These days, charities need your support more than ever. As you lend a helping hand, keep the following tax facts in mind.
The tax consequences of charitable gifts
- If you itemize, you may deduct cash contributions to qualified charities, as well as the fair market value of donated property.
- Contributions to religious institutions and large, national charities usually qualify for tax deductibility, while contributions to individuals don’t. If you have any doubts, check with the IRS to see if your charity is on the list of qualified tax-exempt organizations.
- When you donate brand-new merchandise or stocks and bonds that are publicly traded, it’s relatively easy to determine market value. But what’s the value of used clothing, furniture, or appliances? According to the IRS, you may take a deduction for used clothing and household items only if they are in “good” or better condition.
- The value of your charitable services is not deductible, but you can deduct out-of-pocket and incidental expenses. Example: You drive to a charity dinner, help out in the kitchen, and donate your favorite casserole. You can deduct the cost of the food and your charitable mileage, but not the value of your time.
- Instead of contributing cash, consider donating stock, mutual funds, artwork, or similar items that have increased in value. You may deduct the full market value of the property, and you’ll avoid paying tax on the built-in capital gain.
- With securities that have decreased in value, it’s better to sell the securities first and donate the proceeds. That way, you can deduct both your charitable contribution and your capital loss on the sale.
- If you plan to make a large contribution to charity, seek tax advice before rather than after making the gift in order to maximize your tax benefits.
Good recordkeeping is required
If you plan to claim a tax deduction for charitable contributions, you need documentation to support your gift. Here are the IRS requirements:
- Cash, check, and other monetary donations of any amount can be deducted only if substantiated by a bank record or written documentation from the charity.
- If you donate used clothing or household items, you may claim a deduction only if the items are in “good” or better condition.
- If you contribute property with a value above $500, your personal records must also include details of how and when you acquired the property and your cost basis in the property. Always get confirmation of your gift from the charity.
- If you donate an item or a group of similar items worth more than $5,000, all of the previous requirements apply, but you must also obtain a qualified appraisal. There are special exceptions for publicly traded stock and, in some cases, for nonpublic stock.
- If you receive anything of value in return for your donation (“quid pro quo” contributions), your deduction is limited to the difference between what you donate and what you receive. For all quid pro quo donations over $75, the charity must provide you with a written disclosure of the value of the goods or services provided and must indicate that the deduction is limited to the difference between the donation and the value stated.
Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.