(from Kelly Phillips Erb’s 12/20/2015 Forbes article. Click here for the original post. Kelly is a staff writer for Forbes, goes by the handle Taxgirl® and has earned her JD, LLM in Taxation and spent time working for the IRS. Follow Kelly on Twitter @taxgirl.)
Americans gave $358.38 billion in 2014, a 7.1% increase from 2013, and equivalent to a whopping 2% of the U.S. gross domestic product (GDP). The majority of that giving, $258.51 billion, came from individuals, representing 72% of all charitable donors.
Making a charitable donation is not only a chance to make a difference: it’s also an excellent way to reduce your tax burden for the year. The tax benefit is considered a compelling reason for making charitable deductions: more than two-thirds of high-net-worth donors said they would decrease their giving if they did not receive a corresponding tax deduction.
A tax deduction for charitable giving isn’t guaranteed just because you’re feeling generous. As with everything in tax law, it’s important to follow the rules. With that in mind, here are 11 tips for making your charitable donation count:
- Itemize. In order to claim a charitable deduction on your tax return, you must itemize your deductions. You report itemized deductions on Schedule A on your federal form 1040 using lines 16 – 19.
- Choose carefully. Only donations to qualified charitable organizations are deductible. If you’re not sure whether an organization is qualified, ask to see their letter from the Internal Revenue Service (IRS): many organizations will actually post their letters on their website. If that isn’t possible, you can search online using IRS Exempt Organizations Select Check. Please note that this year, due to a programming problem at IRS, organizations that received determination letters in November 2015 and later may not be reflected on EO Select Check. You can always confirm an organization’s exempt status by asking to see the organization’s IRS determination letter (many organizations will post the letter on their website) or by calling the IRS at 1.877.829.5500. You can also find out more about a charitable organization’s tax-exempt status – as well as review financials, mission statements and more – by checking out a third party evaluator site like Charity Navigator. Finally, keep in mind that churches, synagogues, temples, and mosques are considered de facto charitable organizations and are eligible to receive deductible donations even if they’re not on the list (some exceptions apply so be sure and ask if you’re not sure).
- Remember that donations to individuals will not qualify. You cannot deduct contributions to specific individuals – no matter how deserving. This includes handouts to the homeless and collections at the office or in your neighborhood for those experiencing tough times (including pooled funds for folks who are ill or have experienced a tragedy such as an accident or fire). If the deduction is important to you, consider working through an established organization like the Red Cross which provides disaster or other relief. See again #2.
- Get a receipt – even for cash. Cash deductions, regardless of the amount, must be substantiated by a bank record (such as a canceled check or credit card receipt, clearly annotated with the name of the charity) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation. You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your contribution from the qualified organization. As a best practice, I suggest always asking for a receipt – almost any charitable organization worth its salt will happily offer you one. You don’t have to submit documentation along with your tax return but you need to be prepared to provide it at audit.
- Don’t overlook payroll deductions. Increasingly, employees rely on charitable giving opportunities available through their employer. If you make a contribution by payroll deduction, record keeping requirements under the Pension Protection Act of 2006 require you to retain a pay stub, form W-2 or other document furnished by your employer that shows the total amount withheld as a charitable donation along with the pledge card that shows the name of the charity. For federal workers, a pledge card with the name of a Combined Federal Campaign will meet these requirements.
- Pay attention to the value of any incentives. A charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. If you make a donation and receive something in exchange – anything from a coffee mug to a dinner – you can deduct the cost of your donation less the value of the item received. If you’re not sure of the value of an item or service received after a donation, just ask. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter or receipt.
- Consider donating appreciated assets. Donating property that has appreciated in value, like stock, can result in a double benefit. Not only can you deduct the fair market value of the property (so long as you’ve owned it for at least one year), you avoid paying capital gains tax. Normally, appreciated property is subject to capital gains tax at disposition but there’s an exception for donations to charitable organizations (for more on donating appreciated assets, see this post).
- You can’t deduct the value of your time. The IRS does not allow a charitable deduction for volunteering your services. The good news is that most out of pocket expenses relating to volunteering are deductible so long as they’re not reimbursed or considered personal in nature. Out of pocket charitable expenses which might be deductible include the cost of transportation (including parking fees and tolls); travel expenses; uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services. As with other donations, keep good records since documentation is key.
- Document the value of your gift. Good records are always important when it comes to charitable giving but even more so for donations of non-cash items. You must be able to substantiate the value of your donation. You can generally take a deduction for the fair market value of the items, or what the item would sell for in its current condition, but you’ll want to be able to establish an appropriate value. If self-documenting the donation because it’s less than $500, be specific, noting the description and condition of the items. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property’s fair market value. If you make non-cash contributions (generally those over $500), you may also be required to fill out one or more parts of form 8283 (downloads as a pdf).
- Limits may apply. Many taxpayers aren’t even aware that there are limits on charitable deductions but they do exist. If you contribute more than 20% of your adjusted gross income (AGI, found on line 37 of your form 1040), pay attention to limits. The specific limitations can be fairly complicated – with numerous exceptions – but here are some quick rules of thumb: you can deduct appreciated capital gains assets up to 20% of AGI; you can deduct non-cash assets worth up to 30% of AGI; and you can deduct cash contributions up to 50% of AGI. Pease limitations may limit your gifts even more (for more on Pease limitations in 2015, check out this prior post). Carryovers may apply if you exceed the limits on contributions.
- Pay attention to the calendar. Contributions are deductible in the year made. To make it count during the tax year, gifts must be made by December 31. That doesn’t necessarily mean cash out of your account. Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. Credit card charges – even if they’re not paid off before the end of the year – are deductible so long as the charge is captured by year end. Similarly, checks which are written and mailed by the end of the year will be deductible for this year even if they aren’t cashed until 2016. Good intentions don’t count: making announcements that you intend to donate assets (a la Zuckerberg’s letter to his daughter pledging to donate most of his Facebook stock) will not qualify for a deduction in the current tax year unless you make good on the pledge during the year.