If you made a charitable donation and wish to claim a tax deduction, here are some basic rules to follow. Remember that the IRS tax code is complex, with many details and exceptions. Donors who are particularly concerned about maximizing their tax deductions should talk with an accountant or financial planner.
Itemize or Not?
Deductions for charitable gifts can be made only if you itemize deductions.
An organization cannot simply state that it is a nonprofit group and receive donations that are tax deductible. Make sure it has a 501(c)(3) tax status, which is granted by the IRS to organizations that are officially recognized as a nonprofit. In general, for-profit companies cannot receive tax-deductible donations, though many for-profit organizations will set up nonprofit groups that are eligible.
Giving to Overseas Charities
Charitable giving to foreign organizations is typically not tax deductible, so if a person or group has a particular cause in mind, they should seek out a domestic nonprofit that does similar work. In certain cases charitable gifts to organizations in Canada, Mexico, and Israel may be tax deductible if the United States government recognizes them. The rules for each country are different, so do your research ahead of time. IRS Publication 526, “Charitable Contributions,” discusses the rules.
Cash and Noncash Gifts
While the most common type of charitable giving is a cash gift, people may also donate items such as equipment, furniture, vehicles, or real estate. With this type of noncash gift, the donor may take a tax deduction only for the fair market value of the item. The IRS describes fair market value as the amount the item could be sold for to a willing buyer. The IRS provides general recommendations for the giver to establish this amount. Clothing and household items, for instance, must be in good condition or better to even qualify for a deduction. You will also be required to fill out an additional form if your noncash contributions exceed $500 for the year.
Raffles, Auctions, and Other Fundraising Events
One common way for nonprofit organizations to raise money is through fund-raising events such as auctions, raffles, or other games of chance. Although these provide a great opportunity to give, money given for raffles and other games of chance are not tax deductible. In addition, people who participate in an auction can deduct only the amount that is above and beyond the value of the item purchased.
Documentation and Paperwork
As with many other aspects of tax law, documentation is a crucial part of the charitable donation process. When it comes to cash donations, a simple receipt from the organization is often all that is needed. Other types of documentation that qualify include bank records, payroll deductions, or telephone bills for donations made via text message. In all cases, the documentation needs to include the name of the organization, the amount of the gift, and the date it was made. In addition, for donations of more than $250 the organization must provide you with a description of the donation and a statement that you did not receive any goods or services in exchange for the donation.
To deduct charitable contributions, you must file Form 1040 and itemize your deductions on Schedule A. If you donate an item valued at $5,000 or more, you must also complete Section B of Form 8283 and may have to get a qualified appraisal.
Limits on Giving
While most individuals may not get to such a threshold, the IRS does set a general limit of giving. This is generally capped at 50% of a person’s adjusted gross income, though a 20% or 30% limit may apply in certain cases. A person or group getting close to this limit should consult with a tax professional who can provide proper guidance on documentation.