The Basics of Charitable Contributions

by Tax Man on January 1, 2012

Happy 2012 everyone and welcome to Tax On Tax Off.  For more about what the site is all about, click on our About page.

At the time of writing it is January of 2012.

Soon you are going to have to report the charitable contributions you made last year in 2011.

Whether you donated $100 or $1 million, you will have to follow certain steps with the IRS to realize the tax benefit of your generosity.

Just in-case you do not know, the IRS has created a series of numbered publications, designed to address everything having to do with US Income Tax. They are available in print or on the internet.

There is a particular publication, numbered 526, that sufficiently answers and explains everything having to do with charitable contributions. I did the google search for you and here is a link you can use at anytime to access Publication 526, Charitable Contributions:

http://www.irs.gov/pub/irs-pdf/p526.pdf

Unfortunately, Publication 526 consists of over twenty-one pages of densely written material; a ton of information for simply giving the bell-ringer outside your local supermarket a 5 dollar bill. This is why you are reading this article.

Knowing the practical steps for charitable contributions will save you time and confusion. For your convenience, here are seven steps, written in the form of questions, that will provide you some solid knowledge on the subject:

Step 1. Are you Itemizing Deductions?

Let’s make sure this is right out in the open: in order to deduct a charitable contribution, you must file IRS Form 1040 and itemize your deductions on Schedule A. So, if your allowable charitable deduction plus all your other itemized deductions doesn’t add up to more than your standard deduction you generally won’t realize a tax benefit from the charitable contributions you’ve made.

Step 2. Did you donate to a  Qualified Organization?

You can only deduct contributions that are made to qualified organizations. Churches, synagogues, temples, and mosques automatically qualify. Practically all other organizations have to apply to the IRS. An organization should generally be able to tell you if it is a qualified organization. If you need to you can check IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986, which is available online at www.irs.gov.

Contributions are not tax deductible if given to any of the following:

  • Political parties, political campaigns, or political action committees.
  • Contributions given to individual people.
  • Fees or dues paid to professional associations.
  • Contributions to labor unions, chambers of commerce, or business associations.
  • Contributions to for-profit schools and hospitals.
  • Contributions to foreign governments.
  • Fines or penalties paid to local or state governments.
  • The value of your time for services rendered to a non-profit.

Step 3. Did you receive a benefit?

If you make a contribution and receive a benefit as a result, you can only deduct the amount that’s more than the value of the benefit you receive (for contributions over $75, the charity must give you a statement describing the value of the goods and services provided to you). Therefore, if you pay $300 at a charity auction for a weekend getaway that has a fair market value of $250, your deductible charitable contribution is $50.

You can, however, deduct your entire payment to a qualifying organization if you receive only a token item or benefit in return, and the organization determines that the value is not substantial and tells you that you can deduct the full amount of your payment. (Special rules apply to payments made to colleges and universities for the right to buy tickets to athletic events.)

Step 4. Do you know the limits?

You are allowed to deduct cash contributions in full up to 50% of your adjusted gross income. You are allowed to deduct property contributions in full up to 30% of your adjusted gross income. You can deduct contributions of appreciated capital gains assets in full up to 20% of your adjusted gross income.

Charitable contributions in excess of these limits can be carried over to the following tax year. The excess contributions can be carried over for a maximum of five years.

Step 5. Did you Volunteer your Time? Review your expenses

If you volunteer your services to a qualified organization, you are allowed to deduct unreimbursed amounts directly connected with the services you provide. You can deduct out-of-pocket expenses that are directly related to the use of the vehicle in providing services. You can use actual expenses, or base your auto deduction on the standard mileage rate. You can also deduct parking and tolls. You can’t, however, deduct the value of your time.

Step 6. Have you Practiced Good Recordkeeping?

Make sure that you keep records that document the contributions that you make during the year.

For cash contributions, you’ll need a bank record (e.g., a canceled check or a credit card statement), or a receipt from the organization that includes the name of the organization as well as the date and amount of the contribution. If you make an individual contribution of $250 or more, you’ll need a written acknowledgement from the organization that meets specific requirements.

If you made noncash contributions, the specific documentation that’s required depends upon the amount of the deduction.

Step 7. Why is there always more steps?

The seventh step is just a reminder that there is always a little more you can do. One example, discuss your situation with a tax professional. He or she might be able to provide you with additional strategies not mentioned on the internet. Also, do additional research on the topic. Read Publication 526, Charitable Contributions and utilize similar resources.

 

This is our first ever article so thanks for reading and we hope you found it useful! If you did find this useful please share the article on Facebook and Twitter. And definitely put your email address in the form below for more tax-info awesomeness in your inbox. Finally if you have any questions feel free to email “connor” @TaxOnTaxOff.com

{ 4 comments… read them below or add one }

Small Biz Guy January 2, 2012 at 5:45 am

It’s great to have these considerations in a step-by-step structure -my head swims when I’m considering what I can and can’t deduct but by asking myself these questions in turn, it makes more sense and I’m remembering things I would not have considered itemising.

I think good-record-keeping is the best tip and it’s important that this is stressed. I’m not the best at it myself but I’m improving by taking pictures of receipts and donation checks with my camera phone – keeps everything documented.

Keep up the good work.

HighOrderGuiltComplex January 6, 2012 at 6:28 pm

if you do work for a non-profit agency, can you deduct your milage to and from going to the charity event (i.e. driving to and from Harvest Hope food bank to volunteer your time)?

Normand Osterman March 23, 2012 at 9:58 am

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gold price November 11, 2012 at 12:21 pm

If the property that the donor is contributing would have produced either only an ordinary gain or a short-term capital gain had he sold it, then he may deduct only his adjusted basis in the contributed property. The taxpayer may not deduct contributions in an amount greater than 50% of his adjusted gross income (AGI) in the year of donation. Any excess may be carried forward for up to 5 years and may be deducted subject to the same limitations.

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