Giving season is quickly approaching, and as you get into the holiday spirit, you may want to brush up on the basics for charitable tax deductions. Contributions made to qualified organizations and time spent volunteering could help lower your tax bill. Here are some key tips to keep in mind while doing good deeds this season.
1.) Choose your Charity. Organizations that qualify for charitable deductions include churches, schools, hospitals, and other groups that are tax-exempt under section 501(c)(3) of the Internal Revenue Code. Contributions made to specific individuals or political candidates and associations cannot be deducted. If you’re not sure whether or not the organization is qualified, call the IRS at 1-877-829-5500.
2.) Take Notes. Remember that in order to qualify for charitable tax deductions as opposed to just a standard deduction on your 2011 tax return, you need to itemize each deduction on Schedule A of Form 1040.
“Itemizing not only encompasses qualified charitable contributions,” says Julian Block, a tax attorney in Larchmont, N.Y., and author of Julian Block's Tax Deductible Travel and Moving Expenses. “You can also itemize state income taxes, mortgage interest on a personal residence, and, in some cases, medical expenses exceeding 7.5% of adjusted gross income. Itemizing may be more beneficial than taking just a standard deduction for 2011, depending on your situation.”
Block says that if you plan to itemize each contribution for 2011, and then take the standard deduction for 2012, you may want to make all charitable contributions before the year end. But, if you plan to take the standard deduction for 2011, and make itemized deductions for 2012, you will want to save all of your charitable contributions for 2012.
3.) Do the Math. If you contribute to a charity and you receive merchandise, goods, or services in return, your deduction must be noted as the amount exceeding the fair market value of the amount received. For example, if you gave $200 to your favorite charity and as a thank you, that charity sent you tickets to a local sporting event. If you’d purchased those tickets at the box office, the face value would’ve been $80 total. In this case, the measure of your deduction is actually $120. A confirmation letter from this charity would specify that something was given in return.
“Fair market value also applies to clothing donations,” says Block. “If you purchased a winter coat last season for $200, and decided to donate it to a local coat drive this year, its value would be similar to what it would sell for at a thrift store. If it would sell for $30 at a thrift store, then $30 would be the amount contributed.”
Vehicle donation also has some special restrictions. If you donated a car that would have sold on eBay (EBAY) for $1,000, but the charity sold it for $800, your allowable deduction is $800. If it would have sold on eBay for $800 but the charity sold it for $1,000, then your allowable deduction is still $800.
4.) Receipt, Please. In order to deduct a monetary contribution of $250 or more, you must keep some kind of record of the transaction, whether it’s from a bank, from your paycheck, or a written confirmation from the selected charity, clearly stating the amount donated.
And, if you donate money or other items worth more than $5,000, you have to complete Section B of Form 8283, and, if necessary, an appraisal by a qualified appraiser.
5.) Give Now or Give Later. Your tax bracket may play a role in whether or not you want to donate now or donate later. “If you expect to be in a higher tax bracket in 2011 than in 2012, because you’re retiring or your spouse plans to stop working, deductions will be worth more for you this year than next year,” says Block. “If you expect your financial situation to change in the next year or so, you may want to consider this before making your contributions.
6.) Time Counts, Too. Volunteers may also qualify for deductions. For example, if you work as a receptionist for a qualified organization, you can’t deduct the value of your time or services, but you can deduct the costs of gas and oil used to transport yourself to and from your volunteering session. The standard mileage rate is $0.14 per mile for tax year 2011.
“If you use public transportation to and from your volunteer work,” says Block. “Make sure to keep track of your fares. These can be claimed as travel expenses.”
If your volunteer project requires that you wear a uniform, you can deduct the cost of the uniform, and the cost to clean it, if it isn’t suitable for everyday use and if it’s required attire for your volunteer session.