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Giving to charity can make you feel good. And it can save you money on your income taxes, because the IRS lets you deduct qualifying charitable contributions. How can you be sure your contribution qualifies?
First, you can't deduct charitable contributions unless you itemize your deductions, and when you do itemize, you need to make sure your contribution meets the IRS requirements. Among the things to consider:
- Make sure you are contributing to a qualifying charity. Not every organization that looks like a charity is OK with the IRS. Be especially wary of groups with names that are very similar to the names of well-known charities. You can't deduct gifts to most foreign entities or to individuals. You can find a list of IRS-qualified charities on the IRS Web site.
- Place the proper value on your contribution. The IRS has significantly tightened its oversight of valuation of charitable gifts. No longer will the giver be able to report the value. In order to claim the deduction, it is now necessary to document the value of the gift. Obviously, if you write a check you know how much value to assign to your contribution. But what if you drop spare change in the collection plate at church, or you donate used clothes, books or your old computer? You need a receipt from the organization, or you need to be able to provide other documentation or a detailed list of the contributed items, with reasonable values attached for each item. And, the IRS says you can only deduct the value of "usable" items, so those jeans with the ripped-out seat should go in the trash, not to the Salvation Army.
- Big donations need more documentation. Any item valued at more than $5,000 now requires a written appraisal. No longer will the IRS accept simply a receipt from the charity. Note, however, that the IRS considers each donation to be separate, even if you make several donations to the same charity. So, for example, if you make five $100 memorial donations to the American Cancer Society over the course of the year, those count as five $100 donations, not one $500 gift.
- Really big non-cash donations require you to file a supplementary form with your taxes. If you make a single gift of more than $500, check with your tax adviser or the IRS about what additional paperwork you need to file.
- What about cars? The rules for donating cars have changed – and not for the better. You used to be able to deduct the fair market value of a vehicle you donated to a charitable organization. Now, though, your deduction depends on what the organization does with the car. For example, if the car is sold, you can deduct only the amount of profit the organization made from the sale. Both you and the charity have to fill out extra paperwork for vehicle donations.
- Know when you can't deduct everything. For example, if you buy a ticket to a charitable dinner or a membership that includes a magazine, you cannot deduct the part of your contribution that represents the value of the dinner or the magazine – even if you don't attend the dinner or read the magazine. The charity usually will tell you how much of your contribution is deductible. If they don't, then ask. If you do volunteer work, you cannot deduct the value of your time. However, you can deduct any out-of-pocket expenses you have, including transportation.
- You can deduct the contribution in the tax year in which it was made. If you make your contribution by credit card, you can deduct it when it is charged to the card, regardless of when you pay the bill.
For additional information, contact your tax adviser.