Each year, roughly one-third of American households itemize deductions on their federal income taxes. If you're among that group, there are several important actions you need to take by year's end in order to take full advantage of available deductions.
For example, by December 31, 2011, you must pay for any uninsured medical expenses, state and local income and property taxes, and unreimbursed employee expenses you want to deduct from your 2011 taxes. You also need to decide how much you want to contribute to charitable organizations and either charge your credit or debit card or postmark a check by midnight on the final day of the year.
Here are a few tax-related issues and other matters to keep in mind when choosing how you'll make -- and report -- your charitable contributions:
Confirm the organization's tax-exempt status. The IRS revoked the tax-exempt status of approximately 275,000 nonprofit organizations because they hadn't filed annual reports for three consecutive years, as required by law. Although donations you may have made to those organizations prior to their being disqualified still count as tax-deductible, going forward, such organizations are no longer eligible to receive tax-deductible contributions unless they're reinstated by the IRS. Click Here to find out if any of your donations are affected.
Charitable auction purchases and donations. If you buy an item at a charitable auction, you're only allowed to claim a deduction for the amount you pay that's above its fair market value, so be sure to get documentation from the organization (e.g., a catalog showing a good-faith estimate). On the other hand, if you donate an item for a charitable auction, you're only allowed to claim your "tax basis" in the item -- that is, the amount you originally paid for it, vs. its current fair market value.
IRA distributions. For many, one of our tax code's downfalls is that unless you itemize deductions you cannot reap tax advantages from your charitable contributions. However, an important exception is made for senior citizens, many of whom no longer carry a mortgage and thus don't itemize deductions: People age 70½ or older may contribute up to $100,000 from their IRAs directly to charity and have it count toward their 2011 Required Minimum Distribution (RMD).
- A lower AGI could reduce taxes on your Social Security benefits.
- It could make you eligible for tax breaks that are tied to AGI.
- The contribution will lower your overall IRA balance, which in turn reduces the size of future mandatory distributions.
Choose wisely. Before making a donation or volunteering your time, make sure the nonprofit organization is well-run. Ideally the organization applies at least 75 percent of contributions to programs that serve its beneficiaries, as opposed to spending them on salaries, advertising, fund-raising and other administrative expenses. Study the organization's website and annual report and request a copy of its IRS Form 990, which details how contributions are spent. Speak to staff members or volunteers or, if you know someone who has used its services, ask for their impressions.
- The IRS' Tax Information for Contributors website features a search engine for eligible organizations, information on reporting and substantiating charitable deductions and other helpful tips.
- At GuideStar, you can review financial summaries and other data for more than 1.8 million IRS-qualified, tax-exempt organizations. Its basic search engine is free; or you can order more customized research for a fee. The site also features helpful questions to ask and tips for choosing a charity.
- Charity Navigator rates nearly 5,500 large charities by financial strength, revenue spent on programs and services and other criteria. Their Top 10 Lists and Tips for Donors provide helpful evaluation tools. You also can use their evaluation guidelines to formulate your own inquiries for smaller organizations not included in their ratings.
- Charity Watch, formerly known as the American Institute of Philanthropy, is a nonprofit charity watchdog and information service whose Charity Rating Guide (available for $3) rates more than 500 major American charities on how they spend donor money on scale of "A" to "F."
- The Better Business Bureau rates whether organizations have met its standards of accountability, including ethical conduct and honest solicitation practices.
- Ask whether your employer will match a portion of your contributions, and if it allows automatic payroll deductions to charities of your choice.
- You must have a receipt to claim deductions for cash or property, no matter how small. A cancelled check or credit card statement will suffice for contributions under $250, but amounts over $250 require a written statement from the charity. See IRS Publication 526 for details.
- Be wary of telemarketing and email solicitations for donations. When in doubt, hang up or delete the email and contact the organization yourself. And, be aware that scammers often choose names that are similar to those of legitimate organizations.
The personal rewards that come from donating your time and money to worthy causes certainly far exceed mere tax breaks, but still, it pays to know how the rules work in case you do qualify.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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