Tips For Making Tax-deductible Donations
As the end of the year rolls around, many people begin to think about tax planning and how they can lower their annual taxes for the year
. Donations to charity are certainly one of the best ways to reduce your taxable income so that you will owe less in federal income taxes. And by making a donation, you can also help others who are less fortunate, or contribute to a cause that you believe in, like the environment or animal welfare or providing scholarships to gifted children. However, there are some very important things you must know before you write your check or make your charitable donation.
First of all, you cannot take a tax deduction until you actually make your donation. If you just make a pledge or promise to donate, there is nothing for you to deduct until you fulfill that pledge or promise by making your payment or turning over the items you are donating.
Secondly, you must contribute to an organization that meets the IRS's requirements for a being a qualified tax exempt charity. Always ask the organization that you want to donate to whether they have received a special IRS notice called a 501(c)(3) tax-exempt status. (However, some churches and other religious organizations may not need to have 501(c)(3) status from the IRS, so talk to your tax advisor if you plan to donate to them.)
When you file your taxes you claim your tax deduction on Form 1040, Schedule A (PDF) so you can only take the charitable tax donation if you fill out Form 1040, not 1040A or 1040EZ. You must also itemize your deductions, so if you always take the standard deduction you won't see any tax benefits.
Another important point to remember is that you must keep excellent written records of any donations you make to charity if you want to deduct these contributions on your taxes. Always save your canceled checks, any receipts from the charity, and any appraisals for donated property. These documents are especially important if you make donations of $250 or more. Make sure your records clearly indicate the name of the charitable organization, the date of your contribution, and the amount your contribution.
If you donate any non-cash items like clothes, toys, household items and even stocks, You must be able to substantiate the fair market value of the goods or property you donated, usually by doing an appraisal or showing the current fair market price for similar items that are being sold through local classified ads and auction sites. Remember that you must attach IRS Form 8283 to your tax return if your total non-cash contributions exceeds $500, and written appraisals are absolutely required for any items valued at more than $5,000. Furthermore if you contribute a car, truck, boat, airplane, or other vehicle, and the vehicle is worth more than $500, you must also receive a written acknowledgement from the non-profit before you can claim a tax deduction.
While donating to charity can help reduce your tax burden, you should also keep in mind that there are limits to how much you can give and still take a deduction. You should always verify the details with your tax professional, but in general you can deduct cash contributions in full up to 50% of your adjusted gross income, but you can only deduct property contributions in full up to 30% of your adjusted gross income, and contributions of appreciated capital gains assets are limited to 20% of your adjusted gross income. On the good side, however, if you give more than these limits, you can carry the excess amount over to help reduce your taxes during the next tax year. In fact, you can do some tax planning by scheduling your contributions so that the excess is deducted out over for a maximum of five years.
Finally, it is very important that you understand what payments are not tax deductible. Many people are surprised to find that contributions to political parties, political campaigns, or political action committees cannot be deducted. You also cannot deduct any payments that you make directly to an individual person, like a homeless person, or a relative that you are supporting. And you cannot deduct business expenses like fees or dues paid to professional associations and contributions to labor unions, chambers of commerce, or business associations (though some of those expenses may be appropriate to list on your Schedule C Form).
Contributions to for-profit schools and hospitals, or to foreign governments are also not deductible, and you cannot deduct any fines or penalties that you pay to state or local government, including parking tickets, property tax payments, littering fees, or other costs. Finally, even though you may spend a great deal of your time helping at your local animal shelter, hospice, food pantry or soup kitchen, you cannot donate the value of your time for services rendered to a non-profit.
But even with these limitations, the ability to do good while saving money on your taxes is usally a win-win situation. So as the end of the year draws closer, review your finances, check out some deserving charities, and see if you can make a donation that will help make the world a little better in the coming year, while saving you a few tax dollars as well.
by: CCSTB
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