The Tax Value Of Charitable Donations
A few days before Christmas 2011, a self-employed executive recruiter in Virginia called her financial adviser seeking tips to lower her tax bill. She had a good year, with net revenue of about $400,000.
“The first question I asked her was how much she had given to charity,” the financial adviser said. “There was this long pause. Then she said, ‘Well, I haven’t given anything to charity yet this year.’ My first reaction was sadness. Why would someone who made so much money give none of it to charity? And my second reaction was surprise. Why didn’t her accountant advise her that giving to charity is a great way to lower your taxable income?”
It’s true that charitable contributions can help lower your taxable income and your tax bill. However, there are important things you need to know:
Most, But Not All, Charitable Contributions Are Tax Deductible
If you give to a charitable organization recognized by the Internal Revenue Service, chances are the donation is tax deductible. Gifts to churches and other religious organizations, tax-exempt educational organizations, hospitals and certain medical research organizations and governmental organizations are tax deductible.
But some gifts that might seem tax deductible may not be. Gifts to needy individuals, foreign charities, politicians and some political organizations, professional associations, labor unions and chambers of commerce are not tax deductible.
If you want to make sure that your donation will be tax deductible, ask your potential charities if they’ve received their 501(c)(3) tax-exempt status from the IRS. Keep in mind that churches and other religious organizations are not required to have that status for your donation to be deductible.
To Get Credit For Your Donations, You’ll Have To Itemize Your Deductions
Unless you opt for the standard deduction, you must file IRS Form 1040 and itemize your deductions on Schedule A if you want to deduct what you give from your taxable income.
A Contribution To A Qualified Charity Is Deductible In The Year In Which It Is Paid
Putting the check in the mail to the charity constitutes payment. A contribution made on a credit card is deductible in the year it is charged to your card, even if payment to the credit card company isn’t made until the next year.
Some Cash Gifts Require Written Confirmations
If you give a cash gift of $250 or more, you will need a written confirmation from the charity. The document must include the name of the charitable organization, the date of your contribution and the amount your contribution. A canceled check or credit card statement is not enough proof for the IRS.
There Are Deductions Limits
There are limits to how much you can deduct, but those limits are very high. For example, if you make a cash contribution to a public charity, the deduction is limited to 50 percent of your annual income. So if you have an adjusted gross income of $100,000 per year, you can give as much as $50,000 that year. For property contributions, the limit is 30 percent of your adjusted gross income. For appreciated capital gains assets, the limit is 20 percent of your adjusted gross income.
The Benefits Of Charitable Giving Increase With Income
The tax laws are set up so that wealthy people have more incentive to give to charity. For example, if you are in the 25-percent tax bracket, the actual cost of a $100 donation is $75 -- $100 less the $25 tax savings. If you’re in the 35-percent tax bracket, the actual cost of that $100 gift is $65.
Non-Cash Gifts Have Quality Requirements
If you donate clothes, furniture or some other non-cash gifts, it usually must be in "good condition or better," or the IRS will not allow you to deduct it. (The rules are different, for example, if you’re donating a vehicle or boat to a charity.) The amount of the deduction is equal to the items’ fair market value, which is what you could reasonably receive if you sold it.
Remember that you must have a receipt to claim a deduction for a non-cash gift. And if your total deduction for all non-cash contributions for the year is more than $500, you must complete and attach IRS Form 8283 to your return. If you’re donating an item or a group of similar items valued at more than $5,000, you must also complete Form 8283 Section B, which requires an appraisal by a qualified appraiser. These forms are available at http://www.irs.gov or by calling (800) TAX-FORM (800-829-3676).
So now that you’re an expert on charitable giving, how can you get the most bang for your buck?
Financial advisers and accountants say look no further than Neighborhood Assistance Program (NAP) organizations, which help impoverished people by providing food, education, job training, housing assistance, health care and other services. The size of the NAP tax credit you receive depends on where you live. For example, if you live in Missouri and you donate $3,000 to a NAP-eligible organization, you can receive a Missouri NAP tax credit of 50 percent, or $1,500; an IRS tax deduction of about 34 percent of the amount, or $1,020; and a Missouri tax rate deduction of $187.50. That means you just donated $3,000 to a charity you love, and your total after-tax cost is $292.50.
Know the cliché "it’s better to give than to receive?" It's true, say financial advisers. When it comes to taxes and you’re giving to charity, you can give and receive. What’s not to like about that?