Tax Deductions for Your Charitable Contributions and Volunteer Work
Charitable contributions and volunteer work can reduce your taxes and enrich your retirement.
After retirement (and even before), many people are looking for meaningful ways to spend some of their newly free time and to make a difference in the world. Volunteer work is often the solution. Whether you use expertise developed during your paid career or throw yourself into something new, volunteer work allows you to help worthy causes, pursue your interests, and meet new people. And the IRS is willing to give you a little help, in the form of tax deductions for some of your volunteer expenses.
Of course, volunteer work isn't the only way to help others. If you are fortunate enough to have cash or property to donate, your charitable giving can fund worthwhile endeavors -- and the attendant tax breaks are nothing to sneeze at, either. Whether you give money, property, or your time, this article explains some basic rules about claiming tax deductions for your good work.
What Is a Qualified Organization?
No matter what or how much you decide to donate, your gift will be deductible only if you make it to a qualified organization. This means the group must meet the IRS's requirements for receiving tax-deductible donations.
Most public charities are qualified organizations, as are many nonprofit private foundations. If you are uncertain whether an organization qualifies to receive deductible donations, you should ask the organization for a copy of the IRS letter approving the organization's tax-exempt status.
If you are unable to verify tax-exempt status with the organization itself, you can check IRS Publication 78, a list of organizations qualified to receive tax-deductible donations; you can find it at the IRS website, www.irs.gov. Or, you can contact the IRS's Tax Exempt Customer Account Services line, at 877-829-5500.
If you donate money to a qualified organization and receive nothing in exchange, your donation will be fully deductible (as long as your contribution isn't too large relative to your income). However, you may not deduct a cash donation unless you have a tangible record of the donation, no matter how small the amount. You might know that you put $5 in the church basket every week, but without a receipt, that donation is not deductible. To claim a cash donation, you will need one of the following:
- a canceled check
- a bank statement showing the name of the charity and the date and amount of the check, or
- a written receipt from the charity that includes the name of the charity and the date and amount of your contribution.
If you donate $250 or more, you must obtain a written acknowledgement from the charity. The acknowledgment must state the amount of your donation and whether or not you received goods or services in exchange for the donation.
If you receive something in return for your cash donation, such as services, items of property, or even benefits (if they are financial in nature), then you must reduce your deduction by the value of the items or benefits you received. For example, if you pay $200 for tickets to a charity dinner, but the dinner itself was worth $50, you may deduct only $150 as a charitable contribution.
If you donate more than $75, the charity generally must provide you with an estimate of the value of benefits you received in exchange for your donation. The IRS has said that you may rely on the charity's written estimate of the value of those benefits.
You may donate almost any type of property, whether used or new (although certain types of property must be in good condition, so you can skip the running shoes with holes in the soles). Property contributions run the gamut from used clothing and cars to investment securities, real estate, artwork, and other collectibles.
When you donate property, you may typically deduct its fair market value on the date you donate it. For example, let's say that the day after you retired, you boxed up all of your suits and other professional clothing and took them to your local Goodwill store. You may not deduct the full price you originally paid for the clothing; instead, you may deduct only its value used, on the day you donate it. You can figure out this value by looking at comparable items in thrift stores or consignment shops.
Sometimes, you may not deduct the fair market value of property, but instead may deduct only your tax basis in the item -- basis is a tax term that takes into account what you paid for the property, what you've spent to improve it over the years, and any tax benefits (such as depreciation) you've already claimed for it.
Stricter rules also apply to more valuable property. For example, you may have to submit additional forms to the IRS or have the property appraised to determine its value. You can find more information in IRS Publication 561, Determining the Value of Donated Property.
People who volunteer their time and expertise believe they have something valuable to offer. So, you may find it distressing that your services, expert though they may be, are worth a tax deduction of precisely zero. This rule is not unique to volunteer work; in fact, it is consistent with other tax laws. With only rare exceptions, the general rule is that you must spend cold, hard cash or give away stuff before you may claim a deduction.
However, you may deduct many of the expenses you incur for volunteer work, including:
- the cost of hosting a party or fundraiser for the organization
- advertising that you buy on behalf of the organization
- supplies you purchase to be used in volunteer work, such as stamps and stationery
- the cost of a required uniform (and the cost of keeping it clean), and
- telephone expenses.
Some local travel expenses are also deductible, such as bus, train, or taxi fares. If you use your own car, you may deduct the parking fees, tolls, and cost of your gas and oil for those miles you travel for the charity, but you may not deduct the cost of insurance, maintenance, registration fees, or depreciation, as you could if you were using your car for business. If you don't want to keep track of your actual gas and oil expenses, you can simply keep a log of the miles your travel for volunteer work and deduct the IRS standard rate per mile for charities (see the IRS website for current rates).
For information on all types of tax deductions you may qualify for in retirement, see Nolo's Essential Retirement Tax Guide, Your Health, Home, Investments and More, by Twila Slesnick (Nolo).