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Six Rules for Deducting Charitable Contributions

5319988695_2c54d1530688% of American households donate to charities.  In 2012, individuals donated $223 billion, while foundations and corporations gave another $93 billion.  Why?  Mostly because they care about the organizations to which they donate, though tax deductions for charitable gifts may influence some people to donate, or donate more, than they would otherwise.

The IRS permits taxpayers to deduct the value of charitable contributions up to a certain limit (generally, the deduction cannot be more than 50% of your adjusted gross income, though lower limits may apply).  As a deduction, qualified charitable contributions reduce the amount of income subject to tax.  Here are six other rules you’ll need to know if you plan to claim the charitable contribution deduction.

  1. Not every donation counts as a deductible contribution.  A charitable contribution, per the IRS, is “a donation or gift to, or for the use of, a qualified organization.  It is voluntary and is made without getting, or expecting to get, anything of equal value.”
    Deductible contributions include:

    • Money or property you give to religious organizations; federal,  state, and local governments (if your contribution is solely for public purposes); nonprofit schools and hospitals; qualified organizations like The  Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, and others; and war veterans’ groups.
    • Expenses paid for a student living with you, when that student is sponsored by a qualified organization.
    • Out-of-pocket expenses when you serve as a volunteer for a qualified organization.

    Donations that are not considered deductible contributions include:

    • Money or property you give to civic leagues, social and sports clubs, labor unions, and chambers of commerce; foreign organizations (except certain Canadian, Israeli, and Mexican charities); groups that are run for personal profit; groups whose purpose is to lobby for law changes; home-owners associations; individuals; and political groups or candidates for public office.
    • The cost of raffle, bingo, or lottery tickets.
    • Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups.
    • Tuition
    • The value of your time or services.
    • The value of blood given to a blood bank.
  2. Not every nonprofit is a qualified organization.  The IRS rules stipulate that a charitable contribution is one given to a qualified organization, which includes nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.  Fortunately, you don’t have to discern which organizations qualify from the IRS’ vague definitions; the IRS keeps a list of qualifying organizations at:
  3. If you want to deduct charitable contributions, you have to itemize.  The IRS gives taxpayers two options for deducting certain types of expenses from income.  One option is to take the standard deduction, which in 2014 is $6,200 for most taxpayers ($12,400 for those filing jointly).  The other option is to itemize deductions, which means you actually list all of qualifying expenses and deduct them from your income.  Common deductions include mortgage interest and charitable contributions.
  4. You must have a record.  Every time you make a contribution to a qualified organization, get a receipt.  If your donation is a monetary gift, you need to keep a bank record, payroll deduction record, or a written communication from the organization containing the name of organization, the date of the contribution, and the amount.  If you donate items rather than money, the organization needs to list each item donated, its condition, and its fair market value.  For donations of property valued at $500-$4,999, you must also have a record of when and how you got the property.  For donations valued at more than $5,000 you will also need an official appraisal.
  5. You can deduct unreimbursed out-of-pocket expenses and mileage when you’re volunteering, but you can’t deduct the value of your time.  If you donate to charity by volunteering your time and/or talents, you can deduct out-of-pocket expenses if the organization hasn’t reimbursed you.  You can also deduct the cost of transportation to and from the location where you volunteered (if you drive, you can either compute actual costs or use the standard rate of 14 cents a mile).  You cannot, however, deduct the value of the time you spent volunteering; nor can you deduct the expense of childcare.
  6. If you receive something in return, you have to deduct its value.  IRS rules define a charitable contribution as one that you make without expecting to get anything of equal value in return.  However, organizations will often provide incentive for individuals to donate –meals out, tickets to a sporting event, a t-shirt, etc.  If you received anything in return for your donation, you must subtract the value of what you received from the amount of your donation.  For example, if you donated $100 to qualified organization and you received a $20 t-shirt in exchange, you can only deduct $80.

Whatever motivates you to give to charity, deducting your charitable contributions can help reduce your tax liability.

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