How Charitable Contributions Can Affect Your Income Taxes

Giving is a good thing. It can also help reduce your income tax obligation.

If you regularly file a Schedule A, you know that most of the deductions you record there benefit you and your family as well as lowering your tax bill. Home mortgage interest means you have a place to live. Medical and dental expenses? You have health care. The real estate taxes you pay come back to you in terms of local resources.

But that Gifts to Charity section? That’s often about other individuals who don’t have those things. Thanks to U.S. tax law, you can help other people and the organizations that serve them while getting a bit of a break yourself.

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This section of the IRS Schedule A documents how you’ve helped other people throughout the year and helps you calculate the tax deduction you receive for that generosity.

As with any other type of tax-related deduction, the IRS has rules that spell out what kinds of charitable contributions can be claimed and what proof you may be asked to provide. And like most of the tax code, these regulations are complex; some have exceptions.

We’re getting close to that final quarter of the year, which is when many people make extra donations in addition to those they’ve made throughout the year. So here’s some of what you need to know.

Who Qualifies?

First, let’s look at the IRS’ definition of a charitable contribution: “…a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.”

How do you know whether an organization is qualified to receive tax-deductible donations? Some are obvious, like churches, the American Red Cross, and the Girl Scouts of America. Many fundraisers include this information when they ask for money. You can also use this IRS tool to find out.

What Contributions Can You Deduct?

taxplan-0916-image-2_zpsactpixucMoney is, of course, deductible, but so is property. The IRS allows you to deduct the fair market value of anything you donate, which is the price that a willing buyer and willing seller would agree on in the open market. Most often, this is clothing and household items like furniture, electronics, and appliances, and it’s usually much less than you paid for it. For example, you might use the cost that a thrift store would charge for an item of clothing.

What about more expensive items like jewelry and gems, paintings, property, etc.? Depending on the item’s value, you may need to get a written appraisal from a qualified, reputable source. The general rule is that you don’t need to get an appraisal for items worth $5,000 or less. But there are exceptions. If you’re planning to make a donation that runs into the thousands of dollars, we’ll be happy to help determine what’s needed for your tax return.

Are There Limits to How Much You Can Deduct for Charitable Contributions?

Yes. You can only take deductions for contributions that add up to less than 50 percent of your adjusted gross income for the tax year. But then there’s the 30 Percent Limit and the 20 Percent Limit. Here again, if you’re making substantial contributions to a charitable organization, let us work with you.

What Records Do You Need to Maintain?

Depends. Did you make the donation using cash, credit card, payroll deduction, etc.? If it was less than $250, documentation like cancelled checks or credit card statements will suffice. More than that, and you’ll need a written acknowledgement of your contribution or specific payroll deduction records.

Was it a noncash contribution? Was it worth less than $250? You’ll still need a receipt or a letter from the organization that received it unless, for example, you dropped some bags of clothing off at a site where no one was present. You also need to maintain written records that contain detailed information about the donation. There are additional requirements for contributions of between $250-500 and $500-5,000, and more than $5,000.

What about out-of-pocket expenses, like using your own vehicle as a part of providing services to a qualified organization? Some of those expenses are deductible (gas and oil) while others aren’t (repair, maintenance, etc.). You can also just deduct a flat 14 centtaxplan-0916-image-3_zpsvdfrki8ks per mile rather than reporting actual expenses.

There are other rules—and other exceptions—that apply to the income tax status of your charitable contributions. Bottom line: Keep thorough records for anything you donate to an organization. And let’s start a conversation if you’re planning to make considerable contributions this year – before the tax year ends.

Stock images courtesy of FreeDigitalPhotos.net

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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