You want to do the right thing and make charitable contributions to help your fellow man. At the same time, it is nice to get your own benefits by receiving corresponding tax breaks. You certainly can do both, but you need to take a few steps first as you consider which charities to support.
- Verify a Charity is Legitimate – Unfortunately, fake charities exist to take advantage of people’s good nature. Online research can separate the scams from legitimate operations. Note that sham organizations may have names or acronyms similar to well-known organizations; be sure that you have the exact name before searching (verify with the address, phone number, or other specifics).
Try searching for the organization’s website, check for complaints, and verify the organization with clearing house sites such as Charity Navigator or the Wise Giving Alliance put out by the Better Business Bureau. If you are unsure, don’t contribute.
- Look for Qualified Charities – The IRS maintains an updated list of “qualified” charities, meaning that contributions to that organization are tax-deductible. Most non-profit charitable organizations fit the criteria, but check the Exempt Organization Select Check on the IRS website just to be sure.
Legitimate churches and government organizations are eligible even if they do not appear on the list. If you are unsure, call the IRS for confirmation.
Once you have chosen a charity (or charities) and determined they are legitimate and qualified for tax purposes, you can make your contributions. As you do, consider the following:
- Research in Depth – Just because a charity is legitimate doesn’t mean that it is the best use of your dollars. Do more in-depth research to determine your comfort level. Does the charity’s mission, scope, and locations served fit your plans? How is the money used? How much goes toward overhead, and do they have unusual expenses? Be sure before you donate.
- Decide on Method/Type of Donation – Monetary donations are fairly straightforward. For all donations, you need some form of written record to be able to claim tax deductions, and above $250, it must be either an acknowledgement letter from the organization or records of payroll deduction if that is how the payment was made.
Non-cash contributions, anything from used clothing to jewelry or parcels of land, are typically assessed at fair market value for tax purposes. Higher value items will require an appraisal.
Non-cash contributions have escalating criteria of proof starting at $250 up to over $5,000, where an appraisal is typically necessary. See IRS Publication 526, Charitable Contributions, for details.
Larger and more complex methods such as charitable trusts, donor-advised funds, pooled income funds, and other methods of creating running donations should be set up with the assistance of a qualified tax advisor.
- Be Aware of Limits – As a deduction, the benefits you receive will be proportional to your tax rate. The total limit on deductible charitable donations is 50% of your AGI, although there are other specialized limits that may apply in certain cases. You may also be able to carry unused deductions for use in subsequent year’s taxes for up to 5 years. Again, see Publication 526 for details.
Higher income donors have other limitations to consider. The Pease limitation kicks in at an Adjusted Gross Income (AGI) of $254,200 for individual taxpayers and $305,050 for married couples, and limits itemized deductions to 3% of the dollar amount earned over the threshold up to an 80% cap on the total itemized deductions.
Any benefits (merchandise, tickets, services, etc.) received as part of the donation reduce your deductible amount by the value of the benefits.
- Keep Track – As fundamental as it may sound, make sure you keep track of all donations and the corresponding paperwork. No paperwork, no deduction. Use a spreadsheet if it helps.
To take advantage of your deductions, you will need to itemize them on Schedule A, and you will also need to file Form 8283 if you made total non-cash contributions valued at more than $500. For more complex charitable methods, other IRS forms may be required. Feel free to ask the MoneyTips professional advisers any additional questions you may have.
Those in need thank you for your charitable contributions – and when tax time rolls around, your wallet will thank you as well.