Charity: The Gift that Gives Back
With all of the disasters, poverty and sickness in the world, Americans donate more than any other nation in the world to charity. Even in these economically uncertain times, individual Americans continue to dig deep into their wallets and find a few extra dollars for charity. But did you know that those donations are tax deductible?
That’s right. You can give up to 50% of your income to qualified charities and deduct that amount from your AGI on tax day. You can donate property, cash or services and if you’re over 70.5 years of age, you can even donate part of your IRA to lower your fixed income for the year.
Make sure to keep good records of your charitable donations so that you know the values to enter on your Form 1040. You must itemize the deductions on Schedule A, so don’t just add it all up and put it on your 1040EZ!
What Can I Donate?
You can donate all kinds of property, such as cars, art, clothing and furniture. If it’s useful or sellable, most charities will gladly take it off your hands. Make sure to have your property appraised before you donate it so you know the fair market value (see below for more information on fair market values).
If you want to donate a car, boat or aircraft to charity, your first priority is to find out what it’s worth. Check with your local library or look online for the many monthly or seasonal guides that will help you figure out what your vehicle is worth. You can look up your vehicle’s year, make and model, enter the condition, mileage and any other special features or damages and find out what you could sell it for on the private market. Don’t call a dealer and ask how much they would sell it for, only the private fair market value counts for charitable donations of this kind.
Boats might be a bit trickier to appraise online as there aren’t as many resources. The best way to determine the fair market value of a boat is to have a marine surveyor appraise it for you.
Art and Antiques
If you have expensive artwork or antiques that you want to donate to charity, you should have it appraised by a qualified professional and have the appraisal fully documented before you do anything. If your items are worth less than $5,000, you don’t need to have it appraised, but it’s still a good idea since you never know what something may be worth.
If the value of the items you are donating totals up to more than $20,000, you have to attach a copy of the signed return and include it with your return. If it is only one item worth more than $20,000, you may also need to include a photograph that is large and clear enough to properly show the item. An 8x10 is the best, but it can’t be smaller than 4x5 inches.
If you donate one piece that is valued at more than $50,000, you may request a Statement of Value from the IRS before you file your return. When you file the request, make sure to include a copy of the qualified appraisal, a check or money order for $2,500 payable to the IRS for processing your request for up to three items (add $250 per each additional item). Also fill out and include Form 8283, Section B and let the IRS know which of their regional divisions is responsible for your return.
Donating Capital Gains Property
There are two types of capital gains property, ordinary income or short-term capital gains and long-term capital gains. If you are donating inventory from your business, you can deduct part of what you are losing by not selling it directly. Let’s say your income from your private business was $700,000. You paid $400,000 for inventory that you want to donate to charity. If you sold the inventory, you would make $600,000 at fair market value, which is a profit of $200,000. To figure out what your deduction is, you take the fair market price of $600,000 and subtract the gain you would have made, $200,000 and you’re left with $400,000. That is your deduction. But keep in mind, you can only deduct up to 50% of your AGI, so you can only deduct $350,000 from this year’s income and next year, if you don’t make any more major donations in the coming year, you can deduct the remaining $50,000 on your next return.
Long-term capital gains are a bit trickier. If you are donating something that would have earned a long-term capital gain from a sale, you can only deduct up to 30% of your AGI if it’s to a public charity and 20% if it’s a private charity. You can carry over the remaining amount for the next five years under the same restrictions. Make sure that if you are donating long-term gains, that they have passed the threshold dates to be considered long-term. If they are sold before they qualify as long-term capital gains you will lose the deduction.
Cash donations are the easiest type of donation because you know exactly what they’re worth and that value doesn’t change. You can donate up to 50% of your AGI in cash to qualified charities and any donations in excess of 50% can be carried over for the next five years.
Donations from Your IRA
If you are over 70.5 years of age, you are allowed to donate up to $100,000 of your IRA to charity through 2013 and you won’t have to report the withdrawal as taxable income and you can deduct the donation as a gift to charity. That means that your deductions won’t be affected by the AGI limit on charitable donations or by the phase out limits for itemized deductions. There are other advantages to keeping your IRA distributions separate from your adjustable gross income; amounts donated like this all count as part of your required minimum distribution.
Donate Your Time and Skills
Unfortunately, any time or services you donate to charity are not tax deductible. You can, however, deduct any costs incurred while rendering those services. You can deduct travel costs, room and board and purchases you made for the services, but you cannot deduct your fee for services rendered, nor can you deduct child care costs.
How Much is My Donation Worth?
Fair market value is such a broad term that finding out the value of your donations, unless they are cash, can be tough to do. It is basically the price that two reasonable people, who are both aware of all the facts pertaining to the item would agree upon if neither party was under any pressure to buy or sell the item. There are no rules and formulas or set prices for how much a dent on the fender of a car or a scratch on an antique dresser lowers the value, so your best bet is to call in a professional. They will know how to take all of the variables into consideration, such as condition, desirability, rarity, quality, etc. If you can’t afford to do that, there are resources out there to help you determine how much your property is worth.
For more information on fair market values, see Publication 561 and be sure to keep detailed records of any donations and their values as well as receipts from the recipients.
What’s a “Qualified” Organization?
There are so many charities, public groups, religious organizations, educational needs, military aids and relief groups that it is certainly not hard to find a way to donate. Whichever groups you choose to support, make sure they are legitimate and recognized by the IRS as “qualified organizations” before you write that check if you want to claim the deduction.
The first major group of qualified organizations includes non-profits such as religious, charitable, educational, scientific and literary organizations as well as groups dedicated to preventing child abuse or animal cruelty. Religious organizations include churches, temples, synagogues, mosques and any other tax-exempt religious groups. Charitable organizations include groups such as the Red Cross, United Way, Salvation Army, CARE, Goodwill and other international relief organizations. Educational groups include non-profit schools, colleges, museums and daycare centers, Boy and Girl Scouts, Boys and Girls Clubs of America, etc. Non-profit research facility and hospital donations also fall into this group as do animal and child abuse prevention groups such as PETA and the Children’s Defense Fund.
The next group of qualified groups includes war veterans organizations, posts, auxiliaries, trusts, foundations within the US.
The third group includes domestic fraternal societies, associations and orders that adhere to the lodge system. This does not include dues and fees and may only be used for charitable, religious, scientific, literary or educational purposes or for the prevention of cruelty to animals or child abuse.
A fourth group, although small, includes non-profit cemetery companies. You cannot donate to have a specific lot or mausoleum cared for, only the whole cemetery.
The final group includes good old Uncle Sam himself. You can donate to any state or local government in the 50 states, D.C. and any political subdivisions, including Puerto Rico or Indian tribal governments. You can also donate to federal or state-run facilities such as parks, public recreation areas, volunteer fire companies, emergency utility companies acting as agents for charitable organizations, civil defense organizations, police departments, national parks, etc. These donations are only deductible if they are made for public use.
If you made donations to Haiti relief or other disaster relief, you can claim those donations on your 2012 return.
What You Can’t Deduct
You cannot deduct donations to individuals or non-qualified organizations, nor can you deduct any donations from which you received or expect to receive a benefit. So if you donated at a silent auction, you can only deduct the difference between what you paid and what the item was worth. Personal expenses, appraisal fees, distributions from IRAs, donor advised funds or partial interests in property are also non-deductible.
Any donations made to civic leagues, social or sports clubs, labor unions, chambers of commerce, foreign organizations, personal profit groups, groups whose goal is lobbying for changes in law, homeowner’s associations, political groups or candidates for public office, tuition, or the value of blood given to a blood bank are not deductible.
How to Claim the Deduction
To claim deductions for donations made to charitable organizations itemize your deductions on Schedule A on Form 1040. If your donations total more than $500, you will also need to file Form 8283 and attach it to your return. For more information, see our step-by-step Guide to Filing Form 8283. For general information on charitable contributions see Publication 526.