Give and you shall receive...a tax deduction, that is. Your gifts to qualified organizations reduce your taxable income dollar for dollar via an itemized deduction. To be deductible, your gift has to go to a nonprofit religious, educational or charitable group that meets IRS standards. Gifts made directly to needy individuals don't count as charitable donations.
If you're not certain whether the object of your generosity is approved by the IRS, ask an official of the group for Tax ID number and check with the IRS. The tax agency has a master list of qualified tax-exempt organizations: Publication 78. (You can get a copy of that publication by calling the IRS at 1-800-TAX-FORM or find it at the IRS website: http://www.irs.gov/formspubs/index.html).
It's possible, too, that donations to a qualified group are not always deductible. There's no charitable write-off for donations used by an organization in an attempt to influence legislation. The organization should tell you if part of your donation is not deductible.
When figuring your deduction, include what you donated in cash, property and out-of-pocket costs incurred in your volunteer work.
As with other itemized deductions, you write off your gifts for the year you make them. A check delivered or mailed by December 31, for example, is deducted on your return for that year. If you charge a donation to your bank credit card, you get the deduction for the year of the charge regardless of when you pay the bill.
You have to make the donation to earn the deduction, however. A pledge to make gifts in the future has no tax value; you get the deduction only when you fulfill the pledge by making the donation.
If you get something in return for your gift, you can't write off the full amount. Say, for example, that a local public television station offers a compact disc player in exchange for a donation of $1,000 to the annual fund drive. If the value of the CD player is $200, your deduction is limited to the $800 difference between what you gave and what you got.
If you get something in return for a donation of $84 or more, the charity has to set a value on what you receive and remind you to subtract that amount when figuring your deduction. This same rule applies if you buy something at a fundraising auction. The charity must value what you buy and you get a deduction only to the extent you paid more than the item was worth.
When low-cost items are involved, however, the IRS is willing to let you write-off the full value of your contribution. But the government doesn't go overboard with its generosity on this issue. It applies only when the value of benefits received by the donor is 2% of the gift or $86, whichever is lower. (The $86 figure applies for 2006; it will probably be a couple of bucks higher in 2007.) If you gave $1,000, for example, this rule would limit the value of an incentive to $20 (2% of $1,000). A more valuable benefit would reduce the amount you can deduct.
In addition to funds you give directly to charity, you can deduct money you spend doing volunteer work for a qualified organization. If you drive your car—to volunteer at your church, a hospital or a school, for example—you can include in your charitable deductions an amount based on 14 cents a mile, plus parking and tolls. For charitable miles driven in 2006 in connection with Hurricane Katrina relief efforts the per-mile rate is 32 cents. If you use taxicabs or public transportation, you can count the fares as charitable donations.
Other deductible out-of-pocket expenses include the cost and care of any special uniform you're required to wear while performing services for the charity. For example, a scoutmaster can deduct, as a charitable expense, the cost and the cost of upkeep of such special uniforms and associated paraphernalia needed when his services are donated. The key to the deduction is that the clothes be necessary and not suitable for everyday use.
Materials and supplies you pay for—such as stationery and stamps—that are used in your volunteer efforts are also deductible. If you pay a baby-sitter to take care of your children while you perform volunteer services, however, you can't deduct the cost. The IRS sees that as a personal expense.
You can't write off the value of services you donate, either. Assume, for example, that a carpenter who usually charges $45 an hour spends 20 hours helping build a wing on his church. He can't deduct $900—or any other amount—for his time (although his transportation to and from the work site and the cost of any supplies he paid for can be deducted).
Here's the IRS's logic: If the carpenter had charged $900 for his services, that would have been taxable income. Turning around and donating the cash to the church would have earned him a $900 write-off. The result would be no change in his taxable income. Similarly, donating your time means you don't have the extra income to report in the first place, so there's no need for a deduction to offset it.
This rationale also works to prevent a deduction if you give a qualified organization reduced-rent or rent-free use of property you own. And you may not claim a deduction for the value of blood you donate. If you sold your blood, in fact, you'd have taxable income to report. By donating it, the argument goes, you dodge that tax bill so there's no need for a deduction.
If you are a foster parent, you may deduct as a charitable donation the cost of providing for your foster children that exceeds the reimbursement you receive.
You can also earn a charitable deduction if a student lives in your home under a program sponsored by a qualified organization. To qualify for this deduction, the student may be American or foreign and must be a full-time elementary or high school student. You can deduct up to $50 a month of what you spend for the student, including the cost of books, tuition, food, clothing and entertainment.
When totaling up the deduction, you can't include anything for the value of the housing you provide. For purposes of figuring how many $50 allotments you can claim, count any month that the student lives with you 15 or more days. (You lose the right to this write-off if the student is staying in your home as part of program that will involve your child living with a family in a foreign country.)
Beyond local transportation expenses—and potentially far more valuable in terms of tax savings—you can write off the cost of travel when your charitable services take you away from home. That includes the cost of transportation at 14 cents a mile and food and lodging while you're away from home or, as noted earlier, 32 cents a mile for driving for Hurricane Katrina relief efforts. (Congress did not extend the higher rates to relief efforts for other hurricanes.)
If you are chosen as an official delegate to your church's national convention, for example, the costs of attending can be deducted as a charitable donation. If you attend such a convention on your own, however, your costs are considered nondeductible personal expenses.
Congress has lowered the boom on certain charitable-travel deductions, however, in response to a proliferation of highly publicized trips—sometimes called tax-deductible vacations. The solution the lawmakers came up with was to forbid a charitable deduction if the travel involves a "significant element" of personal pleasure, recreation or vacation.
That doesn't mean you have to have a miserable time doing your volunteer work to qualify for a tax deduction. Consider these examples:
As a troop leader, you take your Girl Scout troop on a camping trip. You can deduct your travel expenses, assuming you are on duty in a substantial sense during the trip, even if you have a great time. If you have only nominal duties or for much of the trip aren't required to render services, you don't get a charitable deduction for your expenses.
You work for several hours each morning on an archaeological excavation sponsored by a charitable organization. The rest of the day is free for recreation and sight-seeing. The IRS says no charitable deduction is allowed for your travel expenses, regardless of how hard you work during the morning hours.
You spend an entire day attending a charitable organization's regional meeting. In the evening you go to the theater. Going to the show doesn't cost you the right to deduct your travel expenses as a charitable donation.
Whether it's old clothes or Old Masters' paintings, donating property can earn you a tax deduction just like donating cash.
Begin with what are probably the most typical property donations: used clothing and household goods. Your write-off for such gifts is the fair market value of the property at the time you give it. That's usually far less than you paid for it. You should also be aware of the new provision that for donations made after August 17, 2006, no deduction is allowed for most donations of clothing and household items unless the property is in good used condition or better.
To set a reasonable value—that is, one the IRS will accept—you have to consider anything that can affect the item's worth. Factors include its original cost, current condition, cost of comparable items, replacement cost and opinions of experts. For relatively inexpensive items, this is a do-it-yourself job.
If you give away an old car, though, there are new rules starting in 2005. Concerned that taxpayers were habitually over-stating the value of cars and other vehicles given to charities, Congress ordered an end to letting the donor estimate the value. Now, within 30 days of the time the charity sells the vehicle, it must issue a 1098-C form to the donor telling him or her the selling price. That sets the deduction. Now, if the charity fixes up the car and sells it or gives it to a needy person, or uses it in its charitable efforts, you can still deduct the estimated fair market value at the time of the gift using used-car value guides available at banks and car dealers. Don't assume prices listed in such guides pinpoint the value of your car, however. You've probably heard stories about owners of old clunkers who decided the tax deduction for giving them away would be worth more than they could get by selling them. As you undoubtedly suspect, the IRS frowns on that approach.
If the vehicle you plan to bestow on a qualified organization—a high school shop class, for example—is a pile of junk, the allowable deduction is probably closer to salvage value than the average retail price shown in used-car guides. On the other hand, if you plan to give away a cream puff and the charity will use it for transportation or give it to a needy person, you may deserve a larger deduction. You may need to visit used-car lots and talk with dealers or mechanics to arrive at a fair figure. When claiming a high deduction, keeping a photo is always a good idea.
You don't need an expert's opinion to set the value of used, everyday clothes you donated to Goodwill Industries, the Salvation Army or similar organizations. For that you can use H&R Block DeductionPro. Use DeductionPro to keep track of your charitable donations and to set values for a wide range of your non-cash donations.
Note: DeductionPro is only available on the Windows platform.
The IRS has a helpful booklet—Publication 561, Determining the Value of Donated Property—that can be a valuable aid in setting the deductible amount for your gifts. (Call 1-800-829-3676 for a free copy or download it from the IRS website, http://www.irs.gov/formspubs/index.html.)
When the deduction you claim for donated property exceeds $500—in total, not per item—you need to file an extra form with your tax return: Form 8283, Non-cash Charitable Contributions. TaxCut of course, includes Form 8283. The information required on the form is basically the same as you need to substantiate any charitable gift—what you gave, when and to whom and, for items valued at over $500 each, when and how you acquired the property and your cost or adjusted basis. (Your basis is the property's value for tax purposes. It's usually what you paid for the property—the cost of stock, including brokerage commissions, for example—but if real estate or other depreciable property is involved, the basis is the cost minus any depreciation claimed.)
When your philanthropic urge prompts you to give away appreciated property—such as stocks, real estate, art or antiques—the tax-saving potential can be much greater. And the rules are much more complicated.
First of all, your deduction depends in part on whether the property donated is considered capital-gain or ordinary-income property. Basically, for this rule, capital-gain property is property you have owned more than 12 months before the gift.
When you donate capital-gain property, your deduction is the fair market value of the property. This can be a major advantage because you get to write off the current value of the property without having to pay tax on the appreciation that built up while you owned it.
Say you own stock now worth $10,000 that you purchased many years ago for just $2,000. If you give the stock to your alma mater, church or other qualified organization, you earn a $10,000 deduction. In the 33% tax bracket, that would save you $3,300 in taxes. But your tax benefit is actually bigger than that. If you sold the stock rather than giving it away, you'd owe tax on the $8,000 profit on the deal. That would cost you $1,200, even with the new 15% rate for long-term gains. But you avoid that bill by giving the stock away. What if you want to keep the stock in your portfolio because you believe it's a great long-term investment? Give it away, anyway, and buy new shares with the money you would have donated. That way, you get rid of the tax bill on appreciation to date and will be taxed only on profit from this point on.
When you contribute tangible personal property—such as antique furniture, jewelry or a painting—how the organization uses the donation can affect your write-off. If your gift is sold for cash, for example, or used for a purpose unrelated to the organization's charitable function, your deduction is limited to your cost. You don't get to write off the appreciation. For example, say you give your alma mater a valuable painting that you've owned more than one year. If it is put on display for study by art students—a related use—you may deduct the full market value of the painting. However, if the painting is sold and the proceeds used by the school, your deduction is limited to what you paid for the painting.
In addition to assets that don't qualify for long-term gain treatment (because you don't meet the 12-month holding period rule), ordinary-income property includes business inventory and works of art or manuscripts donated by the creator. The deduction for such gifts generally is limited to the donor's cost.
An artist who gives away a painting, for example, is limited to deducting the cost of the canvas, paint and frame, regardless of how much the painting would sell for.
The distinction between capital-gain and ordinary-income property is probably most important when it comes to stocks and other assets for which the deduction is controlled by the holding period. In the earlier example of stock purchased for $2,000 and worth $10,000 at the time of the gift, if the donor had owned the property for one year or less, the deduction would have been limited to $2,000. Watch the calendar if you consider such gifts.
You now must have a receipt to deduct a charitable contribution of $250 or more. Congress has specifically ordered the IRS not to accept a canceled check alone as sufficient to back up a deduction.
The $250 trigger point is for individual gifts, not the total you give a charity during the year. If you give $100 a month to your church, for example, you don't need a receipt even though the total donation is $1,200. If you give property rather than cash, the receipt has to describe the donation but the charity is not required to put a price tag on it. Estimating the value is up to you.
The point of this rule, of course, is that Congress thinks our tax returns make us out to be more generous than we really are. The lawmakers hope the receipt-required rule will put the brakes on inflated deductions enough to raise about $100 million in extra taxes each year.
Even for smaller gifts, getting a receipt will help you remember what you gave so you can take full advantage of this deduction. When a receipt is impractical—say you regularly put a $5 bill in the collection plate at church or make it a habit never to pass a Salvation Army bell ringer without dropping a buck or two in the bucket—make notes of the contributions for your tax records. The better your records, the less likely the IRS will deny your write-off for such cash contributions if you're audited.
When the property you give is publicly traded stocks or other securities, it's easy to pinpoint the fair market value. It's what the securities were trading for on the day of your gift. For other types of gifts, however, you may well need an outside appraisal.
When your generosity passes a certain dollar threshold, in fact, the IRS demands that you get a written appraisal from a "qualified appraiser." Such appraisals are required when any single item of property, or a group of similar items, has a claimed value greater than $5,000. For stock that is not traded publicly, the triggering point is $10,000. The appraisal must be made by someone skilled in evaluating the specific kind of property you are giving away.
Beware that the IRS, worried that it has been burned often by charitable deductions based on inflated appraisals, casts a particularly skeptical eye on such write-offs. The agency has its own panel of experts to review the appraised value of art and other high-ticket property donations. Also, the agency demands illustrated tax returns from taxpayers claiming large deductions based on the donation of works of art. When such art is valued at $20,000 or more, an 8- by 10-inch color photo or a 4- by 5-inch color transparency showing the gift must accompany the tax return.
The importance of an accurate appraisal is emphasized by the penalty the IRS imposes if the value of the donated property is significantly overstated. If the value on which your deduction is based is determined to be more than 150% of the property's actual worth and the deduction resulted in understating your tax bill by $1,000 or more, the penalty is 30% of the underpayment. The cost of the required appraisal can't be folded into your charitable contribution. Instead, it can be deducted only as a miscellaneous itemized expense, which makes it impossible for most taxpayers to get any tax benefit.
There is a limit to how much you can deduct in any single year, but few taxpayers have to worry about reaching the ceiling. The rules are complicated, but basically your deductions for gifts to public charities, colleges and religious organizations can't exceed 50% of your adjusted gross income. Within that overall limit, gifts of appreciated property can't total more than 30% of your AGI.
Stricter limits apply to gifts to certain types of organizations. Donations to veterans' groups, for example, come under an overall 30%-of-AGI limit, with a 20%-of-AGI cap on gifts of certain appreciated property.
The key to remember is that you can claim charitable-donation deductions against up to 20% of your AGI without worrying about the twists and turns of the IRS limits. If your generosity exceeds that level, you may need professional advice to structure the gift for the best tax outcome. If you give more than you can deduct on a single year's return, the excess can be written off in future years. Any leftover deduction not used within five years, however, is lost for good.