Knowing what you can and can't claim as charitable contributions helps you maximize the potential tax savings that the charitable tax deduction offers.
Americans have used charitable donations to lower their taxable income since World War I, when the federal government introduced the charitable tax deduction. Nearly 27 percent of filers take advantage of this tax break, according to a preliminary analysis of 2010 tax returns by the Internal Revenue Service.
Not all nonprofit organizations qualify as beneficiaries for tax-lowering gifts, nor do all gifts to eligible charities qualify. Knowing what you can and can't claim helps you maximize the potential tax savings that the charitable tax deduction offers.
Gifts to a non-qualified charity or nonprofit
As a society, we give nearly 2 percent of our personal income to charities and nonprofit organizations. "People have misconceptions about nonprofits," says Jason Parquette, a senior tax accountant with Christopher T. Pakos, CPA, PC. "They don't realize a nonprofit is not necessarily a charitable organization."
For tax purposes, the law classifies charities and nonprofits according to their mission and organizational structure. Each group must register with the IRS for the section of the law that applies to it. Religious and charitable organizations fall under section 501(c)(3) and can receive tax-deductible donations. Not every section allows these deductions. For instance, social welfare and civic organizations registered under section 501(c)(4) don’t qualify. However, two types of 501(c)(4) organizations—veterans' organizations with 90 percent war vet membership and volunteer fire departments—do qualify for charitable deductions.
Because the IRS allows deductible donations to some entities that aren't registered as a 501(c)(3), donors can get confused. For example, taxpayers often have the mistaken belief that civic and employee associations qualify as charitable groups. "Retired worker associations with limited memberships do not qualify," notes Parquette. "Sports groups generally don't, either, although it depends on how they're structured." He recommends asking upfront. "Clients often come in with canceled checks only to learn that they gave to a group that doesn't count as charitable."
A promise to pay
Promised donations do not equate to tax-deductible donations. That pledge you made doesn't become deductible until you actually give the money. When you agree to contribute $10 per month during a fund-raising drive, only the monthly payments you make during the tax year can be deducted on that year's return. You cannot claim $120 if you only paid $40.
The gift that's not a gift
Tax preparers frequently find themselves presenting bad news to clients seeking charitable deductions for bingo games, raffle tickets or lottery-based drawings used by organizations to raise money. "A lot of people think fund-raising tickets are deductible; they are not," Parquette says.
Another misconception relates to community drives aimed at helping an individual or family with medical costs, loss of a house from fire or funeral expenses. He suggests making sure that the cause is sponsored by an 501(c)(3) organization such as the Salvation Army or Red Cross so your financial assistance meets the deductibility test.
Timing plays a role for other cash and stock donations, too. You can't claim a deduction for a check with a future date that falls into the next tax year, even if you send it by the end of the year. Post-dated checks with January dates that are delivered December 31 don't count as a deduction for that tax year, for example. You must use the current date and mail your check by December 31 if you need the deduction.
The day you instruct your broker to transfer a stock gift to your favorite charity is not the gift date; the day the transfer goes through determines the tax year for your donation. However, year-end credit and debit card donations can be claimed for the tax-year in which they were given, regardless of when you pay your bill. The key date is the processing date, advises Parquette.
Gifts that benefit you
The time factor of gift eligibility isn't the only misconception taxpayers have, according to Parquette. "We see a lot of disallowed claims because the donor received value."
By IRS definition, charitable contributions represent gifts given without reciprocity. Supporting a charitable organization by buying merchandise or attending an event puts you into the got-something-in-return category. The price you pay for food, wrapping paper or magazines sold in fundraisers cannot be fully deducted; only the difference between your purchase price and fair market value qualifies. For example, paying $10 for a roll of wrapping paper from a school group that carries an $8 price tag in retail outlets gives you a $2 deduction. Likewise, buying a $50 ticket to a charitable event that includes a meal translates into a $20 deduction after subtracting the $30 you would have paid for that meal in a restaurant.
Politics and charitable contributions don't mix
Joining the political process of our democracy through monetary support does not help reduce your taxable income via charitable donations, much to the disappointment of patriotic donors. They don't count as a miscellaneous deduction, either. Money given to candidates or committees working on their behalf, advertising promoting them or their political party and campaign fund-raising events such as dinners and luncheons do not lower your tax bill. "Election years bring an onslaught of confusion regarding deductions for money given to political campaigns," says Parquette. "The bottom line is that they cannot be claimed."
Undocumented charitable donations
At the end of the year, when you remember those dollar bills you gave here and there to local charities and churches, you may be surprised to learn that you can't take a deduction because you have no receipts. The IRS requires proof of all cash donations big or small: A canceled check, statement or receipt from the receiving organization suffices.
From a tax preparer's perspective, says Parquette, canceled checks make excellent records. "Write down dates, amounts and canceled check numbers. When the IRS does an audit, it wants proof." If you make a donation of more than $250 in any one day to any one organization, your cancelled check is NOT enough. You'll need an acknowledgment letter dated prior to your filing your tax return for the year in which you made the donation.
Noncash donations also need supporting records. For individual noncash gifts of $250 to $500, that proof must include written confirmation. On top of written acknowledgment from the benefiting organization for a noncash gift between $500 and $5,000, you need to document your ownership and cost and file Form 8283. Gifts of noncash property valued at more than $5,000 demand additional substantiation.
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