Charitable tax deductions are the IRS's way of rewarding you for making donations to organizations that help people in need. For every contribution you make (cash or otherwise) to a qualified charity, you can shave a little (or a lot) off your adjusted gross income and reduce your own tax burden.
Charitable contributions can take many forms. Cash, check and credit card donations are the most straightforward type of donation -- they're easy write-offs. But you can also donate property, goods, real estate, your time and services, stock options, intellectual property and just about anything else you can think of. This is where things take a turn into more complicated territory. Some of it will be fully deductible, some partially, some not deductible at all. The answers are all to be found in the IRS publications on charitable deductions, but you might need some time (or professional help) to find them.
Whatever you do, if you've made charitable contributions over the year, you must take the itemized deduction option and fill out Schedule A on your federal Form 1040. If you take the standard deduction you won't get the full benefit of your donations.
This article won't get into the nitty-gritty details of the IRS's exhaustive rules on this subject -- if you're a whaling captain, for example, you'll want to look elsewhere for an explanation of the charitable deductions you can take for subsistence bowhead whale hunting activities. But we will give you the basics and some tips on how to make the most of your charitable giving at tax time.
What You Can Deduct
If you want a tax write-off for a charitable donation, the receiving organization has to be qualified. Qualified organizations have a 501(c)(3) designation, meaning they file an annual informational return (Form 990) with the IRS every year and maintain public records of their operations. Qualified organizations include churches and religious groups (which actually don't need to file for 501(c)(3) status); educational, scientific, literary and athletic organizations; and government entities. If you're wondering about the status of a particular group, you can check out the IRS Exempt Organizations Select Check [NOTE: hyperlink to: http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check].
Charitable contributions don't have to be monetary -- noncash donations of property, goods or assets are just as deductible. As long as you're giving to a qualified organization, there's a way to write off at least part of pretty much any donation you make. If you make a straight-up cash, check or credit card donation, that's an easy deduction. There's some gray area -- and many rules and restrictions -- involved with everything else.
If you receive goods or services in exchange for your donation -- say, getting a tote bag in return for a donation to a public TV station -- you have to subtract the fair market value of the bag before writing off the rest. In the same vein, if you pay an organization more than the fair market value of an item -- paying $5,000 at a charity auction for a vacation that's worth $4,000 -- you can deduct the $1,000 difference.
Noncash contributions are harder to document, so the burden will be on you to prove value if the IRS should come knocking. Any donated clothing or household items must be in good used condition, and you should get written confirmation from the organization that you didn't just drop off a load of junk. Especially for donations over $250, you'll want to hang on to all written records of your charitable contributions for three years, the statute of limitations on audits. If the value of a donated item exceeds $500, you must have the item appraised -- and include Form 8283 (Noncash Charitable Contributions) with your tax return.
Things get murkier when the donated items could appreciate or depreciate, or if it involves a partial interest in property. The rules on vehicle donations have been tightened in recent years to prevent people from inflating the value of their donations. In the past, you could declare the Kelley Blue Book value of a donated car and deduct the entire amount, regardless of the car's actual condition. Now, the charity might have to provide a receipt that states the condition of the car, its fair market value and how it will be used. If you donate a car to a charity that turns around and sells it, you can write off only the sale price, which might not necessarily be its fair market value.
Not all charitable donations are considered equal in the eyes of the IRS. On the next page, we'll tell you what you can't deduct.
What You Can't Deduct
Lest you're planning to donate to charities and deduct willy-nilly, there are restrictions that govern the process. As we mentioned before, the donation must be given to a qualified organization -- always check before you donate. Examples of nonqualified organizations include labor unions, political interest groups and candidates, country clubs, homeowners' associations, Communist groups, chambers of commerce, and foreign groups (but, thanks to trade agreements with Canada, Mexico and Israel, certain organizations in those countries might be OK). You can't deduct donations to individuals, either, even if you donate to a qualified organization and earmark your contribution to a certain person, like in the case of a natural disaster.
There are also all kinds of contributions made to qualifying organizations that aren't deductible. You can't write off raffle, bingo or lottery tickets, dues to a fraternal order, tuition, retirement-home room and board, or donations to lobbyists. And it's a no-no if the receiving organization makes life insurance premium payments with your donation and you (or someone in your family or of your choosing) is a beneficiary of that policy.
That's only the tip of the iceberg.
If you receive a benefit from the donation that's equal or greater in value to the donation — for example, receiving $200 tickets in return for a donation of $200 — you can't deduct any part of that $200. You also can't deduct the value of your time or services, even if you volunteered with a qualified organization. If there were expenses associated with your volunteering, you can write those off, but not your time. Personal expenses are on the no-fly list, as well. And if you incurred appraisal fees in the process of donating an item that was worth more than $500, you can't deduct those fees.
In addition to the restrictions on what kinds of charitable deductions you can take, there are limits on how much you can deduct every year. On the next page, we'll tell you about those limits.
Know the Deduction Limits
There aren't too many people who donate very large chunks of their income to charity every year, but if you do, there are limits on what you can deduct. Most public charities are also known as 50 percent organizations, which means that your deductions from donations to those charities are limited to 50 percent of your adjusted gross income for that year. In other words, if you make $100,000 in a certain year and donate $60,000 of it to a qualified public charity, you'll only be able to deduct $50,000 of that. Other organizations -- usually private charities, veterans groups, fraternal organizations and private family foundations -- have 30 percent limits. To further complicate matters, if a 30 percent organization happens to show capital gains, then you can deduct only 20 percent of your income.
There are additional limits — too involved to fully explain here — that depend on what type of donation you're making. If you happen to donate long-term capital gains to a charity, your deduction is limited to 30 percent of your income, even if you've given to a 50 percent organization. That percentage goes down to 20 if the long-term gains are donated to a 30 percent organization. (Again, we're talking about a very small percentage of the population who will have this issue.)
But never fear, generous people. You will eventually reap the benefits of donating more than the limit -- it just won't be all in one year. If you donate $60,000 of your $100,000 income to a 50 percent organization, you can write off $50,000 that year. The remaining $10,000 can be rolled over and written off gradually over the next five years.
If you'd like to delve deeper into the world of charitable tax deductions, check out the links on the next page.
Author's Note: How Charitable Tax Deductions Work
Kudos to anyone who does their taxes all by themselves, but researching articles like this makes me all the more happy with my decision, made many years ago, to hire an accountant.
- Bell, Kay. "Get a tax deduction for charitable giving." Bankrate. (Nov. 12, 2014) http://www.bankrate.com/finance/taxes/get-a-tax-deduction-for-charitable-giving-1.aspx
- Internal Revenue Service. "Eight Tips for Deducting Charitable Contributions." March 22, 2011. (Nov. 11, 2014) http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions
- Internal Revenue Service. "Form 8283: Noncash Charitable Contributions." (Nov. 11, 2014) http://www.irs.gov/pub/irs-pdf/f8283.pdf
- Internal Revenue Service. "Instructions for Form 8283." December 2013. (Nov. 11, 2014) http://www.irs.gov/pub/irs-pdf/i8283.pdf
- Internal Revenue Service. "Publication 526: Charitable Contributions." (Nov. 11, 2014) http://www.irs.gov/pub/irs-pdf/p526.pdf
- Internal Revenue Service. "Publication 561: Determining the Value of Donated Property." (Nov. 11, 2014) http://www.irs.gov/pub/irs-pdf/p561.pdf
- T. Rowe Price. "Understanding IRS Limits on Charitable Gifts." (Nov. 12, 2014) http://www.programforgiving.org/charitable/pages/understandingIRSLimits.jsp