Charitable Gifts and Tax Deduction Basics
The holidays are upon us and with them comes the giving of gifts. Not just gifts for family and friends, but gifts to charitable and non-profit organizations. Make sure, if you are making a gift and planning to receive a tax deduction for it, that you have completed the steps necessary to ensure that your charitable contributions qualify for a deduction and that you have adequate records to back up your donation.
The process starts by making sure you are making your contribution to a qualified charity (organizations like a church, Goodwill, AMVETS, Purple Heart, and The Salvation Army). Qualified charities are mainly 501(c)(3) organizations, and you can check to see if your charity qualifies to receive tax deductible contributions at the IRS website, using their Select Check Tool.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
If you are giving cash to an organization, you need to have a few records in hand before you file your tax return in order to substantiate your deduction. These include a bank record or written document from the organization. The record must contain the organization’s name, date, and amount of the contribution. Amounts over $250 given in the form of cash to an organization require the written documentation above.
If you are gifting non-cash items to charity there are a few additional rules. To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. The IRS rules state that the amount you can deduct for a non-cash donation is equal to the item’s fair market value, or the amount a person would typically pay for the item. If you claim more than $250 you will need written acknowledgement from the charity listing a description of the property. However, if the gift is large, over $5,000 the IRS requires a qualified appraisal to substantiate the value you are claiming as a deduction.
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2012 count for 2012. This is true even if the credit card bill isn’t paid until 2013. Also, checks count for 2012 as long as they are mailed in 2012.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2012 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
Giving Tax Deductions and Gifts to Family
This information serves as a “Cliffs Notes” version of the IRS code defining what qualifies as a deductible charitable contribution and is meant to demonstrate some very basic and typical guidelines. Consult your Apple Growth Partners professional now with any questions you have about gifts you still want to make in 2012, how this year’s fiscal cliff uncertainty may factor into your giving, and to plan your gifting and tax strategy for 2013.