The Tax Implications of Charitable Contributions

As we enter the season of giving, we all start to think of all the Tiny Tim’s and the charitable contributions we can make to help others.

With that in mind, here’s what you need to know about the deductibility of charitable activities:

If you itemize deductions: Cash donations are deductible. Make sure you have a written acknowledgment from a bona fide nonprofit organization, not just cancelled checks or credit card receipts. The IRS can disallow any charitable deduction not sufficiently backed up by these documents. The acknowledgement should also indicate if you received any goods or services, the value of which must be subtracted from the donation. The remainder is the amount you may deduct on your tax return.

For example, you attend an auction sponsored by a nonprofit organization. You purchase a trip to Bermuda for $10,000. The fair-market value of the trip is $7,500. You may deduct $2,500 as a charitable contribution. You must have the letter of acknowledgement by the time you file your income tax return.

You may also deduct noncash contributions. The deduction amount is based on the items’ fair-market value. If the total values of all noncash contributions exceed $500, you must complete Form 8283 providing detailed information about the donation. Special rules apply for donations of automobiles and donations valued at more than $5,000.

Also note that the IRS has been scrutinizing charitable organizations and many have had their nonprofit status revoked. Before making a donation, ensure the nonprofit qualifies by confirming their status. You can get immediate information by checking this link: http://www.irs.gov/app/pub-78/

From your IRA Distributions. If you don’t itemize deductions, but are at least age 70 ½ and taking regular IRA distributions, you can request that your account manager transfer funds to a charitable organization and therefore indirectly enjoy the deduction.

It works like this: say your IRA distribution is $12,000 for the year and you tell the fund manager to send $1,000 to your favorite charity. You will declare and pay taxes on only $11,000 of income rather than $12,000. This only works if the money never touches your hands. You cannot take a $12,000 distribution and make the donation yourself. Under this provision, the maximum charitable contribution for the year is $100,000. And it only works from an IRA account, which doesn’t include SEP and SIMPLE plans.

Volunteer Expenses. Your unreimbursed out-of-pocket expenses when you serve a qualified organization as a volunteer are deductible. Make sure you have receipts and get a statement from the nonprofit organization. Also, the expenses you pay to provide for a student living with you sponsored by a qualified organization are tax deductible. But check out the rules to make sure you are taking only the deductions allowed. You may also deduct unreimbursed mileage when you use your car in service to a qualified nonprofit organization. The mileage rate for 2011 is $.14 mile.

Tips for Getting Your Taxes in Order Now

Volunteer Time. The value of your time or the services you provide is not deductible – even if you can identify the value. For example, you take five hours off work to provide services to a nonprofit. You can’t multiply your hourly rate by the number of hours and take the deduction. Also, there is no value of your own blood donated to a blood bank.

What to Charities Need This Holiday Season

The list of rules seems endless – there are constraints as to qualifying organizations, travel and meals expenses incurred on behalf of a charity, and limits to how much you can deduct each year. There is not enough space to list them all here and explain all the complexities. I urge you visit your tax pro or look them up here.

Happy holidays!

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.