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.