Your gifts to qualified charitable organizations can reduce your taxable income dollar for dollar as 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.
Money donations are any donations that you make directly to a charitable organization using one of the following payment methods:
Cash
A check
A credit card
Payroll deduction
Automatic withdrawals from your bank account
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’re not certain whether or not the charity to which you’re donating is approved by the IRS, ask an official of the group for their tax ID number and check with the IRS. For a list of qualified tax-exempt organizations, Publication 78, Cumulative List of Organizations.
New for 2007! The Pension Protection Act of 2006 has changed the recordkeeping requirements for money donations. To deduct a money donation, regardless of the amount, you must have a bank record or a written statement from the charity as a record of the donation.
Bank records for this recordkeeping requirement include bank or credit union statements, canceled checks, or credit card statements. They must show the charity’s name, the date, and the amount of the donation. Written records prepared by the donor, such as check registers or personal notations, are no longer sufficient to support charitable donations.
For money donations made by payroll deduction, you can satisfy the recordkeeping requirement if you have:
A pay stub, Form W-2, or other document furnished by your employer showing the amount withheld, and
A pledge card or other document from the organization stating that it doesn’t provide goods or services for donations made by payroll deduction.
For money donations of $250 or more, you must get and keep a written acknowledgment from the charity. You must obtain this written acknowledgement no later than the date that you file your return for the year. If you file late or get an extension, you have until the date you file to provide documentation.
The charity’s written receipt or acknowledgement of your donation must include:
The amount of the donation.
An indication of any goods or services that you received, if any, other than certain token items or membership benefits.
A good faith estimate of the value of any goods or services that you received.
The charity may provide either a separate statement for each donation or periodic statements substantiating your donations.
For more information, see IRS Publication 1771, Charitable Contributions—Substantiation and Disclosure Requirements.
In addition to money that you give directly to a charity, you can deduct expenses for doing volunteer work for a qualified organization. For example, you can deduct mileage expenses if you use your car while doing volunteer work for a hospital or school. You can also deduct mileage expenses for the miles that you drive to and from a charity to drop-off donated goods. The mileage rate for 2007 is 14 cents a mile. If you incur parking fees, tolls, or public transportation expenses, you can deduct those too.
Other deductible out-of-pocket expenses include the cost and care of any special uniform that you’re required to wear while performing services for the charity. For example, if you’re a scoutmaster, you can deduct the cost and upkeep of the scout uniform and any associated paraphernalia needed. Materials and supplies that you pay for and use in your volunteer efforts, such as stationery and stamps, are also deductible.
You can’t write off the value of any services or time that you donate. For example, if you’re a carpenter who usually charges $45 an hour, and you spend 20 hours helping to build a wing on your church, you can’t deduct $900, or any other amount, for your time.
Example of the IRS’s logic: If you had charged $900 for your services, that would have been taxable income. If you turned around and donated the money to the church, you would have earned a $900 write-off. The result would be no change in your taxable income. Similarly, donating your time means that you don’t have the extra income to report in the first place, so there’s no need for a deduction to offset it.
If you’re a foster parent, you can 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 can 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. For the purpose of figuring how many $50 allotments you can claim, count any month that the student lives with you for 15 or more days.
Whether it’s used clothing, furniture, or a car, donating property can earn you a tax deduction just as donating money can. Probably the most typical property donations are 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.
The Pension Protection Act also requires that item donations made must be in good condition to qualify for a deduction. However, Congress didn’t define "good" condition. We recommend that you deduct donations only if the organization intends to sell or use the donated items for its charitable purposes. In particular, if an item is heavily worn, don’t assume that the organization will sell or use it. To be sure, ask the organization.
You don’t need an expert’s opinion to set the value of used, everyday clothes that you donate to Goodwill Industries, the Salvation Army, or similar organizations. For that, you can use H&R Block DeductionPro. DeductionPro helps you keep track of your charitable donations and determine values for a wide range of item donations. When you’re ready to do your taxes, you can import your entries into TaxCut.
If you give away an old car, there are relatively new rules that started in 2005. Congress was concerned that taxpayers were overstating the value of cars and other vehicles given to charities, and ordered an end to letting the donor estimate the value. Now, when you donate a vehicle to a charity, the charity must send you a Form 1098-C within 30 days of the sale that tells you the sales price. This sets the amount that can be deducted on your return. If the charity fixes up the car and sells it, gives it to a needy person, or uses it in its charitable efforts, you can still deduct the vehicle’s fair market value at the time of the gift.
For more information, see IRS Publication 561, Determining the Value of Donated Property.
When you claim a deduction for donated property that exceeds $500 in total, not per item, you need to file an extra form with your tax return—Form 8283, Noncash Charitable Contributions. 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. For items valued at more than $500 each, you must also specify when and how you acquired the property, and the cost or adjusted basis of the item. Of course, TaxCut includes and calculates this form for you.
Example: You made 3 trips during the year to the Salvation Army to drop off some small household items and a few bags of clothing that you were no longer using. The value of the items being dropped off during each trip were $131, $155, and $97. Since the total amount of the donations ($383) is less than $500, you don’t need to file Form 8283.
Now, let’s assume that you donated $175 in goods to Goodwill Industries as well. When you add the value of this donation ($175) to the value of the items that you donated to the Salvation Army ($383), the total now exceeds $500, and you need to file Form 8283 with your tax return.
When you give away appreciated property, such as stocks, real estate, art or antiques, the tax-saving potential can be much greater. And the rules are more complicated as well. Your deduction depends in part on whether the property that you donated is considered capital-gain or ordinary-income property. For more information, IRS Publication 526, Charitable Contributions.
When your generosity passes a certain dollar threshold, 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 isn’t traded publicly, the triggering point is $10,000. The appraisal must be made by someone skilled in evaluating the specific kind of property that you are giving away.
In addition, the Pension Protection Act requires an appraisal for an item of clothing or a household item if:
The item is valued at over $500.
The item is not in good condition.
The IRS imposes a substantial penalty if the value of the donated property is significantly overstated. The cost of the required appraisal can’t be folded into your charitable donation. Instead, it can be deducted only as a miscellaneous itemized expense, which makes it impossible for most taxpayers to get any tax benefit.
See "Appraisals" in IRS Publication 561, Determining the Value of Donated Property for more details.
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% limit of AGI cap on gifts of certain appreciated property.
For more information, see IRS Publication 526, Charitable Contributions.