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How to Leverage Charitable Contributions on Your Tax Returns

        Money | Taxes

Tax Restrictions on Charitable Contributions
U.S. Internal Revenue Service building stands tall in Washington, D.C.
U.S. Internal Revenue Service building stands tall in Washington, D.C.
SAUL LOEB/AFP/Getty Images

There are many tax restrictions on charitable contributions. The restrictions are primarily based on the kind of contribution, the type of organization or foundation that's receiving it and its tax-deductible value.

On August 17, 2006, the Internal Revenue Service's Pension Protection Act made changes to the revenue code to crack down on the artificial inflation of charitable contributions. For example, taxpayers making vehicle donations often overvalue the vehicle by not taking into account the vehicle's condition. A rusty 1967 convertible with no engine or doors is not technically worth the fair market value.

The IRS's changes to the revenue code also strengthened the burden-of-proof requirements for charitable contributions. If you're audited, you had better have receipts and/or documentation of your charitable contributions. The IRS may nullify the contributions you can't justify and then penalize you for underpaying your taxes.

So, when you make a charitable contribution that you expect to deduct, ask the receiving organization for a receipt that shows -- at least -- the value of the contribution, the date of the contribution and the name of the organization. The statute of limitations on audits is three years, so it's best to hang on to those receipts for at least that long. You can also use a bank statement, canceled check or credit card statement as proof of the value and the name of the recipient.

The type of organization affects how much of your donation you can deduct. Public charities, such as United Way, depend on money from the public to conduct their operations.

You can deduct 50 percent of the value of your contributions to public organizations, or 30 percent if your contribution is something that could show capital gain. If you donated some stock, which could rise in value (a capital gain), you could deduct 30 percent of the value of the stock.

Private organizations, such as the Rockefeller Foundation, depend on money from private investments and gifts to conduct their operations. You can deduct 30 percent of the value of your contributions to private foundations, or 20 percent if your contribution is something that could show capital gain.

Those caps may seem like serious limits on your deductible contributions. But you can write off another 50 percent, 30 percent or 20 percent on next year's return. You can continue to do this for five years. So, you're limited in what you can deduct in a single year, but you can write off the contributions over time.

To find out whether an organization is eligible for a tax-deductible donation, download the IRS's Publication 78 "Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986." Or you can use the IRS website to search for an eligible organization.

Next you'll read about different types of contributions to charitable organizations.