This time of year seems to be devoted to commercialism, which is not necessarily a bad thing. In fact, the benefits of spending money on that new big screen television, tablet or blender is a great way to support the economy as well as your favorite local businesses. As the “spirit of giving” continues to shape your holiday spending habits this year, don’t forget that there is another way to make a difference with your dollar – charitable giving.
Whether you choose to give on behalf of your business or yourself, a charitable gift will not only benefit the organization, it can favorably impact your tax return. Consider these tips before donating to make sure that you and your favorite organization will get the maximum benefit for every dollar donated.
1. You may only deduct gifts that are given to qualified charities.
In addition to qualified charities based in the United States, there are some charities in Canada, Mexico and Israel that are eligible under an income tax treaty between the U.S. and that country. Most churches, synagogues, temples, mosques and government agencies also qualify – even if they are not mentioned in the IRS’s comprehensive database.
2. Monetary donations are always welcome, but they are not always deductible.
Monetary donations made in the form of cash, check, electronic funds transfer, credit card and payroll deductions to any qualified charity may be deducted on your tax return. To claim the deduction though, you must have a valid bank record or a written statement from the charity that states the:
- Name of the charity
- Date the gift was given
- Amount of the gift
Remember: Monetary donations made to civic leagues, labor unions, chambers of commerce, homeowners associations, individuals, political groups, groups that lobby for law changes, political candidates for public office, or foreign charities other than those based in Canada, Mexico and Israel, cannot be deducted on your tax return.
3. Is that old couch a tax deduction?
Household items, including furniture, furnishing, electronics, appliances and linens all qualify for a deduction. A tax deduction for clothing, as long as it’s in good condition, is available as well. If you donate an item with a value of $500 or more, then you must include a qualified appraisal of the item with your tax return and file Form 8283. Regardless of what you donated and its value, you should document all information pertaining to the donation and keep it on file until the period of limitation expires. Information you will need to gather and retain includes:
- The name of the charity that is receiving the donation
- The date the donation was given
- The location of the charity
- A description of the property that was donated
- The method you used to determine the value of the property and what the fair market value of the property was determined to be
- What you paid to acquire the property
4. Mind the cap.
Be prepared for the IRS to cap how much of your contribution can be deducted. The amount you donate can’t exceed 50 percent of your adjusted gross income (AGI). This means that if you donate $30,000 to charity, if your AGI was $50,000 you could only claim $25,000 as a charitable deduction. Don’t give up on your ability to donate the remaining $5,000, though. In the event that you are unable to claim all of your contributions during the year they were made, you are still able to carry the deductions over to another year – up to five years. If in that time, you were not able to claim the deduction, then your ability to claim the deduction is lost. It’s also important to note that if you claim the standard deduction in a carryover year, the carryover is reduced by the amount that had been itemized in the first place.
5. Keep good records, regardless your donation.
In addition to the information you should already have on file, it is important to obtain acknowledgement for each deductible donation (money or property) of $250 or more from the organization that received the donation.
Email Rea & Associates to find out more about how making donations to your favorite charities can help you.