More than any other time of year, the holidays tend to bring out the charitable side in many of us. I am a strong advocate of charitable giving. Through these benevolent donations, many wonderful causes are funded and much good is brought about in our society. Our current tax law also provides incentive to be generous to these great organizations including churches and other charities. I want to briefly discuss the deductibility of charitable contributions including limits on how much of your income can be donated and also discuss the need to do research on a charitable organization before you write that check to ensure that the organization qualifies as a 501(c)(3) not for profit organization and that the causes they support are in line with your views.
I have listed below a few points to remember when making charitable contributions.
1. The gift must be made in the tax year that the deduction is claimed. Checks or cash must be delivered or postmarked by December 31st in order to qualify and credit or debit card donations must be initiated by December 31st even though you will likely not pay the credit card bill until the following year.
2. You must be able to itemize your deductions in order to claim a charitable deduction on your tax return. If you will not have enough deductible medical (most taxpayers will not clear the medical dollar threshold to have federally deductible medical expense), tax, interest and charitable contributions to exceed the standard deduction amount for your filing status, you will not obtain a tax benefit for your charitable contribution since you will claim the standard deduction as it will be higher than your itemized deduction total.
3. You can donate up to 50% of your adjusted gross income to charity in a given tax year assuming the charitable organization is a qualified 501(c)(3) tax exempt organization. Groups in this 50% limit category include churches, religious organizations, hospitals, educational organizations, private operating foundations or other organizations that receive a substantial portion of their support from the public or the government. There are 20% and 30% of income deduction limits for specific gifts or the organizations and the groups to which they are given but most charitable organizations qualify as a 501(c)(3) organization and fall under the 50% rule. The honest truth is that most taxpayers won’t even come close to contributing 50% of their income in a given year so this limitation does not affect very many taxpayers. If you are limited by the 50% rule in a given year, the deduction is not lost but can be carried forward for up to 5 years until it can be used to offset income in a future year.
4. You should obtain a receipt from the charitable organization when making a donation to document the transaction in case the IRS ever questions the validity of your donation.
5. When making an in-kind donation as opposed to contributing by cash, check or card, you must determine a market value for the donation and this can be tricky. Organizations such as the Salvation Army and others provide guidelines for valuing anything from used clothing to household goods to equipment to electronics. Large dollar items such as vehicles, boats or artwork may require an appraisal or other certification of fair value as of the date of the contribution. In some cases where the charitable organization plans to sale the item received, the donor may be required to wait until the organization sells the item in order to know what value to place on the donation for tax purposes.
6. Lastly, you should do some research about the organization you intend to contribute to in order to ensure it is legitimate and that your views are in sync with the goals and mission of the organization. You can use the IRS tool Exempt Organizations Select Check to search the status of exempt organizations. Private groups such as GuideStar and Charity Navigator also offer searching options for charitable organizations.
If you have any questions regarding charitable giving and the tax benefits, please contact us as we would be glad to help. Happy holidays!