It would appear as though Americans have never before been more generous with their hard-earned dollars than they have in recent years. According to the Giving USA Foundation’s Annual Report on Philanthropy, donations from American individuals, estates, foundations and corporations reached an all-time high in 2015 – $373.25 billion – a trend that is expected to continue.
Not only is charitable giving a great way to support a nonprofit that is committed to doing great things in your community or for a specific initiative you support, it’s an excellent way to reduce your taxable income. But before you go writing off your donated dollars; be sure to remember these six important facts to help you optimize your efforts.
- Donations must have been given to a qualified charity. You can find out if a particular charity qualifies by using the Exempt Organization Select Check Tool or Guidestar. It is generally a good idea to check the validity of the charity you are planning on donating to even if they do seem to be familiar. Believe it or not, some scammers will attempt to take advantage of your generosity by posing as a representative of an organization with names similar to those used by reputable organizations.
- Deductions must be itemized. If you intend to deduct the money you donations you made to charity over the past year, then you must file Form 1040 and itemize your deductions. Your tax preparer will help you file Schedule A, for itemized deductions, alongside your federal tax return.
- Account for any items or service received in return for your donation. Sometimes nonprofits will offer additional incentives, such as merchandise, meals, tickets, etc., to donors who commit to giving a specified amount. If you received something in return for a donation, then you will not be able to claim the entire donation on your tax return. The IRS says a taxpayer can only deduct the amount of a gift that’s greater than the value of what was received in return for the monetary donation.
- Depending on how your donation materializes, it could be subject to fair market value. If your donation takes a form different from the traditional cash or check option, the deduction you can claim on your tax form is limited to the price you would likely get if it were sold on the open market. The rules typically dictate that used clothing and household items generally must be in good condition or better. However, special rules apply to cars, boats and other types of property donations.
- All noncash charitable contributions should be reported on Form 8283. This includes all noncash charitable donations totaling $500 or more over the last year. Be sure to maintain detailed records of your philanthropic activities and maintain a working recordkeeping system. Publication 526 will give you more insight into what records to keep.
- Bigger donations require proof from the charity. It doesn’t matter if you donated a large sum of cash or piece of land, if the value of your donation exceeded $250, you must receive a written statement from the charity acknowledging your donation. Be sure the nonprofit identifies the amount of the donation and a description of the property given. It must also state whether goods or services were exchanged in exchange for the donation.
Learn more about the importance of helping area nonprofit organizations on episode 11 of unsuitable on Rea Radio, the warm glow of giving, featuring Laura MacDonald, CFRE, president of the Benefactor Group.
By Maribeth Wright, CPA (Cambridge office)