Tax Tips for Charitable Giving

April 1, 2015

piggy bankOnce again, it's that time of year we'd all much rather avoid: tax season. Perhaps one silver lining of having to deal with filing taxes is the potential to get breaks from them.

Donating to charity isn't only an opportunity to make a positive impact but is also a means of reducing the amount in taxes you owe each year, making the twofold benefits of charitable giving all the more appealing.

Making Your Gifts Count

While contributions made to qualified organizations may help lower your bill, a tax deduction isn't necessarily guaranteed simply because you're feeling generous. As with anything tax-related, understanding certain guidelines will help you know how to stay in the clear and make your donations count:

Choose wisely. Donations are deductible only when they are made to qualified organizations, which generally means they classify as 501(c)(3) public charities under the IRS Tax Code. Contributions to individuals, foreign governments, foreign charities and some private foundations are not deductible. However, religious entities—such as churches, synagogues, temples and mosques—are considered de facto organizations and are therefore eligible to receive deductible donations. If you're unsure whether an organization qualifies, ask to see its IRS exemption letter or search the IRS exempt organization database.

Document everything. You must be able to substantiate the value and/or the amount of your donation. For cash contributions, you must have a written acknowledgement, such as a bank record, canceled check or a receipt with the name of the charity along with the date and the amount of the gift. For text message donations, have a phone bill that shows the name of organization, the date of the contribution and the amount given. For donated goods, you can generally take a deduction for the fair market value of the items. If self-documenting an item valued at less than $500, be as specific as possible by noting the description and condition of the items. If your total deduction for all noncash contributions for the year is over $500, you must attach IRS Form 8283 (Noncash Charitable Contributions) to your return. If contributing property valued at over $5,000, you must complete Section B of IRS Form 8283 and obtain a qualified written appraisal of the property's fair market value.

Consider your appreciated assets. Donating property that has appreciated, such as stocks, has a double benefit in that you get a deduction for its fair market value and you won't be taxed on capital gains, so long as you have owned the donated property for one year. With this in mind, consider making donations of appreciated assets as opposed to selling certain items then donating the proceeds. For information on determining value, refer to IRS Publication 561.

Pay attention to your payroll. More and more employees are relying on giving opportunities made available through their employer. If you make contributions via payroll deduction, you must retain a pay stub, W-2 form or other documentation from your employer that shows the total amount withheld for charity along with the pledge card bearing the charity's name. For federal workers, a Combined Federal Campaign pledge card will meet these requirements.

Your time is priceless. Unfortunately, your time is literally priceless—as in worthless—for the sake of charitable deductions since the IRS doesn't allow deductions for simply volunteering your services. You are, however, allowed to deduct unreimbursed out-of-pocket expenses pertaining to volunteering, such as transportation or travel costs, parking fees, or clothing or supplies related to your charitable service. As with all other donations, keep good records.

Watch the calendar. Timing is everything with contributions since they are deductible only in the year they were made. So gifts must be made by December 31 in order to qualify for the current tax year. Fortunately, even if no payment is made until later, credit card charges are still deductible so long as the charge was made prior to the end of the year. Similarly, uncashed checks written and mailed before the end of the year still qualify.

It's important to realize that tax rules are constantly changing, and it's essential to keep up in order to take maximum advantage of any breaks, understand special rules and realize limitations. For more information on charitable contributions, refer to IRS Publication 526. You can also visit the IRS website, call 800-TAX-FORM or subscribe to receive IRS tax tips.