When you give a little, you can get a little—or, to put it better, keep a little. Charitable deductions can be deducted from your taxable income, which can lower your tax bill. However, in accordance with the federal tax code, there are certain rules you must follow in order to claim the charitable contribution deduction.
Rules For Claiming A Charitable Donation Deduction
Itemize: First and foremost, you can only deduct charitable contributions if you are itemizing your deductions. You may not take the deduction if you plan on taking the standard deduction.
Where to itemize: If you do plan to itemize your deductions, you can do so on Form 1040, Schedule A on your federal income tax return.
Qualified organizations: In order to be deductible, all charitable donations must be made to qualified organizations. There are five types of organizations that are considered “qualified.” Any donations made to these organizations are only deductible if they are used for purposes involving religion, charity, science, literature, or education, as well as for children and animal cruelty prevention.
Five Types Of Organizations:
- A community chest, corporation, trust, fund, or foundation created under United States law.
- Organizations for war veterans, including posts, trusts or foundations.
- Associations, including domestic fraternal societies or orders, which operate under the lodge system. A lodge system is a society that has a governing body and subordinate lodges into which members are elected or admitted under laws or rituals.
- Nonprofit cemetery companies or corporations.
- Any state, district, U.S. possession, or its political subdivisions, or an Indian tribal government that performs substantial government functions.
Example organizations include Red Cross, Goodwill Industries International, Inc., the Boy and Girl Scouts of America, churches, synagogues and any other religious organizations, colleges, museums and nonprofit hospitals.
Types Of Deductible Contributions
There are various types of contributions that you can deduct from your taxable income, which can be divided into two categories. A cash contribution is the easiest form of donation to deduct. This includes any contribution made by cash, check, credit card or payroll deduction to a qualified organization.
Property, or a donated tangible item, is more difficult since the value is not explicit. For non-cash items, you will need to determine the fair market value, which is an estimate of the price at which a buyer would pay a seller for the item, both having reasonable knowledge of the facts. Non-cash contributions are also subject to other rules, including limits on the amount that can be deducted.
Some of the most common non-cash donations include clothing or household items.These include furniture, electronics, appliances and other similar items. Perishables, art, and jewelry are not included in household items.
Generally, clothing and household items must be in good used condition, however, household items that are not in good condition are deductible as long as you deduct more than $500 and use a qualified appraisal with your return. A qualified appraisal is a document that is created, signed and dated by a qualified appraiser and meets IRS requirements.
The fair market value of household items is usually much lower than the price you paid when new. These items may have little or no market value if they are worn, out of style or otherwise useless.
Qualified vehicles, which include planes, automobiles and boats, are considered charitable donations. If the deduction exceeds $500, you may deduct the lesser of the gross proceeds from the sale or the item’s fair market value on the date of contribution. For boats, the valuation should be based on an appraisal from a marine surveyor. For cars, you may use car-pricing guides from trade organizations, such as blue books to help determine an appraisal.
Limits On Deductions
Depending on the type of donations you made, the amount of your deduction is limited to 50%, 30% or 20% of your adjusted gross income.
You can usually deduct the full amount of cash contributions, up to 50% of your adjusted gross income. You can only deduct up to 30% of your income for property contributions. The 20% limit applies to contributions of capital gain property.
It is important to keep all records of any charitable donations you made in order to prove that you made them. The types of records you’ll need to keep are dependent on the amount and type of your contributions.
For cash donations, a bank record that shows the contribution and the name of the qualified organization are acceptable records, as well as a receipt from the organization or payroll deduction records.
For non-cash contributions less than $250, you must get a receipt from the organization that shows the name, date, location and description of the contribution.
For non-cash contributions between $250 and $500, you must have a separate acknowledgement from each organization or one that shows your total contributions. The written acknowledgment must include a description of the contributions, whether the organization gave you anything in return and a description and estimate of the contribution value.
The higher the deduction amount gets, the more requirements you must meet in your records.
Having to figure out what you can deduct, how much you can deduct and how to deduct it can be a difficult task. Before you itemize your deductions, and even before you decide what donations to make, it’s a good idea to check the Internal Revenue Service website here to understand the guidelines. If you need further help, you can call an IRS-certified volunteer with the Volunteer Income Tax Assistance (VITA) program for free help. To find the nearest VITA site, visit IRS.gov or call 1-800-906-9887 or 1-800-829-1040.