A tax deduction for charitable giving isn't guaranteed just because you're feeling generous. As with everything in tax law, it's important to follow the rules. Here are 13 tips for making your charitable donation count:
1. Itemize. To claim a charitable deduction on your tax return, you must itemize your deductions. You report itemized deductions on Schedule A on your federal form 1040 using lines 16-19:
And yes, while many itemized deductions are currently under fire, both versions of tax reform efforts include keeping the charitable donation deduction in place.
2. Choose carefully when making a donation. Only donations to qualified charitable organizations are deductible. If you’re not sure whether an organization is qualified, ask to see the organization's determination letter from the Internal Revenue Service (IRS): many organizations will post their letters on their website. If that isn’t possible, you can search online using the IRS Exempt Organizations Select Check tool. You also can confirm charitable status by calling the IRS (toll-free) at 1.877.829.5500. Keep in mind that churches, synagogues, temples, and mosques are considered de facto charitable organizations and are eligible to receive deductible donations even if they’re not on the list (some exceptions apply so be sure and ask if you’re not sure).
3. Remember that donations to individuals will not qualify for a tax deduction. You cannot deduct contributions to specific individuals no matter how deserving. This includes handouts to the homeless and collections at the office or in your neighborhood for those experiencing tough times (including pooled funds for folks who are ill or have experienced a tragedy such as an accident or fire). If the deduction is important to you, consider working with an established organization like the Red Cross which provides disaster or other relief. See again #2.
4. Get a receipt - even for cash. Cash donations, no matter the amount, must be substantiated by a bank record such as a canceled check or credit card receipt, clearly annotated with the name of the charity or in writing from the organization. The writing must include the date, the amount and the organization that received the donation. You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your contribution from the qualified organization. As a best practice, always asking for a receipt: almost any charitable organization will happily offer you one. You don't have to submit this documentation along with your tax return, but you need to be prepared to provide it in case of an audit.
5. Don't overlook payroll deductions. Your employer may participate in a charitable giving program which allows you to make contributions directly from your paycheck. If you make a contribution by payroll deduction, recordkeeping requirements under the Pension Protection Act of 2006 require that you retain a pay stub, form W-2 or other document furnished by your employer that shows the total amount withheld as a charitable donation along with the pledge card that shows the name of the charity. For federal workers, a pledge card with the name of a Combined Federal Campaign will meet these requirements.
6. Pay attention to the value of any donor incentives. A charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. If you make a donation and receive something in exchange - anything from a coffee mug to a plated dinner - you can only deduct the cost of your donation less the value of the item received. If you’re not sure of the value of an item or service received after a donation, just ask. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter or receipt.
7. Consider donating appreciated assets. Donating property that has appreciated in value, like stock, can result in a double benefit (just ask Zuckerberg). Not only can you deduct the fair market value of the property (so long as you've owned it for at least one year), you will avoid paying capital gains tax. Normally, appreciated assets are subject to capital gains tax at disposition - whether by selling or gifting - but there's an exception for donations to charitable organizations.
8. Don't forget about retirement assets. Typically, if you want to make a donation from your IRA, you'd have to withdraw those funds, pay the tax and then make the donation. There is an exception: IRA owners who are age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free. Even better: The transfer counts toward your required minimum distribution (RMD) for the year. To be an eligible transfer, funds must be transferred directly by the IRA trustee to the charity (you can't pull the funds out yourself and write a check or you don't qualify for the exception).
9. You can't deduct the value of your time. The IRS does not allow a charitable deduction for volunteering your services even if you can easily put a dollar amount on your time. So, if, as an architect, you normally charge $350 per hour and you use that time to help out a qualified charitable organization, you're allowed a deduction in the amount of $0 - that's not a typo. The same rule applies whether you're a lawyer, doctor, artist, nurse, accountant or editor at Forbes.
10. You can deduct expenses related to volunteering. While you can't deduct the value of your time (see again #9), there is some good news. Most out of pocket expenses relating to volunteering are deductible so long as they're not reimbursed to you or considered personal. Out of pocket charitable expenses which might be deductible include parking fees and tolls; other travel expenses; uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services.
For 2017, the rate for mileage driven in service of charitable organizations is just 14 cents per mile. The rate is currently fixed by Congress and is never adjusted for inflation - which is why it hasn't budged in years, despite the fact that gas is more expensive. But those tax reform measures I mentioned earlier? On the list is making the charitable mileage rate subject to inflation (if it passes, it won't kick in until 2018).
As with other donations, keep good records for out of pocket expenses: Documentation is key.
11. Document the value of your gift. Good records are always important when it comes to charitable giving but even more so for donations of non-cash items. You can generally take a deduction for the fair market value of the item: fair market value is generally the price that a willing buyer would pay to a willing seller. If self-documenting the donation because it's less than $500, be specific, noting the description and condition of the items. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property's fair market value. If you make non-cash contributions (generally over $500), you may also be required to fill out one or more parts of federal form 8283, Noncash Charitable Contributions (downloads as a pdf).
12. Limits may apply. There are limits on charitable deductions: If you contribute more than 20% of your adjusted gross income (AGI), found on line 37 of your form 1040, pay attention to limits. The specific limits can be complicated but here are some quick rules of thumb:
- You can deduct appreciated capital gains assets up to 20% of AGI;
- You can deduct non-cash assets worth up to 30% of AGI; and
- You can deduct cash contributions up to 50% of AGI.
Pease limitations may limit your gifts even more (for info on 2017 Pease limitations, check out this post). Carryovers may apply if you exceed the limits on contributions.
If you're scratching your head thinking that you've heard some whispers about Pease limitations recently, it's because those tax reform proposals include eliminating the Pease limitations. Tax reform proposals also include changing the limits on cash donations to 60% of AGI. If those changes become law, they wouldn't be effective until the 2018 year.
13. Pay attention to the calendar. Contributions are tax-deductible in the year the contributions are made. To make it count during the tax year, gifts must be made by December 31. That doesn't necessarily mean cash out of your account. Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. Credit card charges - even if they're not paid off before the end of the year - are deductible so long as the charge is captured by year end. Similarly, checks which are written and mailed by the end of the year will be deductible for this year even if they aren’t cashed in 2017. Good intentions don't count: making announcements that you intend to donate assets will not qualify for a deduction in the current tax year unless you make good on the pledge during the year.
Click here to see the full Forbes list of America's Top Charities 2017.
