Charitable Contributions
Giving to others to make their plight a little easier makes us feel good. Considering the positive tax ramifications of charitable giving can make a good feeling feel even better. Charitable organizations depend on your generosity but not all charitable gifts result in tax benefits. Here is some information that will help you know what charitable gifts provide tax benefits and how to receive the benefits.
WHO CAN I MAKE CHARITABLE CONTRIBUTIONS TO?
Tax benefits can be gained through contributions to recognized charitable
organizations, otherwise designated by the Internal Revenue Service as Section
501 (c) (3) organizations. Among these organizations you will find churches,
schools, and nonprofit groups organized for religious, charitable, educational,
scientific, literary purposes, prevention of cruelty to children or animals, and
certain national or international amateur sports competitions. You can even make
voluntary contributions to the federal government, any state or local
government, or any U.S. possession. Of course, the gift must be for public good
and not to license your puppy. Generally, the charities must be organized in the
United States to qualify. Certain Canadian, Mexican, and Israeli charities may
qualify if they are covered under an income tax treaty and you have earnings in
those countries. To find out whether a charity is qualified for tax purposes,
you can check with the organization or the IRS. The IRS has Publication 78,
Cumulative List of Organizations described in Section 170(c) of the Internal
Revenue Code of 1986, that contains the names of qualified charitable
organizations. This publication can be viewed by visiting the IRS website at
www.irs.gov.
WHAT CAN I GIVE?
A charitable contribution can be in the form of cash or property. A cash
contribution is the easiest to value. The value is the amount given, no matter
whether it's cash, check, or credit card. The value of property is a little
harder to obtain. Normally, the deduction will be the smaller of the property's
value or its cost. You can gift items such as clothing, food, personal items,
household goods, stocks, bonds, or real estate. If these items have been
recently purchased or appraised, you have a reasonable value. If not, you have
to obtain the value by some reasonable means. Many of the organizations, such
as Salvation Army, provide a guide of reasonable values for used property. The
Salvation Army guide is available at www.salvationarmyusa.org by searching for
"valuation guide." It is helpful to have a copy of this valuation guide when you
make your donation. Used cars have also been a popular donation. The IRS
recently introduced Publication 4303, A Donor's Guide to Giving a Car, to help
with the valuation and reporting needs.
You can even give gifts with strings attached. What this really means is that you want the charity to have property later rather than now because you may need or want the income the property would generate. If set up correctly, you can receive earnings and take a charitable contribution. This concept is known as a charitable remainder trust. There are different forms with different specifications, but the basic idea is that you contribute your property to the trust with the agreement that you will receive a certain amount of earnings each year for a term or for life. At the end of that time, the charity will receive the property. You are allowed to take a deduction at the time the property is placed in trust. The deduction will be based on the present value of the gift when it is turned over to the charity. Each year for life or for a certain term, you will receive income from the trust. The computation of the charitable deduction is a little complicated, but your tax professional or the charitable organization can help you with it. Many colleges and universities have fund-raising specialists who can provide you with more information.
There are some things that will not qualify as charitable gifts. The value of
your donated "time" will not translate into a charitable contribution. But you
can deduct the transportation costs incurred in performing charitable functions
such as delivering food to shelters or traveling to meetings where you are a
representative of the charitable organization. Donating a week at your vacation
condo as an item for the school fund-raising auction will not be a deduction
even though it has value. You can deduct any out-of-pocket costs you may incur
to provide the prize such as supplies to be used at the condo during the donated
week. Contributions to specific individuals if\ times of crises are not
deductible gifts. A deduction would be available only if you gave the items to a
recognized charitable fund for the victims.
Political contributions are not deductible nor is the cost of daycare while you are providing volunteer services. If you allow foreign exchange students to stay with you, charitable contributions of your expenses up to $50 for each month (15 days or more = full month) that they stay with you is allowed. Sometimes you can even give gifts without realizing a gift has been made. You may sell a piece of property to a local charity. Perhaps your church wants to build a new building and you own a plot of land that would be perfect. You generously set the price at $50,000 when you could have sold it to a local developer for $65,000. Your transaction is part sale ($50,000) and part gift ($15,000). Because the gift is to a recognized charity, you have made a charitable contribution of $15,000.
Raffle tickets. dues to belong to a fraternal
organization, and the blood
you donate to the Red Cross are not deductible contributions. When you purchase
items and you pay extra because some of the profit goes to the organization, you
can deduct the excess over the usual cost of the item. Girl Scout cookies are a
good example of the purchase of goods that benefit the organization. The Girls
Scout organization usually provides the amount to be deducted per box on each
box.
IS THERE A LIMIT TO WHAT I CAN DEDUCT?
There is a limit to the amount that you may deduct in a given year. First, as an individual, you must be able to itemize your deductions to benefit. Secondly, the deduction is generally limited to 50% of your income. A 30% limit applies to certain selected organizations such as veterans' organizations and fraternal organizations such as the Elks Club or Moose Lodge. If your contribution is property instead of money, the limit may be reduced to 30% and 20%, respectively if the fair market value (FMV) is higher than your cost. If you give more than your limit in one year, you can carryover the excess for a maximum of five years.
WHAT PROOF DO I NEED?
The important part of claiming a charitable deduction is having the proof to substantiate the contribution. If you're making cash gifts, canceled checks or receipts for the charity are necessary. When the gift is $250 or more, you must have a written receipt from the organization along with the date of the contribution, the amount contributed, and the value of anything received in return. This receipt must be in your hands before you file your income tax return for that year. When a contribution of $75 or more is made and you receive goods or services in return, the organization must provide a statement to you outlining the value of the goods or services you received. If you are giving property, a detailed list of the property is necessary. This is a good way to determine the value using the comparison charts provided by organizations mentioned earlier. Real estate, art objects, antiques, and other items valued over $5,000 need a formal appraisal. (The cost of the appraisal is not a charitable contribution.) Having pictures of the property you donate may help reinforce the value that you have given the property.
Be generous and save tax dollars at the same time. The above rules apply for federal purposes. State and local jurisdictions may vary.