are listed in Publication 78 though—for example, churches, synagogues, temples, and mosques are not required to apply for IRS recognition to be qualified charities and are frequently not listed. Easiest of all, however, may be to check the website www.guidestar.org which lists 1.5 million qualified charities and contains in-depth financial information about them as well.

Not every gift you make is a deductible charitable contribution. For example, even if they seem charitable to you, you may not deduct contributions:

  • to individuals—for example, you can’t get a charitable deduction for giving money to your brother Fred (even if he’s broke), to the local panhandler, or to an individual priest, reverend, or rabbi
  • for raffle, bingo, or lottery tickets
  • for political candidates or groups
  • to for-profit schools and hospitals, or
  • to civic leagues, social and sports clubs, labor unions, or chambers of commerce.

In addition, most people don’t realize that they can’t deduct gifts to foreign charities or governments (except certain Canadian, Israeli, and Mexican charities). If you want to help people in a foreign country, you should donate to a qualified U.S. charity providing aid in that country. That way, you can deduct your donation.

Contributions of Money

It’s easiest to give cash, which is usually most welcome by charities. Cash includes currency, checks, and credit card contributions. You can give a huge amount of cash and get a deduction--up to 50% of your adjusted gross income for the year.

Contributions of Property

You don’t have to contribute cash to a charity to get a deduction. You may also contribute property. Property contributions include items such as old clothes, furniture, household goods, cars, and jewelry. They also include intangible property such as stocks, bonds, and mutual funds.

Contributing property to charity is very popular—you can get rid of old stuff you no longer need and get a tax deduction too. However, it’s much more complicated than donating cash.

Unfortunately, a charity is not allowed to set the value of a donation—you, the donor, must do so. The IRS is well aware that some people wildly inflate the value of their property contributions and is now cracking down on abuses. There are also special recordkeeping and valuation rules for large property donations.

You may deduct no more than the property’s “fair market value” when you make the deduction. The IRS says that fair market value means the amount that a “willing buyer would pay and a willing seller would accept for the property, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts.” In other words, it’s a fair price—not too high or too low.

The IRS gives very little guidance on how to determine fair market value other than to say that you shouldn’t use a fixed formula. Rather, all relevant factors should be considered, including:

  • the item’s cost or selling price
  • sales of comparable items
  • replacement cost, and
  • opinions of experts (ordinarily used only for high-ticket items).

You’ll need to obtain an appraisal from a qualified appraiser if the property is worth more than $5,000. But a formal appraisal is not required for less expensive property.

Recordkeeping Requirements

You must keep a cancelled check, bank record, or receipt for all your cash contributions, however, small.

For property deductions over $250, you’ll need to obtain a written receipt or acknowledgement from the charity, as well as keep your own records of the contribution. The receipt or acknowledgement must be obtained before you file your tax return. Most charities know this and will often give you the required receipt without you even asking for it.

You don’t have to file any of these records with your tax return. However, if you make a contribution of property worth more than $500, you’ll need to file IRS Form 8283, Noncash Charitable Contributions, with your tax return, containing the information in your records.

Keep this information with your tax records in case you’re audited.

by: , J.D.

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