December 19th, 2014
We’re running this again with some updates.
In our prior post about year end financial planning, we didn’t talk much about charitable giving. We’ll discuss that here as well as donations.
Tax laws are tricky. While there are many tax-smart ways to donate, it can also be easy to make costly mistakes.
Many thorny problems, for instance, stem from uncertainty over how to value gifts. Other donors stumble because they don’t pay attention to the fine print on such long-cherished techniques as giving stock to charity. And still others trip over paperwork issues, such as getting proper acknowledgment for gifts on a timely basis.
One common error is making a gift of $250 or more and neglecting to get an acknowledgment from the charity saying whether or not you received something in return, such as free tickets. Even if you didn’t get anything, make sure the charity says so—and gives you a description of any property you gave.
Here is the IRS’s 8 tips for deducting charitable contributions:
1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations and candidates.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
It’s very important that if you’re going to deduct donations that you have a valid receipt that itemizes everything. Gone are the days of approximation. So if you make a large donation in the Spring of all the outgrown winter wear, put that receipt in a folder where you can easily find it when you do your taxes.
For more record keeping tips, check out this resource at about.com.
For donations of property, you must keep records to establish what you donated, its condition, its fair market value, and the amount of your tax deduction. Your records must indicate:
- Name and address of the charity,
- Date and location of the contribution,
- Description of the property donated,
- Fair market value of the property and how you figured the value, and
- Amount claimed as a tax deduction.
For non-cash contributions worth $250 to $500, you will also need a written acknowledgment letter from the charity to substantiate your deduction.
For non-cash contributions worth $500 to $5,000, you will need to keep records that establish:
- How you acquired the property (such as purchase or inheritance)
- Date you acquired the property
- Your cost or adjusted basis in the property
For non-cash contributions of $5,000 or more, you will need a written appraisal from a qualified appraiser to substantiate the value of your deduction.
Donated items, such as cars, clothing, and household goods, must be in good condition. No tax deduction is allowed for items in less than good condition. You should keep a detailed list of the non-cash goods you donated to charity, along with a description of their condition.
So give, but keep the documentation in a safe place. And if you hadn’t, 2013 is a great year to start. There’s still a few days left to donate!