The tax code reflects all sorts of moral and value judgments, and Congress often decides to reward certain behavior with tax breaks. Owning a home, attending college and, of course, giving to charity all are hailed as worthy endeavors under the tax code.
Today we'll discuss charitable deductions.
You already know that charitable gifts can be written off as an itemized deduction on Schedule A. (If you claim the standard deduction rather than itemizing, you won't get any benefit from your donation ... well, no tax benefit, anyway.)
What you may not know, though, is that there are some restrictions about what you can and can't deduct, and the Internal Revenue Service is hip to the common maneuvers people use to skirt the rules. To that end, here's a little refresher on the details.
You can deduct gifts to religious, charitable, educational and other philanthropic organizations; the vast majority of these are legit. But if you have doubts about whether the organization is truly tax-exempt, you can check with the
IRS or public charity watchdog group
It's not exactly a free-for-all, though. Many kinds of charitable gifts are not deductible (usually for good reason). Contributions to political campaigns, political action committees or lobbying organizations are not deductible. Nor can you deduct contributions to for-profit hospitals or for-profit academic institutions.
The same goes for fraternities and sororities and other social clubs. Only groups that are exclusively operated for a charitable, religious or other approved philanthropic purpose enable the donor to deduct a contribution. That also rules out donations to civic leagues, chambers of commerce, labor unions and -- in a specific clause that must be a holdover from the Cold War -- communist or communist-front organizations.
And, alas, no matter how valuable your time may be, you're not allowed to deduct the cost of your time or services. So if you're an attorney billing $250 an hour and choose to do some work for Legal Aid, you're not able to deduct $250 for every hour you work for them.
Volunteers can, however, deduct unreimbursed expenses incurred during such work, including commuting expenses, telephone calls, uniform purchase, and meals and lodging if the organization requires you to travel. If you used your car in providing volunteer services, you can deduct either the actual operating costs of your car or a flat mileage rate of 14 cents a mile.
Donating cash (including checks) is the most straightforward of the charitable deductions. If you write a check for $100, you can deduct $100 on your Schedule A.
But if your donation includes some benefit (such as a dinner or a thank-you gift), the value of the benefit is subtracted from your allowed deduction. So if you buy a $100 ticket to a fundraising banquet and the cost of the dinner is valued at $40, you're only allowed to deduct $60.
Most charities will tell you upfront how much the benefit is worth, and many will let you opt out of receiving a gift, making your entire contribution deductible.
Donating appreciated securities gives you the most bang for your buck, though. You're able to deduct the full market value of the securities, and won't have to pay tax on the gain. To do so, you must have held the securities for more than a year. Those held short-term won't convey this same perk.
There are some limitations on how much you can donate. For instance, you can't deduct donations past 50% of your adjusted gross income; that figure falls to 30% when donating appreciated securities. But when your donations in one year exceed the percentage limits, you can carry over the excess for up to five years.
Donating Tangible Items
When most of us donate tangible items, it's stuff that has gone down in value. (I know I've never found anything in my closet that has actually appreciated.) So whether you've done some spring cleaning and want to donate the result, or if there's a particular item (such as a car) you're looking to unload, there is a specific set of rules you need to know.
First of all, you can only deduct the fair market value of the item you're donating. So even if you paid $400 for that suit you never even cut the tags from, you can't take a $400 deduction. By sheer dint of the fact that suit is no longer in Bloomingdale's, its fair market value is no longer $400, no matter what the tags say.
To determine an item's fair market value, shop around for similar items. Check out thrift shops, online auctions, newspaper ads, secondhand furniture shops and flea markets. Frankly, most experts say that taxpayers tend to
value their items, so it's in your own best interest to do a little homework.
And that sometimes means not going by your first source. So when donating a car, check the
Kelley Blue Book, but if your car doesn't meet the criteria they lay out, you can't use their value. If the engine needs work or the brakes are stripped, for instance, you can't claim the Blue Book price. Likewise, though, if you've done a lot of work on the car you might be able to claim more than the Blue Book suggests.
If you're donating items that have appreciated in value -- like artwork, rare coins or other collectibles -- you can still claim a deduction for the fair market value. There is a catch, though.
Tangible items that have been held for more than a year must be donated to a charity that uses them for its main purpose in order for you to be able to deduct their fair market value.
Let's say you bought a painting from a local artist for $5,000. Now, several years later, the artist is the new "it" girl of the art world; that painting is worth $15,000 and you're looking to unload it. If you donate it to a museum, you can deduct the fair market value of $15,000. If you donate it to a college that hangs it in the library where students can study it, you can deduct the fair market value of $15,000.
But here's the catch: If you donate the painting to the Red Cross, which either hangs it in the lobby or sells it and uses the proceeds for new equipment,
you can only deduct your cost basis
. That's $5,000.
use your donated item to directly effect its mission in order for you to be able to deduct the fair market value of the item. In other words, if the museum promptly sells the painting, or if the college hangs it in the faculty lounge, technically you're only able to deduct your cost basis.
Perhaps somewhat surprisingly, though, the IRS allows for a "common sense" sort of loophole. If you reasonably believe that the donated item will be used in the charity's main purpose, you're able to deduct the fair market value no matter what the institution does with it. In order to substantiate the deduction, consider asking for a written statement of intended use from the charity.
For the Record
You'll need to keep some record of your charitable contributions to substantiate them in case of an audit, but in most cases the substantiation doesn't need to be filed with your return.
Keep a cancelled check or receipt from the charity as proof of
of less than $250. (That's not necessarily each item, but say, each bag of clothes or each trip to the charity.) For donations of $250 or more, you'll need to have a written acknowledgement that also notes any benefits or goods that you received in exchange.
If the claimed value of any single donation exceeds $500, you'll need to complete Form 8283 and file it with your 1040. And for donations that exceed $5,000 you'll need a written appraisal.
And in general (as with many other aspects of your tax return), if you're claiming something that you fear will raise an eyebrow or two at the IRS, attach an explanation.