The holidays are a time when people think of those less fortunate. Many are coming together this season to help those in need, such as Hurricane Sandy victims and the poor.
While most give simply out of the goodness of their hearts, there also are tax advantages to giving.
In fact, according to the Congressional Research Service, charitable deductions are expected to reach $52 billion by 2014. You may find that these deductions could help you give more than you may have thought possible due to the tax savings you could receive.
The first step in the process is to understand what organizations are considered public charities or exempt organizations by the IRS as this ensures that your contributions can be deducted.
The Red Cross, United Way, Goodwill, Salvation Army, Boys/Girls Clubs of America, and Big Brothers Big Sisters would all fall into that category.
In addition, many religious organizations, war veterans groups, nonprofit hospitals, fire departments and schools also are generally exempt. It is always a good idea to visit the IRS charity search tool at https://apps.irs.gov/app/eos/ to confirm that the organization you are considering helping qualifies as an official charity.
Limitations
While there is no limitation to how much you can give, the IRS does limit the amount you can deduct for tax purposes.
Most public charities are known as 50-percent charities because you are limited to deducting 50 percent of your adjusted gross income per year. Depending upon the organization and the goods you are donating, the limit may drop to 30 percent or even 20 percent of AGI. However, contributions above the limit can be carried forward and used for up to five years.
Documentation
The documentation required to verify the gift will depend on the type and value of the donation.
Generally cash donations are the most straightforward to document — amounts less than $250 only require bank records such as a cancelled check as evidence.
However, cash contributions greater than $250 require bank records and a written acknowledgement from the charity specifying the date and amount of your contribution.
Some donors choose to contribute noncash items such as clothing, automobiles, collectibles, real estate and stock certificates.
The deduction associated with noncash items is based on the fair market value or the price the item would sell for in the open market on the contribution date.
For example, donations of used clothing to the Salvation Army would be based on the sale price for items of similar condition, which are generally substantially less than the original purchase price.
If your noncash contribution is $500 or less, you are required to retain documentation that proves the value of the items.
Noncash donations greater than $500 require the completion and attachment of IRS Form 8283 to your tax return. This form requires you to describe each item donated, recipient and information on the value of the item.
Finally, donations greater than $5,000 will require a qualified appraisal and the completion of section B on Form 8283.
Consider reviewing IRS “Publication 526:
Charitable Contributions and Publication 561 — Determining the Value of Donated Property” at IRS.gov for more information.
Additional Notes
Taking charitable deductions can be tricky and you may have to consider a few special circumstances.
For instance, many donations to charities based outside the United States are not deductible, so do your due diligence ahead of time. Remember that time spent working for a charity is not deductible, but other costs associated with donating your time such as supplies or vehicle mileage may be deductible. Again, be sure to keep excellent records.
Possible changes coming
Many tax laws are up in the air as we wait to see how President Barack Obama and Congress will act to minimize the “fiscal cliff” and charitable deductions are subject to change. Although 68 percent of Americans oppose a reduction of charitable deductions to help reduce the deficit, some of the plans being considered by Congress could affect allowable deductions. As a result, consider speaking to your tax adviser to determine if you should act before year-end to take advantage of any deductions before tax laws change.
Leveraging the deductibility of donations can help those in need while also reducing your tax liability on next year’s return. Since everyone’s tax situation is unique, consider speaking to your tax adviser and qualified charity to determine the right strategy for you.
Kurt J. Rossi, MBA, is a certified financial planner practitioner. He can be reached for questions at (732) 280-7550 or kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.
