Contributing money and property to a charitable organization is one of the ways that a taxpayer can support a charitable cause while simultaneously reducing their income tax burden. However, in order for the donation to be tax-deductible, certain conditions must be met. The IRS recently put forward the following tips for taxpayers regarding the deductibility of donations.
1. Tax-exempt status – Contributions must be made to qualified charitable organizations in order to be deductible. Be sure to ask the charity about its tax-exempt status, or check IRS.gov for the Exempt Organizations Select Check (a/k/a Publication 78), an online search tool that allows users to select an exempt organization and check for information about its federal tax status as well as information about tax forms an organization may file that are available for public review. This search tool can also be used to find which charities have had their exempt status automatically revoked.
2. Itemizing – Charitable contributions are deductible only if the taxpayer itemizes deductions using Schedule A on Form 1040. Generally speaking, it is probably not a good idea to use Schedule A if the taxpayer’s total itemized deductions do not exceed the standard deduction provided to all taxpayers (for 2012 this means $5,950 for single filers, $8,700 for head of household filers, and $11,900 for married filing jointly).
3. Fair market value – Cash contributions and the fair market value of most property donated to a qualified organization are deductible. Special rules apply to several types of donated property, including cars, boats, clothing and household items. If the taxpayer receives something in return for their donation, such as merchandise, goods, services, or admission to a charity banquet or sporting event, only the amount of the donation that exceeds the fair market value of the benefit received may be deducted.
4. Records to keep – It is important to keep good records of every donation, regardless of the amount. All cash contributions must be documented to be deductible – even donations of small amounts. A cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity that includes the charity’s name, contribution date and amount usually fulfill this record-keeping requirement. If the donation is made to a wholly-owned subsidiary of a charity, special rules may apply.
5. Large donations – All contributions valued at $250 and above require additional documentation to be deductible. For these donations, the taxpayer should receive a written statement of acknowledgment from the charity. The statement should specify the amount of cash and/or provide a description and fair market value of the property donated. It should also say whether the charity provided any goods or services in exchange for the donation. For donations of non-cash items valued at $500 or more, the taxpayer must also complete a Form 8283, Noncash Charitable Contributions, and attach the form to their return. For contributions of noncash property worth more than $5,000, the taxpayer must typically obtain a property appraisal and attach it to their return along with the Form 8283.
6. Timing – A pledge to donate to a qualified charity, is usually only deductible in the tax year that payments are actually made. For example, if a taxpayer pledged $500 in September but paid the charity just $200 by Dec. 31 of that same year, only $200 of the pledged amount may qualify as tax-deductible for that tax year. End-of-year donations by check or credit card usually qualify as tax-deductible for that tax year, even though a credit card bill may not be paid or a bank account may not be debited until after Dec. 31.
Failure to properly report or record charitable donations can lead to trouble with the IRS, including the disallowal of deductions, penalties and fees, or an audit of the taxpayer’s return. If you have questions about your charitable deductions, especially when they are sizeable, and thus more likely to be scrutinized, you may wish to speak with a Florida tax attorney who can help you avoid issues before they happen.