Some things, the IRS says you must do. Other things, the IRS will reward you to do, such as donating to charities that help people from local communities to nations across the globe. Donations of money or property may be deductible and reduce your taxable income. You get to feel good, do good, and save taxes. Talk about a win-win-win situation!
So how can you benefit others and yourself at the same time? Here are answers to questions you may have about whether charitable donations can reduce the bottom line on your tax return.
What are Charitable Contributions?
The IRS defines charitable contributions as gifts or donations to qualified charitable organization. A qualified charity is a corporate entity that meets the requirements for non-profit status established by the IRS. These include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. You can verify whether a charity is qualified by accessing the IRS’s “Exempt Organizations Select Check” tool at http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check .
Who Can Take the Deduction?
Eligible charitable contributions are only deductible for taxpayers who itemize their deductions using IRS Schedule A. Deductions for donations made could be limited if your adjusted gross income (e.g., Line 37 on Form 1040, page 1) exceeds specified amounts that are adjusted annually (e.g., $152,525 for married filing jointly for 2014).
Contributions may be in the form of a monetary donation or a gift of property, such as clothing, household goods, vehicles, stock, or real estate. Monetary or “cash” contributions are made directly to a qualified charitable organization in the form of check, credit card, or currency. Cash donations are acknowledged by a letter from the charity stating the amount and date of the donation, reduced by the value of anything in return, such as dinner at a fundraising event.
Many special rules apply to donations of property. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction per items is based on the “thrift shop” value, unless an appraisal is obtained. Donated vehicles valued at more than $500 are deducted at fair market value or the price received at auction, reported to the taxpayer on IRS Form 1098-C. Donations of real property and items valued over $5,000 require an appraisal. Stock and other investment donations are generally deductible based on the fair market value on the donation date.
How Does this Impact You?
The information presented here is very general. More details and potential limitations are addressed in IRS Publication 526, Charitable Contributions, at http://www.irs.gov/pub/irs-pdf/p526.pdf. A qualified tax professional or financial advisor could also help figure out how cash or non-cash charitable contributions could reduce your income tax liability.