Every year you have to do your taxes! I hope that in the last calendar year you contributed to a charity in some way, shape or form.  If not, start contributing now for next year’s tax return.

How to pick your charity of choice

If you are contemplating making a charitable contribution, make sure you make smart choices to maximize the benefits.  For example, when picking a charity you should inquire as to how the nonprofit is spending your money. You would want at least 75% of a donation to go towards a program. You can inquire about actual amounts of aid distributed and how the charity is fulfilling its mission.  If you are donating cash, you should write a check directly to the charity because if you pay with a credit card, charities lose 2% to 3% processing fees to the card issuer.  If you are shopping, be on the lookout for stores that donate a percentage of your purchase to a charity.  If you can’t afford to give money to many different charities, the smart choice is to focus on one or two charities so that your donation will have a greater impact.  Moreover, if you do not have cash to donate, giving your time or physical goods such as canned food and gently used clothing can have just as much of an impact.  Also, you should watch out for scams, which use names that are confusingly similar to legitimate charities.

Charitable donations can be tax deductions

If you have donated to charity, apart from helping others and boosting your own health and emotional well-being, on a practical level, your donations to charity are tax deductible expenses that can reduce your taxable income and lower your tax bill.  So you are giving and getting back. In order to be tax-deductible, you must ensure that you: (1) actually donate cash or property; (2) contribute to a qualified tax-exempt organization; (3) be able to itemize; and (4) meet record keeping requirements.  It’s time to use your organization skills and keep excellent records of your charitable contributions!

For deductions less than $250, you must obtain a receipt or letter showing the organization name, location, donation date, and item description, and you must keep a written record of:

  • The name and address of the organization to which you made your contribution
  • The date and location of the contribution
  • A reasonably detailed description of the property
  • The fair market value of the property at the time of the contribution, and how you computed the fair market value
  • Your cost or basis in the property
  • Whether there were any terms to your donation

For deductions more than $250 but less than $500, you must meet all documentation requirements for donations of less than $250, and ask for and keep a written acknowledgment of your contribution, with the following information:

  • A description of the donated property
  • Whether you were compensated for your donation
  • A good faith estimate of donated goods

For deductions more than $500 but less than $5,000, you must meet all documentation requirements for donations of more than $250 but less than $500, and you must make a record of how you acquired the property, the date of acquisition, and your basis in the property.

For deductions more than $5,000, you must meet all documentation requirements for donations of more than $500 but less than $5,000, and you must get a written appraisal from a qualified appraiser.

Donated items, such as cars, clothing, and household goods, must be in good condition.  You cannot make a deduction if the items are less than in good condition.  You should keep a detailed list of the non-cash goods you donated to charity, along with a description of their condition.

What contributions are not tax deductible

There are, however, contributions that are not tax deductible.  For example, contributions to political parties, political campaigns, or political action committees, individual people, professional associations, labor unions, chambers of commerce, or business associations, for-profit schools and hospitals, and foreign governments; and the value of your time for services rendered to a non-profit.  Therefore, make sure that if you want to claim a charitable deduction that the charity or philanthropic organization you select is a tax-qualified organization under IRS rules.

Charitable purchases are only deductible in the amount exceeding the worth of the item purchased.  For example, if you attend a gala dinner for $1,000 for a charitable organization, the deductible amount is equal to $1,000 minus the fair market value of the dinner.  If the cost of the actual dinner is $100, then you can deduct $900.  You should keep all documents for any and all of your charitable cash contributions.  You should have receipts from the charity, a cancelled check, or credit card statement to prove the donation.  Even though you don’t need to mail in the receipts with your tax return, in the event the IRS decides to audit you, you will then be able to show supporting documentation.  Generally, household and personal items may be deducted at their fair market value. A good way to get the fair market value of an item is to determine what the item would sell for at a garage sale, flea market, or thrift store.

I hope these general tidbits help you maneuver your way through your charitable contributions this year.  You should definitely consult a lawyer or tax advisor if you have questions regarding your specific situation.  If you make smart choices and keep organized, everyone will be able to benefit from your charitable contributions!

NOTE: The information contained in this article is intended to provide general information and does not constitute legal or tax advice. The content is not guaranteed to be correct, complete, or up-to-date. This article is not intended to create an attorney-client relationship between you and the author, and you should not act or rely on any information in this article without seeking the advice of an attorney and tax advisor. First published in 2012.