The Ins and Outs of Charity Tax Deductions
How Charity Tax Deductions Work
Charitable donations can reduce your tax bill, but they are only deductible if you itemize deductions when filing taxes. This means that you must list your deductible donations on Schedule A along with other items like medical expenses, real estate taxes, and student loan interest.
It is important to know how charity tax deductions work before making a large donation. This article will cover everything you need to know about this topic.
Donations of cash
If you donate cash, you must have a document from the charity to substantiate your claim. This can be a canceled check, bank statement or written acknowledgment from the charity. If you donate noncash property, the fair market value of the item must be documented by a third party. You must also prepare a list of the items donated and their values. If you receive any benefits or incentives for a donation, you must subtract their value from the total.
Generally, you can deduct only up to 60 percent of your adjusted gross income for cash donations to public charities. This limit applies to contributions made by cash, checks, credit cards and payroll deductions from your employer.
Despite wild fluctuations in tax policy, history suggests that charitable donations tend to increase with higher after-tax incomes and a growing economy. Moreover, these gifts fund activities that substitute for government activity and can promote healthy democracies. Nevertheless, some critics argue that the tax incentive for charitable giving has turned the charity into the province of the rich.
Donations of property
Donations of property can take many forms, including real estate and financial assets. However, they may be subject to more restrictions than cash donations. For example, a donation of appreciated real estate will only be deductible to the extent of the donor’s cost basis in the property. The same is true for donations of long-term securities.
In addition, donated properties can be subject to tax obligations if they have a mortgage. This could result in ordinary income or short-term capital gains. Donors can avoid these taxes by donating the property to a charity that is not related to them.
In order to claim these deductions, donors must itemize their deductions on Schedule A. Generally, it is more time-consuming and expensive to itemize than to take the standard deduction. This is why it is important to plan ahead and consider the impact of your charitable contributions before making a decision. You should also consult your tax advisor before filing your return to make sure you’re claiming all the eligible deductions.
Donations of personal property
If you donate property to charity, the IRS requires that you keep careful records to substantiate your donation. These records include a receipt from the charitable organization and, for donated property worth more than $5,000, an independent appraisal. This can be a complicated process, but it is important to plan carefully. Tax-planning strategies can help you get the most benefit from your donations.
Donations of property, including personal items, are generally deductible up to 50 percent of adjusted gross income (computed without regard to net operating loss carrybacks). For gifts of long-term capital gain properties, special limitations apply. A discussion of these limits may be found in Publication 526, Charitable ContributionsPDF.
However, the current tax law nearly doubled the standard deduction, so fewer taxpayers will itemize their deductions. Nevertheless, there are still many benefits to charitable giving. The tax deduction encourages giving by lowering the price that donors pay to support charities. Economists argue that a credit is a more efficient way to provide this subsidy.
Donations of vehicles
If you donate a car, you can claim a tax deduction for the fair market value of the vehicle. However, you have to itemize your deductions on Schedule A in order to take the deduction. This can be more time consuming and may require more expensive tax software, but it may reduce your tax bill more than the standard deduction. Some charities offer help with setting the value of donated vehicles, and you can also consult the IRS publication on this topic.
It’s easy to give away a junked car and get rid of it, but you should consider your goal carefully before you do so. For example, if you’re primarily looking to lower your taxes, then it may not make sense for you to donate the car. Be sure to consult with your tax preparer before donating any property. The rules for claiming charitable donations are complex and subject to change. The IRS has changed the rules for cars due to exaggerated deductions based on inflated book values.