Confused about charitable giving? Read these answers to four important questions before you make your gift. This knowledge could save you time, money, and headaches!
While we are officially over the half-way mark for the year, there is still plenty of time to make charitable gifts by December 31st. Choosing qualified organizations, using the right gifting strategy; and attending to the details will result in a nice tax deduction.
#1 - Which organizations qualify as charities?
Not all nonprofit organizations qualify as charities for tax purposes. Public charities and religious organizations that fall under IRS Section 501(c)3 are eligible to receive tax-deductible gifts. Private charities, veteran organizations, fraternal societies, and cemetery organizations can also qualify, but there are limitations. Important to note: Donations to political parties or campaigns are not tax deductible.If you make a charitable gift to an organization that does not qualify and your tax return is audited, it may cost you interest and penalties in addition to owing more tax. Go to www.guidestar.org to determine if your favorite organization is a qualified charity.
#2 - What types of assets count as tax-deductible gifts?
There are various ways to make tax-deductible gifts to charity. The most common is gifting cash directly to the charitable organization. Although gifting cash may be the most efficient way to donate, it may not be most advantageous. Here are some other strategies:- Gifting investment assets may be better than cash. Mutual fund units or individual securities that you have owned for at least twelve months and have increased in value will avoid long-term capital gains tax when given to charities. Your tax deduction is equal to the fair market value of the asset on the date it is received by the charity.
- If approved by Congress for 2015, qualifying individuals (age 70 ½ or older) may transfer funds directly to charities from their IRA to satisfy all or a portion of their required minimum distribution. Last year it was approved on December 19, 2014! In prior years, the IRA Charitable Transfer provision allowed individuals to gift amounts to charities up to a maximum total of $100,000. The amount gifted is excluded from taxable income. If this is approved for 2105, this charitable gifting strategy should be the first source for charitable giving for those who qualify.
- Gifting clothing, household items, or even autos is another way to donate to charity. While the fair market value of cash or appreciated assets is easy to identify, determining the fair market value of property is not as straightforward. Gifts of clothing or household goods must be in “good used condition.” Determining the value of the items is your responsibility, not the charity’s. Check out the various calculators on-line or the websites of Goodwill, Salvation Army, and others that provided pricing guidelines.
Monetary donations to charitable organizations are tax-deductible, but time is not. Volunteer time, even if performing duties of your occupation, is not deductible. However, deducting expenses of supplies and mileage is allowed.
#3 - How much can charitable contributions reduce my taxes?
In order to receive a tax break for a charitable gift, deductions must be itemized on Schedule A of your federal income tax return. Since itemized deductions decrease your taxable income, the reduction in your tax liability is determined by your tax bracket. If you are in the 15% marginal tax bracket, $1,000 in charitable contributions would reduce your income tax by $150. If you are in the 35% tax bracket, your income tax liability would be reduced by $350.#4 - What kind of charitable gift documentation is required?
For cash and appreciated asset gifts, written proof showing the organization’s name, contribution date, and amount is required. This can include bank records, cancelled checks, or receipts. For monetary gifts over $250, the donor must have on file a written acknowledgement from the charity.If non-cash contributions (i.e., household goods, clothing) over $500 are made, Form 8283 is required to be filed with your income tax return. On this form, you would provide a description of the donated property and the method used to determine its value.