The holidays season is relaxing break from work and opportunity to spend some time with family and friends. It is also a great time to reflect on all your blessing and to help those less fortunate than you. If you have the ability to give back this year, here is a quick guide for the federal tax implications of charitable contributions.
What Counts as a Charitable Deduction?
Cash and non-cash contributions to qualified exempt organizations. The most common exempt organizations are 501c registered charities and religious organizations. The IRS provides an Exempt Organization lookup tool on their website (https://www.irs.gov/charities-non-profits/exempt-organizations-select-check) to for taxpayers to verify organizations they wish to contribute to.
Cash contributions typically means just that…a contribution of cash; though the actual contribution can be made through cash, check, credit/debit cards, payroll deductions, or any other method. It just means that money was given to a qualified organization. For cash contributions, taxpayers need to maintain a financial record of the transaction or a receipt from the organization validating the contribution. The contribution must also be paid in the actual tax year, e.g. you can’t claim a deduction for the current year if you only pledge to pay, but don’t actually pay the charity until the following year. This is something to keep in mind with year-end donations.
Non-cash contributions mean anything else other than cash, e.g. clothes, books, cars, stocks, real estate, etc. These are deducted at their fair market value. With non-cash contributions the recordkeeping requirements vary as its difficult to ascertain the value of various properties. Records are required for each individual item, though smaller value items such as clothes, books, toys, etc. can be grouped together. For donations worth less than $250, you need to keep a receipt nothing the name of the organization, date and time of the contribution, and detailed description of the property that was donated. However, if it is impractical to get a receipt, such as in cases where you drop clothes off a drop-in bin, you aren’t required to get one. You also need to also keep your own records of all the above details plus details on how you figured out the fair market value of the property and any special circumstances associated with the contribution. The record keeping requirements get stricter as you claim items donations of values of higher items. For items valued over $250, you have to have a receipt and are also required to get an acknowledgement from the organization on whether you received any benefits in exchange for your contributions. For items valued over $500, you also need to maintain records on how you came to own the property you are donating. For items valued over $5,000, you also need to get an independent appraisal on the value. These are just some of the requirements.
How Much Can You Can You Deduct?
The amounts you can deduct vary. Your total deductions cannot be more than 50% of your adjusted gross income (AGI) at any time, but there are also limits depending on both what you gave and who you gave it to. For public charities and religious organizations, you can deduct contributions up to the full 50%, but for other exempt organizations such as non-profit social clubs or veterans’ benefits organizations you can only deduct contributions up to 30% of your AGI. The IRS lookup tool will tell you what limit the organization you wish to contribute to falls under. Additionally, there is also a 30 to 20% limit on appreciated property, e.g. if you are donating house you bought for $50,000 and is now worth $100,000, you can only claim up to 30% of your AGI for a contribution to public charity and religious organization and only up to 20% for other exempt organizations.
What About Volunteering?
If you volunteer for an exempt organization, you can write-off many out of pocket expenses related to the volunteer work, for example supplies, uniforms, parking and tolls. You can also deduct mileage or public transport costs for getting to the volunteer work location. You can’t however put a value on your volunteer work and deduct that, e.g. a lawyer doing 8 hours of probono work for a charity can’t deduct the value of 8 hours of his/her time at standard billing rates.
These are just some highlights of the typical tax rules related to charitable contributions, there are a lot more additional rules and requirements which may be relevant depending on a taxpayer’s situation.