Updated December 2016
Certainly good deeds are their own reward. But there’s no reason they can’t also come with a tax benefit from the federal government, which rewards philanthropy with an income tax deduction.
If you’re in a philanthropic state of mind this holiday season, and you follow a few simple rules, you may be able to deduct the value of cash and other property you donate to charity. But you’ll need to donate to a qualified charity and itemize deductions on your tax return.
Requirements for a Tax-Deductible Contribution to Charity
For federal tax purposes, charitable contributions are the documented donations of cash or other property you make to qualified charities without receiving goods or services in return.
The qualifying charitable contributions you make are deductible on your income tax return in the year you make them — again assuming you itemize. This means checks are deductible in the year in which the donation is made, regardless of when the check is cashed or clears the bank. If you deliver your check to a charity — or drop the check in the mail — in 2016, it’s deductible on your 2016 tax return.
Cash and Non-cash Contributions
You can make tax-deductible donations in the form of cash or other (non-cash) property.
Cash donations typically consist of checks, currency, electronic funds transfers, credit card donations, or payroll deductions. Property donations commonly include appreciated stock or securities, clothing, household items, art and cars.
There are special rules for certain non-cash contributions. For example, donations of clothing or household items — furniture, furnishings, electronics, appliances, linens and other similar items — generally must be in good condition or better to be deductible. The exception is an item worth more than $500 for which you have a qualified appraisal. In such a case the condition doesn’t matter.
Other special rules apply to donations of cars, boats, and planes and for taxidermy property, property subject to debt, partial interests in property, conservation contributions, and business inventory, among others.
To be eligible for a tax deduction, your donation must be made to a qualified charity.
The IRS maintains a searchable database — Exempt Organization Select Check — that lists many of the organizations eligible to receive deductible contributions.
Establishing the Amount of Your Contribution
If you’ve contributed cash, the value is obvious. If you’ve contributed property, it can be more problematical — and determining the value is your responsibility. A charity is not required to assign a value to any non-cash contribution it receives.
As a general rule, the value of a non-cash donation is equal to its fair market value. Where possible, you should have independent, written documentation establishing the market value of your non-cash contributions, as well as photos and original receipts where appropriate. If the total value of these contributions exceeds $500, you’ll need to include IRS Form 8283 with your tax return.
There are a number of tools available to help you establish the market value of your donations. ItsDeductible from TurboTax is available free either as an app or an online tool that tracks your donations and provides values for your donated items. The Salvation Army provides online valuation tables for donated clothing, furniture and household items, among others.
If you donate a car, boat, or airplane, your deduction is typically limited to the gross proceeds from the sale. You charity should provide you with a completed IRS Form 1098-C, to be attached to your tax return.
Substantiating Your Charitable Contribution
The rules for documenting your contribution depend on the amount and type of the donation.
Cash Donations Under $250
To document your donation, you’ll need either a record such as a canceled check, bank statement, credit card statement, pay stub or W-2 — or a written document from the charity that includes the name of the charity, the date, and the amount of the tax-deductible contribution.
Single Cash Donation of $250 or More
You must get a written document from the charity that includes the name of the charity, the date and amount of the donation, whether you received any goods or services in exchange, and a good-faith estimate of the value of any goods or services received.
Non-cash Donations Under $250
Ask the charity for a written document that includes as much of the following information as possible: your name, the date and location of the donation and a list of the items you donated. If you can’t get all of this information from the charity, keep you own written records.
Non-cash Donations of at Least $250 But Not More Than $500
For these non-cash donations, you must have a written acknowledgement letter from the charity that includes all of the above elements — plus whether there were any goods or services provided in return and, if so, an estimate of fair market value. Any single item worth at least $250 requires a separate acknowledgement. You must receive your acknowledgment letter(s) before the extended due date of your return or its actual filing date, whichever is earlier.
Non-cash Donations of More Than $500
In addition to a written acknowledgement letter from the charity, your records must also include how you acquired the property, the approximate date you acquired it, and its cost or other tax basis.
Non-cash Donations With a Total Value of More Than $5,000
You’ll generally need a qualified appraisal to support the value of your donations, except for donations of publicly traded securities.
Direct-from-IRA Charitable Contributions
You may be able to make tax-free distributions of up to $100,000 from your IRA to eligible charities. Such contributions do not qualify for a charitable tax deduction, but the IRA withdrawals are not included in your gross income — so there is no tax impact. However they do count as part of your IRA’s annual required minimum distribution.
To qualify under the special rule, you must be age 70 1/2 or older on the transfer date and your IRA trustee must contribute the funds directly to the eligible charity. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and SEP plans, are not eligible. Charitable distribution treatment only applies if the entire amount distributed would be otherwise deductible. If you receive any benefit from the charity, tax-free treatment doesn’t apply to the entire distribution. And, remember that not all charities are eligible.
Additionally, donations to donor-advised funds and supporting organizations do not qualify.
If you have questions, give us a call.
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