Wikipedia defines charity as “the voluntary giving of help to those in need”. To that end, I hope your intention behind giving to charity is always altruism, but as I am a financial advisor, I would also like to share some of the rules and tax benefits of donating your money.
- A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. You must itemize in order to take a charitable deduction. Make sure that if you itemize, your total deductions are greater than the standard deduction. If they’re not, stick with the standard deduction.
- A contribution 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 credit card, even if payment to the credit card company is made in a later year.
- Most, but not all, charitable organizations qualify for a charitable contribution deduction. You can deduct contributions only if they are made to or for the use of a qualified recipient. No charitable contribution deduction is allowed for gifts to certain other kinds of organizations, even if those organizations are exempt from income tax. Contributions to individuals, foreign governments, foreign charities, and certain private foundations similarly are not deductible.
- Rules exist for non-cash donations. If you contribute property owned for more than one year, the value of the deduction is normally equal to the property’s fair market value. You have an advantage when you contribute appreciated property because you get a deduction for the full fair-market value of the property. You are not taxed on any of the appreciation, so, in effect, you receive a deduction for an amount that you never reported as income.
- You need to maintain proper documentation of your contributions. If you want to claim a charitable deduction for a cash gift, then you must be prepared to verify your claim. In other words, you cannot deduct the spare change dropped in a charity’s collection bucket without the proper documentation. If you are audited, the IRS will only accept one of the following to substantiate a monetary gift: a canceled check, credit card statement, bank statement or a written acknowledgment from the charity.
- Be especially careful when valuing a donated vehicle. Although a law implemented in 2005 attempted to crack down on taxpayers who were overvaluing donated vehicles, the government reports that many taxpayers still inflate the value of such donations. As a result, the IRS continues to take a close look at such deductions. If you donated a car worth more than $500, then you can only deduct the amount the charity received from the sale of your car. You can use the receipt from the charity to substantiate your claim. Do not attempt to use the fair market value unless one of the following conditions apply: (1) instead of selling the vehicle, the charity keeps and uses it, (2) the charity makes improvements to the car before selling it, (3) your car is sold at a discounted price to a person with a low income, (4) or if the car is worth less than $500.
- The IRA charitable rollover offers tax benefits for those that qualify. The IRA Charitable Rollover allows individuals who are 70 1/2 years old to donate up to $100,000 to charitable organizations directly from their IRA, without that donation being counted as taxable income when it is withdrawn. To qualify, contributions must come from a traditional IRA or Roth IRA, and they must be made directly to a qualified charitable organization. Additionally, the donor may not receive goods or services in exchange for the donation, and they must retain a receipt from each charity to which a donation is made.
The value of giving goes far beyond money but it’s nice to know the rules and benefits just in time for the holiday season. Some of the above rules are a bit complicated so if you have questions or need assistance with your charitable donations, please call our office at (435)773-9444.
*The numbered information above was taken from CharityNavigator.org. Visit their website for guide to intelligent giving.