Are All Charitable Contributions Tax Deductible?
March 6, 2013
How can I figure out the tax benefit of my charitable contributions?
It feels great to give. It can feel even better if your gifts are tax deductible. The tax benefits can be particularly important for large donors who factor charitable giving into their overall financial plans. But even for individuals who have smaller amounts to give, the tax perks can be a nice plus.
However, your question is right on the mark, because the IRS has a variety of rules surrounding different types of giving—from gifts of cash and property to volunteering.
First, you can only deduct charitable contributions if you itemize deductions. This eliminates the tax benefit for a lot of folks right off the bat. The standard deduction for tax year 2012 is $5,950 for singles; $11,900 for married filing jointly. In 2013, it goes up to $6,100 and $12,200 respectively. If you think your itemized deductions will exceed that amount, then see if your charitable donations pass these other IRS deductibility hurdles.
Are you giving to a qualified charitable organization?
In general, an organization must be what the IRS has designated as a qualified organization for your contribution to be tax deductible (for public charities you can deduct up to 50% of your adjusted gross income; for private charities, 30%). The charitable organizations you think of most often—for example, churches, schools, hospitals, the American Red Cross, or Boys & Girls Clubs of America—are public charities. Private foundations, which generally support the work of public charitable organizations, are private charities. Donations to a political party or candidate, on the other hand, are not deductible.
Is your donation in an accepted form?
Whether or not your charitable contribution is fully tax deductible depends on its form. Here's a brief rundown of possible contributions:
- Cash—This is usually fully deductible, up to 50 percent of your adjusted gross income.
- Tangible personal property—This can include used clothing and household items, even cars. However, there are different deductibility allowances depending on the usefulness of the item to the charity. For instance, the current reasonable value of old clothing or household goods donated to Goodwill is usually fully deductible because it relates directly to the charity (as long as the items are in good condition). Similarly, if you donate a painting to a museum, you can deduct the painting’s full market value. But if an object doesn't relate directly to the charity (for example, if you donate a painting to a hospital), you may only deduct the amount you paid for it or its current reasonable value, whichever is less. Donating a car can be especially tricky if your claim is for more than $500. IRS Publication 4303, A Donor's Guide to Vehicle Donations is a good source of information.
- Ordinary income property—You can donate items created or used in a trade or business. For instance, an artist might donate a painting that would usually be sold for income. Stocks held for less than a year are included in this category. However, you can only deduct what you paid for the stock (up to 50% of your adjusted gross income), not the current market value.
- Long-term capital gain property—If you donate appreciated long-term assets such as stocks, bonds or mutual funds you've held for more than one year, you can usually deduct the full market value of your donation, up to 30% of your adjusted gross income. This amount is the average of the high-low price on the date of transfer. An added plus is that there's no capital gains tax.
Unfortunately, volunteer hours worked for a charity aren't tax deductible. But you can deduct out-of-pocket expenses related to your volunteer work, such as transportation.
Did you receive a benefit from the contribution?
If you receive a benefit from your contribution, you can only deduct the amount that exceeds the benefit. Let's say you pay $100 to attend a charity event that includes a dinner that would normally cost $25. You'd have to subtract that $25 from your contribution. Only the excess $75 would be tax deductible. If the value of what you pay and what you receive is equal—say you paid $250 at a charity auction for a night at a hotel and the fair market value for the room was $250—your contribution would not be tax deductible even though it was made at a charity event.
Have you kept the right records?
The type of records you need to keep depends on the type and amount of your contribution. For any cash contribution you need a receipt or corroborating bank record that includes the date, amount, and name of the charity.
Noncash contributions also require documentation. For a donation over $250, you need a receipt that shows the organization's name, date and place of the contribution, and a description of what you gave. If your combined contributions for the year are over $500, you'll need to file Form 8283 with your taxes; for noncash contributions worth over $5,000, you need a written appraisal. These things can be tricky, so if you're making large contributions, I'd check IRS publication 526 for details or talk to your tax professional
How much can you deduct?
For the record, there are limits on how much you can deduct—up to 50% of your adjusted gross income depending on the type of contribution and the type of organization. There is also a five-year carryover of any unused charitable deduction for a given year. This usually only affects large donors. Once again, check with your tax professional or IRS publication 526 for details.
While there's a lot to consider here, don't let it dampen your generosity. I encourage everyone to make charitable giving a part of their financial life, no matter the tax benefit. It not only feels good, it does good.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.