When it comes to charitable giving, Uncle Sam believes one good turn deserves another. But while the Internal Revenue Service allows you to deduct your charitable contributions, the amount of your deductions may be limited, and you must follow a number of strict rules. First and foremost, you must itemize your deductions on your federal tax return by using Form 1040-Schedule A.
To avoid being taxed for your own generosity, also keep these guidelines in mind:
Know your limits. Depending on whether you contributed cash or property, the amount of your deduction may be limited to 20, 30 or 50 percent of your adjusted gross income.
Get receipts. The IRS requires receipts for gifts worth $250 or more; a canceled check is not sufficient documentation. If you donate personal possessions instead of cash--clothes or furniture, for example--you can take a deduction for the property’s fair market value, the price at which property would change hands between a willing buyer and seller.
Used clothing and household goods usually have a fair market value far below their original cost. Consult IRS publication 561: Determining the Value of Donated Property for information on how to properly value donated possessions. (You can also request a free copy by calling the IRS at 1-800-TAX-FORM.)
Document your donations for tickets to charitable events. When you buy a ticket to a charitable event, the entire price of the ticket is not deductible. For example, if you buy a $100 ticket to a charitable event and receive a $25 meal in return, the charity is required to give you a statement noting that the deductible portion of the gift is $75.
Donate stock that’s appreciated in value. This is a win-win move. Donate stock and you won’t have to pay capital gains taxes on the profits, and the full value of the stock can be deducted as a charitable donation.
For example, say you own $10,000 worth of stock that you originally bought for $3,000. If you sell it now, you’ll pay tax on the $7,000 profit. (If you’re in the 28 percent federal tax bracket, and qualify for the 20 percent long-term capital gains rate, you’d pay $1,400 in tax. That reduces the $10,000 to $8,600.)
But if you give your $10,000 worth of unsold stocks to a charity, the IRS kindly lets you claim a tax deduction for the full $10,000. At the 28% tax bracket that works out to a $2,800 deduction.
Consider a charitable remainder trust. In this move, a charity accepts your gift of assets, such as appreciated stock, through a trust (you get a tax write-off for the present value of the asset in the year you transfer it). The trust then pays you a stream of income, such as the dividends received on the stock, for your lifetime or for a set number of years, depending on the terms of the trust. After you die, the principal goes to the charity. An accountant or tax attorney can help you set up a charitable remainder trust. |
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