Everything you need to know about tax deductions for charitable donations
Since no good deed goes unpunished, the federal income tax rules for deducting personal charitable donations are complicated. Here’s what you need to know to claim your rightful deductions:
Charitable deduction basics
Depending on the type of charity and whether you contribute cash or other stuff, your charitable write-off can potentially be limited to 20%, 30% or 50% of your adjusted gross income (AGI). AGI is the number at the bottom of Page 1 of your Form 1040. It includes all taxable income items and selected write-offs such as the ones for alimony paid and moving expenses. Contributions that exceed the applicable AGI limit can be carried over for up to five years and hopefully deducted in those future years.
Documentation requirements You can only deduct donations for which you have the required documentation. Here are the details on the documentation rules.
Cash donations under $250 To deduct a cash donation of $250 or less, the best proof of your generosity is a canceled check or credit card statement. Preferably, you should also get a receipt from the organization showing its name, the date and place of the contribution, and the amount given. For small cash donations, say to your church when attending weekly services or to the Salvation Army around the holidays, keep a log to satisfy the IRS.
Noncash donations under $250
To deduct the donation of a noncash item worth less than $250, you need a receipt — like the familiar slips you get for donations to Goodwill. The receipt should show the organization’s name, the date and place of the donation, and a description of what you donated. You may have to fill in most of this information yourself. You must also place a value on the donated item(s). Finally, you must have the receipt in hand by the time you file your return to claim your rightful deduction.
Cash donations of $250 or more
To deduct cash donations of $250 or more, canceled checks or other evidence supplied by you is not good enough for the IRS. Instead you must collect from the charity a contemporaneous qualified written acknowledgment (more detailed than a simple receipt) that meets IRS guidelines. You need to have this acknowledgment in hand by the time you file your return in case you get audited. If you do get audited and don’t have it, you lose the deduction even though there may be no doubt you made the donation.
An acknowledgment meets the contemporaneous requirement if you obtain it on or before the earlier of: (1) the date you file your Form 1040 for the year you made the donation or (2) the due date (including any extension) for filing that return. If you don’t have a qualified acknowledgment in hand by the applicable magic date, you won’t be able to get credit for your charitable deduction.
Noncash donations of $250 to $5,000
To deduct a donated noncash item worth $250 to $5,000, you need a contemporaneous qualified written acknowledgment plus written evidence that supports the item’s acquisition date, its fair market value, how much it cost, and so forth. You’ll need this information to fill out IRS Form 8283 (see below). Keep the acknowledgment and the written evidence (which may simply be notes that you’ve prepared yourself) with your tax records, but don’t file them with your return.
Key point: If your total noncash donations for the year exceed $500, you must fill out IRS Form 8283 (Noncash Charitable Contributions) and include it with your return.
Noncash donations of more than $5,000
To deduct the donation of an item valued at more than $5,000, you generally must collect a contemporaneous qualified written acknowledgment, file Form 8283 with your return, and obtain a qualified written appraisal for the item. You must have the appraisal in hand by the time you file your return. Stricter appraisal rules apply to contributions of artwork worth $50,000 or more. You can write off the appraisal fee as a miscellaneous itemized expense that is subject to the 2%-of-AGI deduction threshold.
Key point: No appraisal is required for donations of publicly traded securities.
Donations of clothing and household items
For donated clothing and household items (such as furniture, furnishings, electronics, and appliances), all the preceding documentation rules apply. In addition, the general rule for these items says you can only claim deductions for stuff that is in “good condition or better.” However, you can deduct the fair market value of an item that is not in good condition or better if you attach a qualified written appraisal that values the item at more than $500. For example, this rule might apply to a donated antique that’s fairly valuable despite being in not-so-great condition.
Donations of appreciated securities
When you contribute appreciated securities, please be sure to give away only those you’ve owned for more than one year. That way you can deduct the full market value and permanently avoid any capital gains tax on the appreciation. In contrast, when you donate appreciated securities you’ve held for 12 months or less, your deduction is limited to the cost of the securities, which may be much lower. As mentioned earlier, no appraisal is required for donations of publicly traded securities.
Donations of vehicles, boats, and planes
You’ve probably heard many radio and TV ads asking for charitable donations of used vehicles. In addition to all the aforementioned documentation guidelines, special rules apply to donated motor vehicles, boats, and planes.
For a vehicle (or boat or plane) valued at $500 or less, you can deduct the fair market value (FMV). If the FMV exceeds $500 and the charity simply sells the vehicle (or boat or plane), your deduction is limited to the sale price. Since charities often sell donated vehicles at used car auctions, the sale price might be significantly less than FMV. On the other hand, if the charity uses the vehicle in its tax-exempt purpose (for example, to deliver items to the needy), you can deduct the full FMV. Ditto if charity makes significant improvements to the vehicle (for example, rebuilding the engine or transmission). Minor dent removal and a paint job don’t count as significant improvements. No deduction is allowed for donating a vehicle (or boat or plane) for which the claimed value exceeds $500 unless you receive a contemporaneous qualified written acknowledgment from the charity. Usually, the charity will supply you with IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) as the acknowledgment. Limitation on deductions for noncash donations
If you contribute a noncash item (other than securities), your deduction is limited to the item’s tax basis (generally what you paid for it) unless the item is used in the charity’s exempt purpose. For example, if you donate a painting with a basis of $2,000 and a FMV of $75,000 to a children’s shelter, your deduction will be only $2,000. But if you donate the painting to a museum that will display it in a gallery, you can deduct the full $75,000 FMV. Big difference!
Phase-out rule for high-income individuals
Unfortunately, itemized deductions for charitable donations are affected by a phaseout rule that can potentially wipe out up to 80% of your otherwise deductible amounts. (This phaseout rule also affects itemized write-offs for home mortgage interest, state and local taxes, and most miscellaneous deduction items.)
For the 2015 tax year, the phaseout rule kicks in when adjusted gross income (AGI) exceeds $258,250 for singles, $309,900 for married joint-filing couples, $284,050 for heads of households, and $154,950 for married individuals who file separate returns. AGI is the number at the bottom of Page 1 of your Form 1040. It includes all taxable income items and is reduced by selected write-off such as alimony paid and moving expenses.
Under the phaseout rule, the total amount of affected itemized deductions is reduced by 3% of the amount by which AGI exceeds the applicable threshold. However, the reduction cannot exceed 80% of the affected deductions that you started off with.
Key point: Most folks are untroubled by the itemized deduction phaseout rule, and even when it does apply it does not make a big difference unless you are really raking it in.
Itemizing versus claiming standard deduction
You can claim either the applicable standard deduction or itemized deductions, but not both. If you have enough itemized deductions to exceed your standard deduction amount, you should itemize using Schedule A (Itemized Deductions), which is filed with your Form 1040.
If you don’t have enough itemized write-offs, claim the standard deduction. For 2015, the standard deduction amounts are $6,300 for singles, $12,600 for married joint-filing couples, $9,250 for heads of households, and $6,300 for married individuals who file separately.