Giving to charity can provide you with a warm feeling as well as a nice tax break. But you’ve got to itemize deductions on your tax return. And, like most tax breaks, charitable deductions come with a number of rules you must follow to actually claim the write-off. Here are the details.
You can deduct donations only if you have adequate documentation. The amount and nature of that documentation depends on what you’re donating. For example:
Cash under $250. In this case, the best proof of your generosity is a cancelled check or credit card statement. Preferably, you should also get a receipt from the organization showing its name, the date and place of the contribution, and the amount given. For small cash donations, such as gifts to the Salvation Army around the holidays, keep a log.
Noncash under $250. For donations of non-cash items worth less than $250, you need a receipt. The receipt should show the organization’s name, date and place of the donation, and a description of what you’re giving. You may have to fill in most of this information yourself.
You must also place a reasonable value on the donated item(s). Finally, you must have the receipt in hand by the time you file your return to claim a deduction. So keep all such receipts with your tax records for the year.
Cash of $250 or more. With these gifts, canceled checks or other similar evidence isn’t good enough. Instead, you must get from the charity a contemporaneous qualified written acknowledgment (more detailed than a simple receipt) that meets IRS guidelines. If you don’t and you get audited, you’ll lose the deduction even if there’s proof that you made the donations claimed.
An acknowledgement meets the contemporaneous requirement if you obtain it on or before the earlier of:
- The date you file your return for the year the donation was made, or
- The due date (including an extension) for filing the return.
If you don’t have an acknowledgement in hand by the applicable date, you can’t claim the deduction. Legitimate charities know these rules, so you should have no problem collecting a suitable acknowledgment. Keep it with your tax records.
Key Point: For purposes of the $250 threshold for the written acknowledgment, each contribution is considered separately. So if you give $25 every Sunday at church, you don’t need an acknowledgment. But keep a log of all your contributions if they aren’t made by check. Similarly, you don’t need an acknowledgment if you have $50 taken out of each paycheck for charity at work. But keep your check stubs and the pledge card from when you signed up for payroll deductions.
Non-cash of $250 to $5,000. For these donations, you need the contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost, fair market value (FMV), etc. Keep this information with your tax records.
A written acknowledgment in this case generally must include three things:
- A description of the non-cash item,
- An explanation of whether the charity provided goods or services in exchange for the donation (other than intangible religious benefits), and
- A description and good faith estimate of the value of any goods or services the charity provided in exchange for your donation.
If your total non-cash donations for the year exceed $500, an IRS form must be filled out and included with your return.
Non-cash of more than $5,000. For these donations, you generally must get a contemporaneous written acknowledgment. In addition, you’ll need to file an IRS form with your return and obtain a qualified written appraisal by the time you file.
Stricter rules apply to contributions of artwork worth $50,000 or more. You can’t write off the appraisal fee as a charitable donation. However, it qualifies as a miscellaneous itemized expense subject to the 2% of adjusted gross income (AGI) deduction threshold.
Clothing and Household Items
If you donate clothing and household items (furniture, linens, electronics, appliances, etc.), all the preceding documentation rules apply. In addition, you generally can claim deductions for only items in “good condition or better.”
However, you can deduct the FMV of an item that’s not in “good condition or better” if you attach a qualified appraisal that values the item at more than $500. For example, this might apply to valuable antiques that are in only “fair” condition.
If you contribute appreciated securities, give away those you’ve owned for more than one year. That way, you can deduct the full market value and avoid capital gains tax on the appreciation.
In contrast, if you donate appreciated securities you’ve held for 12 months or less, your deduction is limited to the cost of the securities, which may be much lower. No appraisal is required for donations of publicly traded securities.
Vehicles, Boats and Planes
You’ve probably seen or heard ads asking for donations of used vehicles. In addition to the aforementioned documentation requirements, other rules apply to donations of motor vehicles, boats and planes. To begin with, for a vehicle valued at $500 or less, you can deduct the item’s FMV.
But if the FMV exceeds $500 and the charity sells the vehicle, your deduction is limited to the sale price. Because charities often sell donated vehicles at auctions, the sale price might be significantly less than FMV.
On the other hand, if the charity uses the vehicle in its tax-exempt purpose (for example, to deliver items), you can deduct the full FMV. The same is true if a charity makes significant improvements to the vehicle (for instance, rebuilding the engine or transmission). Minor dent removal and paint don’t count as significant.
You can’t claim a deduction for donating a vehicle with a claimed value exceeding $500 unless you receive a contemporaneous qualified written acknowledgment. Usually, the charity supplies IRS Form 1098-C as the acknowledgement. The form should include:
- Your name,
- Your Social Security number,
- The vehicle’s ID number,
- The donation date,
- The date on which the vehicle was sold, and
- Certain other information including the price.
Additional information must be provided if the charity intends to use the vehicle or make significant improvements.
Important: The FMV for a vehicle doesn’t mean the highest value you can find in a used car buyer’s guide. You must make appropriate adjustments for mileage and condition.
Depending on the charity type, and whether you contribute cash or property, your write-off can be limited to 20%, 30% or 50% of your AGI. Contributions that exceed the AGI limit can be carried over for up to five years and usually deducted then.
The AGI limitation rules are complicated, but they normally affect only large contributors. If you don’t know the rules, be sure to read up on them before committing to big gifts. Otherwise, you may not reap the hefty tax savings that you’re expecting.
Rules and Write-offs
Itemized deductions for charitable donations can save you tax dollars while you’re doing good. Just be sure to work with your tax adviser to follow the rules and maximize your write-offs.