Published September 02, 2005
Donating cash or other goods to charity is more than just a nice thing to do. It can save you a bundle on your taxes.
Charitable giving is good for more than just your soul. Play your cards right and it can be good for your wallet, too. Here's a crib sheet on how to make sure your good deeds get properly rewarded.
Stepping Up to the Plate
You probably know you can claim write-offs for contributions of cash and other stuff to charitable organizations like United Way and Goodwill. But what you might not realize is that not everyone — or every contribution — qualifies.
First off, you won't gain any tax savings from charitable contributions unless you itemize deductions. And in most cases, people who don't own homes don't itemize because their standard-deduction amount — $5,000 for singles or $10,000 for joint filers (in 2005) — exceeds their total itemized deductions. So unless your total itemized deductions for this year, including any charitable contributions, will exceed the magic threshold, you won't get any tax benefits for your generosity. Sorry — sometimes being kind can be cruel.
Next, don't forget that you can't donate goods or cash to just anybody. Some nonprofits aren't qualified charities for tax purposes. IRS Publication 78 has a master list of qualified organizations. It's updated quarterly and can be found in many public libraries as well as the IRS web site.
Also, even if you've met both of the requirements listed above, chances are you aren't going to be able to deduct a thing if you don't have the proper documentation. Just what you need to prove to the IRS that you actually made a contribution depends on the size (and nature — i.e., cash vs. noncash) of your contribution. And remember, if you go to, say, a benefit that provides dinner or some other gesture of thanks, you can't deduct the value of those goods or services. Your deduction should be the net amount of your gift. (The charity typically assigns a value to anything it gives donors.)
Here's a breakdown of the type of documentation you'll need based on what you give and how much:
Documentation for Contributions under $250
For cash contributions of less than $250, you should get a written receipt from the organization showing its name, the date and place of the contribution and the amount given. You should also save any canceled checks.
For noncash contributions of $250 or less, ask for a receipt showing the organization's name, the date and place of the contribution and a detailed description of what you're giving (you may have to fill in this last part yourself).
That said, if you fail to get receipts for contributions under $250, it's OK to assemble your own evidence by keeping canceled checks or other reliable records for cash contributions and supplying the other details listed above for noncash contributions. Be sure to keep the evidence with your tax records.
Documentation for Contributions of $250 or More
For contributions of $250 or more, canceled checks or other evidence supplied by you isn't good enough for Uncle Sam. Instead you must get a written acknowledgment from the charity. If you don't and get audited, your deduction will go up in smoke even though there may be absolutely no doubt that you did, in fact, make all the contributions you're claiming. In addition, you must have those written acknowledgments in hand by the time you file your tax return.
If you give cash, the acknowledgment should note the amount. If you give other stuff (i.e., an expensive bottle of wine to a silent auction), the acknowledgment must describe it, but the charity doesn't have to value it. That's your responsibility. Clearly this is more art than science, but just don't get carried away.
For purposes of the $250 rule, each contribution is considered separately. So if you give $25 every Sunday at church, you don't need an acknowledgment. (But be sure to 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 at work for the Heart Association. However, you should keep your check stubs and the pledge card from when you signed up for the payroll-deduction arrangement.
Noncash Contributions over $500 and $5,000
If you contribute noncash stuff worth over $500 to one or more charities during the year, you must file Form 8283 (Noncash Charitable Contributions) with your 1040. Fortunately, it's pretty easy to fill out.
Things get a little tricky, however, when you contribute noncash stuff worth more than $5,000. In this case, you must obtain a written appraisal of the value of the item(s) and complete Section B of Form 8283. Both the appraiser and a representative of the charity must then sign the form.
The appraisal must be performed by a qualified person no more than 60 days before your contribution is made. And you must have that appraisal in hand when you file your return. Even stricter rules apply to contributions of artwork worth $50,000 or more. (For more on this, see IRS Publication 561, Determining the Value of Donated Property.) Unfortunately, you can't write off the appraisal fee as a charitable contribution. It does, however, qualify as a miscellaneous itemized deduction subject to the 2% of adjusted gross income rule.
The good news: You don't need an appraisal for contributions of publicly traded securities worth over $5,000. However, when you contribute appreciated securities in any amount, please make sure you give away only those you've owned for more than one year. Otherwise, your deduction will be limited to cost rather than current market value.
Tightened Rules for Donated Vehicles
Starting with 2005, charitable donations of motor vehicles fall under strict new rules if your claimed deduction exceeds $500. Specifically, your writeoff now depends on how the donated vehicle is used by the charitable organization. If the organization sells it without using it significantly for charitable purposes or making material improvements, your deduction is generally limited to the amount of gross sales proceeds received by the charity. This is a big (and unfavorable) change, because prior law allowed you to deduct the full fair market value of the donated vehicle. Whatever that is! The government suspects many folks were deliberately overstating car values in order to claim excessive deductions. The new rules have eliminated this opportunity to game the system.
In addition, starting with 2005, charities are required to issue detailed written acknowledgments to vehicle donors. The IRS can then require organizations to disclose the information included in these acknowledgments and check to see if it matches up with donors' tax returns.
Income-Based Limitations on Charitable Deductions
Now, if you're really feeling generous, you might run into some additional limitations. Depending on the exact type of charity and whether you contribute cash or other items, your write-off can potentially be limited to 20%, 30% or 50% of your adjusted gross income. Contributions that exceed the applicable limit can be carried over for up to five years and hopefully deducted in those future years.
The adjusted-gross-income-limitation rules are quite complicated, but they normally affect only large contributors. You should already know about these guidelines if you're in the large-contributor category. If not, please take my advice and consult a tax pro before committing to any big gifts based on the expectation of reaping hefty tax savings. You might also want to peruse IRS Publication 526 for full details on how the adjusted-gross-income-limitation rules work.