Donations are a terrific way to give to a worthy charity, and they also give back in the form of a tax deduction. Unfortunately, charitable donations are under scrutiny by the IRS, and many donations without suitable documentation are rejected. Here are six things you need to do to make sure your charitable donation will be tax-deductible.
Remember, charitable giving can be a valuable tax deduction — but only if you take the right steps.
As the year comes to an end, there are several tax-saving ideas you should take into consideration. Use this checklist to ensure you don't miss an opportunity before the year is over.
With U.S. equity valuations near historically high levels, now may be an opportune time to take advantage of the tax benefits of donating long-term appreciated stock to a qualified charity. Directly donating a winning stock you've held for at least one year provides greater tax benefits than writing a check to your favorite cause.
Higher deduction. Your charitable gift deduction will be equal to the market value of the stock on the date of your donation, rather than what you originally paid for it.
No capital gains tax. You avoid paying capital gains tax on the unrealized gains of the stock, because it is transferred directly to the charity rather than sold. That also means the charity gets a bigger gift.
Example: John Diaz bought 50 Wonka Industries shares two years ago at $100.00 a share, and its shares have appreciated since then to $150.00 a share, giving him a long-term capital gain of $2,500 if he were to sell today. Instead, John avoids the capital gains tax by donating the shares to the Red Cross, and he deducts the full market value of $7,500 as an itemized deduction on his tax return.
Some tips to keep in mind:
Tips on Making Charitable Contributions:
Another long-standing type of deception involves scams that happen in the wake of natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned donors. Scam artists use a variety of strategies. Some scammers operating bogus charities may contact people by telephone or email to ask for money or financial information.
Before you give, utilize Select Check on the IRS website to determine if a non-profit is real or not.
The time to file taxes is growing closer. Don't just sit and wait for the inevitable. There are things you can do now to prepare.
Last Minute Deductible Donations
If you're like most taxpayers, December 31st is the final day to take actions that will affect your 2016 taxes. For instance, charitable donations are deductible in the year they were contributed. Donations charged to a credit card prior to the end of 2016 count for the 2016 tax year, even if the bill isn’t paid until 2017. If you write a check, it will count for 2016 as long you mail it by the last day of the year.
If you are over the age of 70 ½, you are usually required to take payments from your individual retirement accounts and workplace retirement plans by the end of 2016. Most workplace retirement account contributions should be made by the end of the year, but you can make 2016 IRA contributions until April 18, 2017. For 2016, the limit for a 401(k) is $18,000. For traditional and Roth IRAs, the limit is $6,500 if age 50 or above and up to $15,500 for a Simple IRA if you are 50 or older.
Did You Move?
If you moved during 2016, make sure to tell the IRS. To do this, send IRS Form 8822 (the “Change of Address” form) to the address included in the form’s instructions.
Did Your Name Change?
If you were married or divorced in 2016 and your name changed, let the Social Security Administration (SSA) know so the new name will match in IRS and SSA records. Do the same for any name changes of your dependents. A mismatch between the name on your tax return and the name the SSA has on file for you can result in issues processing your return, and might actually slow down your refund.
Make Sure You're Saving Copies of Your Tax Returns
If you haven’t kept copies of your tax returns in the past, you’ll want to start doing that now. The IRS is making changes to help guard taxpayers and validate their identities. For example, you might need to know your adjusted gross income amount from a previous tax return to confirm your identity.
As tax filing season approaches, it's important to remember that taxpayers who give money or goods to a charity by Dec. 31, 2016, may be able to claim a deduction on their 2016 federal income tax return and reduce their taxes.
Only donations to eligible organizations are tax-deductible. IRS Select Check on IRS.gov is a searchable online tool that lists most eligible charitable organizations. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations even if they are not listed in this database.
Claiming Charitable Donations
Only taxpayers who itemize using Form 1040 Schedule A can claim deductions for charitable contributions. Charitable deductions are not available to individuals who choose the standard deduction or file Form 1040A or 1040EZ. Most tax software will alert taxpayers about the tax savings available if their itemized deductions, such as mortgage interest, charitable contributions, state and local taxes, exceed the standard deduction.
A bank record or a written statement from the charity is needed to prove the amount of any donation of money. Bank records include canceled checks, and bank, credit union and credit card statements. Donations of money include by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
For donations of clothing and other household items the deduction amount is normally limited to the item’s fair market value. Household items include furniture, furnishings, electronics, appliances and linens. Clothing and household items must be in good or better condition to be tax-deductible. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed. Special rules apply to cars, boats and other types of property donations.
Benefit in Return
Donors who receive something in return for their donation may have to reduce their deduction. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.
Older IRA Owners Have a Different Way to Give
IRA owners, age 70½ or older, can transfer up to $100,000 per year to an eligible charity tax-free. Funds must be transferred directly by the IRA trustee to the eligible charity. For details, see Publication 590-B.
The type of records a taxpayer needs to keep depends on the amount and type of the donation. An additional reporting form is required for many property donations and an appraisal is often required for larger donations of property.