Americans are generous individuals. From corporations to private citizens, Americans gave an estimated $241 billion to charitable organizations in 2003, according to the study "Giving USA 2004." So when tax time rolls around, it's always nice to see your charitable contributions pay off as a charitable deduction. The question is: while contributing may be good for the soul, how good is it really on your tax return?
How Much Is Too Much?
The IRS has a limit on giving, but even if your heart exceeds the IRS maximum, you may still be able to benefit from your generous spirit. You may deduct a maximum of up to 50% of your adjusted gross income (AGI) (Line 36 on IRS Form 1040) for the tax year the donation was given. However, if you give more than 50%, the excess may be carried forward for up to five years. Be aware that the 50% rule applies to most contributions, but certain contributions may have lower limits.
What Is Tax-Deductible? How is it Deducted?
Now that you've figured out how much you can deduct, the next question is what exactly is tax deductible and how is it deducted? If you donate money or property to a "qualified organization," your donation can be deducted by filing Form 1040 and itemizing the deduction on Schedule A. If you do not itemize your deduction using Schedule A, you cannot deduct your charitable contribution.
"Qualified organizations" include nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, and nonprofit groups that work to prevent cruelty to children or animals. The following types of organizations qualify for a deduction:
- Churches, synagogues, temples, mosques and other religious organizations.
- Federal, state and local governments, if your contribution is used for public purposes.
- Nonprofit schools and hospitals.
- Public parks and recreation facilities.
- Salvation Army, Red Cross, CARE, Goodwill, United Way, Boy and Girl Scouts, etc.
- War veterans' groups.
- Expenses paid for a student living with you, sponsored by a qualified organization.
On the other hand, the types of organizations below do not qualify for a charitable deduction:
- Civic leagues, social and sports clubs, labor unions and chambers of commerce.
- Foreign organizations (except certain Canadian, Israeli and Mexican charities).
- For-profit organizations.
- Lobbying or lawmaking organizations.
- Lottery, bingo or raffle tickets.
- Dues, fees or bills paid to social or recreational clubs.
- Homeowners' associations.
- Political groups or candidates for public office.
Keep Those Records for Cash Donations
It is extremely important to get receipts and keep records for your donations. If you make a cash donation of less than $250, a canceled check or a receipt from the charity showing its name, the amount and the date of the contribution is sufficient. However, contributions of more than $250 require written documentation from the charitable organization. This receipt must include the amount you gave and whether or not you received anything of value as a result of your contribution.
Donating Property? Don't Forget That Receipt!
Like cash donations, if you donate property (defined as anything that is not cash) to a charitable organization, the records you must keep depend on the value of the property you contribute. A contribution of less than $250 requires a receipt from the charity showing the charity's name, the date of the donation, and the location and description of the property donated. In addition to a receipt, donations between $250 and $500 require written acknowledgment of your contribution from the charity, stating whether the organization gave you any goods or services as a result of your contribution.
Donations of property valued between $500 and $5,000 require detailed records of how you initially got the property and the approximate date you received it, in addition to a receipt and written acknowledgment. You must file Form 8283, Noncash Charitable Contributions, for all donations of property valued at more than $500. In addition to every requirement stated above, contributions over $5,000 require a written appraisal from a qualified professional.
Please note that property donations of more than $500 made on or after January 1, 2005 will require written documentation from the charity indicating whether or not the property will be sold or used by the organization. You will not be able to receive a charitable deduction without this documentation.
Drive Away with a Tax Deduction
Instead of trying to sell that old Chevy, you can donate it to a charitable organization and, in return, receive a guaranteed tax deduction. If you donated a car to a charitable organization in 2004, you can deduct the fair market value of the car. The fair market value of a vehicle can be found on Web sites such as the "Kelley Blue Book" (www.kb.com). However, the rules change in 2005. As of January 1, 2005, you can no longer deduct the fair market value of a vehicle if the charity sells it; you can only deduct the amount the charity receives from the sale of the car.
As for all donations of property, you must file Form 8283 when deducting a vehicle donation. This will allow you to describe the condition of the car and how you determined the value. For deductions of more than $5,000, you must attach a copy of an appraisal, made by a qualified professional, to your tax return, in addition to the appraisal portion of Form 8283.
Can I deduct charitable contributions, even if I receive something in return?
If you make a contribution to an organization and receive something in return, you may still be able to get a deduction on your taxes. However, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 to a charity dinner and the dinner was worth $30, you can deduct $70. If you make a contribution of more than $75 and receive goods or services, the charity must give you a written statement that tells you the value of those goods or services.
For more information regarding charitable contributions and potential tax benefits, visit the IRS Web site at www.irs.gov and search Publication 526.