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Dear Money101:

I just gave $500 to a charity for the victims of the earthquakes in Haiti. Is this considered a tax deduction

-Carl

A charitable donation consists of either cash or non-cash items of value that a taxpayer claims as a deduction on Form 1040, Schedule A, according to Alan Feigenbaum, certified financial planner and author of The Complete Guide to Protecting Your Financial Security When Getting a Divorce.

“However, it can only be deducted if the taxpayer is itemizing deduction -- i.e., total deductions including charitable, mortgage interest, state/local taxes, etc. exceed the standard deduction,” said Feigenbaum. “If not, the individual should simply claim the standard deduction.”

To figure out if you can itemize your donation, first look at the checklist for using a 1040 EZ form. If you file a Form 1040, charitable deductions, such as the one in question, are normally tax-deductible. To quantify the precise impact of the deduction, you need to know your tax bracket. A tax bracket is just a division or cut-off point used to decide what percentage of your income will be taxed.

“Suppose you made a donation of $100 to your favorite charity and that you are in the 15% tax bracket,” said Sandra Miniutti, vice president of Marketing & CFO at Charity Navigator, a watch-dog group for charities. “The actual cost of that donation is reduced by your tax savings. In this example, your actual cost [tax] is $85 ($100 less the $15 tax savings).” In other words, the higher your tax bracket, the more personal benefit you get from charitable donations.

Feigenbaum puts it another way. 

“Because the government partially subsidizes your contributions (assuming you are itemizing deductions) in the sense that if your taxable income as a single taxpayer is, say, $75,000 and you give $1,000 to charity and itemize deductions, you'll have $74,000 in taxable income instead,” said Feigenbaum. “You'd be in a 28% tax bracket, which means that you'll save $280 in taxes -- effectively meaning that you've donated $720, which the government supplements with an additional $280.”

To calculate your tax bracket, use this calculator on Investopedia.com. It also estimates the total amount of taxes you will pay until age 65 (if you continue to make the same salary).

Seems so simple, right? However, be careful. In order to deduct charitable contributions, the IRS requires that you must follow certain guidelines: you must donate actual cash or property (not just pledge to do so), it must be a qualified tax-exempt organization (they have received their 501(c)(3) tax-exempt status), you must be able to itemize the contributions, and you must keep excellent records of your contribution (receipts, cancelled checks, or letters of acknowledgement).

To itemize a deduction, you must have proof every donation and mark it on Form 1040, Schedule A. More details can be found at http://www.irs.gov/index.html.

Keep your receipts. If you contribute $250 or more, you have to prove that you made the donation and didn’t receive anything in return for it. The IRS needs a receipt, the amount you contributed, the date, and a statement verifying that you did not receive anything in return. You will have to fill out IRS Form 8283 for noncash contributions (clothing, household items, used cars, stock, etc.) that total $500 and above. Record-keeping becomes particularly important if you are ever audited. 

In regards to the recent Haiti earthquake, the IRS has made an exception to their normal tax regulations. Those who donated money or property to charities providing relief to the victims of the earthquake in Haiti between January 12 and February 28, 2010 can take a deduction for it either on their 2009 tax return, or on their 2010 tax return. As a result, taxpayers can decide if their donations will provide greater tax savings on their 2009 or on their 2010 returns.

After all these tax considerations, you still want to make sure that your gift will be used appropriately. 

“Some supposed charities are either total scams or have names similar to known quality charities,” said Feigenbaum. “Although some of these charities are ‘legitimate,’ they often have very high expenses that result in only a small percentage of the contributions they receive actually providing benefits to those [that] such charities purport to serve.”

Organizations such as the Better Business Bureau and Charity Navigator can help you distinguish the legit charities from the scams.

“The best charities are transparent and accountable to the public,” said Miniutti.  “You should be able to see evidence of this in the information they provide on their Web site. The media can also be a good watchdog in this area - providing reports on charities that have been found guilty of a crime or are under investigation.”

E-mail your questions to Money101@FOXBusiness.com, and let us take off some of the pressure.