Charitable Deductions – Frequently Asked Questions
By Abigail Neal, Arizona Charity Lawyer
This article covers the following frequently asked questions about deducting contributions made to charity:
1. What are charitable contributions and qualified organizations?
2. What types of contributions you can deduct on your tax returns?
3. How much of the contribution you can deduct?
4. What records you need to keep?
5. Are there limits on deductions made to charity?
What Is A Charitable Contribution?
A charitable contribution is a donation or gift made to or for the use by a qualified organization that is voluntary and made without receiving or expecting to receive substantial benefits in return for your contribution.
What Is A Qualified Organization?
This includes nonprofit groups whose purposes are religious, charitable, educational, scientific, literary or preventing cruelty to children or animals. You can ask the organization if it is qualified or look up qualified organizations with the IRS website Select Check Tool. However, churches, religious organizations and governments might not be listed although contributions to these organizations are deductible.
What Types Of Contributions Are Deductible?
Deductible contributions include:
Out of pocket expenses that result from services you provided, are directly connected with the services, and are not reimbursed. Personal, living or family expenses are NOT deductible.
Can I deduct volunteer time?
Although most charitable organizations would not survive without the time generously provided by volunteers, volunteers may not deduct the value of their time spent volunteering. However, volunteers can deduct their out of pocket expenses like the cost of gas for getting to and from the place where they volunteer.
What types of contributions can’t be deducted?
You cannot deduct money given to non-qualified organizations like civic leagues, social or sports clubs, labor unions, chambers of commerce or political groups or candidates. In addition, you cannot deduct the price you paid for raffle, bingo or lottery tickets. Finally, as mentioned above you cannot deduct the value of your time or services you provided.
In addition, tuition costs to parochial schools cannot be deducted. Why? You are not voluntarily giving the money to the school and you expect something substantial in return from the money you gave (education of your children).
How Much Of Your Contribution to a Charity Can You Deduct?
The amount you can deduct depends on whether or not you receive a benefit in return for your contribution. You can deduct the full amount of your contribution unless you receive a benefit from the organization in return. If you do receive a benefit, the amount of the contribution must be reduced by the value of the benefit you received in return.
For example, you pay $100 for a ticket to a charitable organization’s annual gala. The fair value of the ticket is actually $40 (for food, etc.). As such, your deductible contribution is $60, assuming you intended the excess over the fair market value to be a charitable contribution.
What about amounts paid for auction items at charitable events? Can you deduct the full amount paid?
No. You can only deduct the fair market value of the property you won at the auction. For example, let’s say you paid $300 for sports memorabilia at a charitable auction:
If the fair market value of the sports memorabilia is actually $500, you cannot deduct anything since the amount you paid is less than the fair market value of the item.
If the fair market value is $200 for the sports memorabilia, then you can deduct $100 (the difference between what you paid less the actual value of the item). You paid more for the item than the fair market value of the item. This assumes that you intended to make the amount paid over the value of the item a charitable contribution.
How do I know the fair market value of goods or services provided?
Most tax exempt organizations have an obligation to tell you the value. If you make a contribution for $75 or more that is partly for goods and services and partly as a contribution, most organizations must provide a written disclosure statement that 1) tells you that your deductible contribution is limited to the excess money over the value of the goods or services provided, 2) provides a good faith estimate of the fair market value of the goods or services and 3) is given to the contributor when the contribution is solicited or received.
How do I determine the value of donated property?
Contributions of typical types of property are generally valued at the fair market value of the property at the time the contribution was made. You cannot deduct the amount you paid for the property. Certain types of property have special rules.
The most common types of donated property are clothing, household items and vehicles. The amount that can be deducted is generally the fair market value of the property at the time the contribution was made, provided that the property donated are in good used condition or better.
Household Items Include: furniture, electronics, appliances, furnishings, linens and similar items.
Household Items Are Not: food, paintings, art objects, antiques, jewelry and gems or collectible items.
How do I determine the fair market value of my donated clothing or household items?
Unfortunately, the fair market value of the item is typically much less that you paid for the item when it was new. Although there are no set rules or formulas on coming up with an item’s fair market value, check what buyers might pay for similar items in used clothing or furniture stores. Using a percentage of what you paid for a replacement item is not a permitted formula. You should keep records on how you came to your valuation such as cancelled checks, photos, purchase receipts and the like.
How do I determine the fair market value of vehicle donations?
Attaining the value of vehicle donations, including cars, boats and airplanes is a little different. First, you need to find out what the organization plans to do with the vehicle. Do they intend to sell the vehicle? Use it in their charitable work? Make substantial improvements to the vehicle? Will they give the vehicle away or sell it for less than the fair market value to an individual in need?
If the charitable organization sells the vehicle, the amount you can deduct is either the gross proceeds gained from the sale of the vehicle or the vehicle’s fair market value, whichever is less. If the organization plans to make significant improvements to the vehicle or if it gives or sells the vehicle to an individual in need, furthering the organization’s charitable purpose, you can deduct the fair market value of the vehicle.
You should be able to determine what the organization intends to do with the vehicle based on the receipt or written acknowledgement that the organization gives you when they take the vehicle. If an organization takes a donation worth $500 or more, it must provide you with this written acknowledgement or receipt. For more on vehicle donations, see IRS Publication 4303.
What Kinds Of Records Should I Keep To Verify My Charitable Contributions?
The kinds of records you must keep depend on the type and amount of your contribution. This depends on whether the contribution was a cash contribution, non-cash contribution or a contribution of out of pocket expenses for donated services.
If you want to deduct your cash contributions, you must have either a bank record (like a cancelled check or receipt) or a written statement from the organization that states the organization’s name and the date and amount of the contribution.
If you make contributions via a payroll deduction, you will need to show a pay stub, W-2 or other document prepared by your employer showing the amount withheld and paid to the charitable organization on your behalf. You will also need a pledge card that is prepared by or for the charitable organization.
Contributions of $250 or more require special records in order to claim a deduction. You will require an acknowledgement from the charitable organization that states the amount of cash contributed, if you received goods or services in return for your contribution, and estimate of the value and description of the goods or services provided by the organization in return for your contribution. If you provided a contribution that gave you intangible benefits in return, the acknowledgment from the organization must state that you received these intangible benefits (like an intangible religious benefit). NOTE: This written acknowledgement requirement only applies to single contributions of $250 or more. You do not add the cumulative value of all contributions given over the course of a year.
The record keeping requirements for non-cash contributions are a little more involved. Different rules apply if your contribution is less than $250, between $250 and $500, between $500 and $5,000 and over $5000. If you plan to donate an item or group of similar worth over $5,000, you will need a written appraisal from a qualified appraiser. You can read more about the record keeping requirements for non-cash contributions in IRS Publication 526.
Are There Limits On The Amount Of Charitable Contributions You Can Deduct?
Yes. If your yearly contributions are more than 20% of your adjusted gross income the amount you can deduct may be limited. For example, if your adjusted gross income was $100,000 you would need to contribute $20,000 before any limits would apply. There are different deduction limits (20%, 30% and 50%) that apply depending on the type of organization you give to and the type of property you give. You can read more about deduction limits in IRS Publication 526.
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