Americans can be some of the most generous persons on earth. What we see in times of disaster, like Superstorm Sandy, is that people come together and can be incredibly generous with their time and money. Some people volunteer, some cook warm meals for their neighbors and some make donations. But tragedy is not the only time we see Americans giving to those less fortunate. On average, almost one quarter of charitable donations occur during the holiday season (also known as year-end giving). While taxes may not be what taxpayers are thinking of when they are writing out a check to the American Red Cross, for example, the ability to receive a deduction on taxable income for their generosity is a unique privilege to American taxpayers.
However, not all charitable contributions are equal under the tax code. To be tax-deductible, charitable donations must be made to a qualified organization, and for the purpose of taxes there is a big difference between giving money, goods and time.
To get you started, here are four things all American taxpayers should know about claiming charitable contributions on an income tax return:
- What the IRS considers a charitable contribution -- A charitable contribution is tax deductible if the donation or gift is made to a qualified organization. Taxpayers can visit www.irs.gov to view a list of qualified organizations. To be deductible, the donation must be voluntary and made without receiving anything of equal value in return. Charitable contributions can include money or property given to a qualified organization as well as certain out-of-pocket expenses accrued when serving as a volunteer.
Tax deductible contributions do not include the cost of raffle, bingo or lottery tickets, the value of donated time or services or the value of donated blood, even if given to a qualified organization.
- What documents are required to deduct a charitable contribution -- Taxpayers are required to keep records and receipts for all charitable contributions regardless of the amount or value. A bank record or a receipt from the organization is required for all cash contributions, and a separate, written acknowledgement from the qualified organization is also required to claim the deduction for any single cash or property contribution of $250 or more.
- When charitable contributions can be deducted -- Charitable contributions can generally only be deducted for the income year in which they are made. Contributions sent by mail are considered made on the date they are postmarked. Some contributions that are not able to be deducted in the current tax year (because of adjusted gross income limits) may be carried over to future years.
- How to deduct non-cash charitable contributions -- Clothing, toys, furniture or other household items donated to a qualified organization allow taxpayers to deduct the fair market value of the donated items. To qualify for the deduction, all items must be donated in good condition. The IRS does not provide a guide to determine fair market value; instead, taxpayers must survey thrift and consignment stores for similar items to provide an indication of fair market value. IRS Publication 561, Determining the Value of Donated Property, provides general IRS guidelines on noncash donations. Generally, the deduction for property contributed is equal to the fair market value of the property at the time of the contribution. However, different rules may apply if the value of the property has increased or for vehicle donations.
As history has shown us, people rarely donate money, goods, property or time purely for tax deduction purposes. They donate because it is the right thing to do, it helps people who need it and also because it feels good to help others.
The IRS and the tax code look very favorably on those who donate to charitable organizations, among other places. So while you are donating to charities in need, be sure to observe the charitable donation tax rules, largely record-keeping, and maximize that tax deduction and do something nice for yourself -- like getting a bigger tax refund for your good deed efforts.