When Hurricane Katrina hit on August 31, 2005, the local, state and Federal government officials just plain blew it. But Americans didn't. Within days, millions of dollars were pouring into charities with dedicated resources to help the victims of the devastating storm. Tractor trailers were loaded up all over the country with bottled water, food, diapers, clothes and other essentials to make the trek to the Gulf Coast region to provide for the needs of the tens of thousands of homeless evacuees. The tragedy may have brought out the worst in government responsiveness, but it certainly brought out the best in Americans.
The United States has a rich tradition of philanthropy dating back to our founding fathers (and mothers) that continues to flourish today. According to the American Association of Fundraising Counsel (AAFRC), charitable giving rose five percent in 2004 to a record level of $248.52 billion. "About 70 to 80 percent of Americans contribute annually to at least one charity," says AAFRC chair C. Ray Clements. "Being a 'philanthropist' does not merely mean making huge gifts; it means giving to any cause that you value."
While charitable giving is encouraged in our country in the form of tax deductions, there are rules that must be followed to properly claim and account for these deductions. If you plan on deducting charitable contributions from your tax return this year, here are five things you need to know when it comes time to file your return.
Basic rules for charitable contributions
The first important rule for deductions pertains to who can claim charitable contributions. An individual can claim charitable contributions as long as the long form (1040) is used and a Schedule A is completed to document the deductions. A business entity organized as a C-Corporation may also deduct charitable contributions. A Subchapter-S Corporation, however, may not deduct charitable contributions. So, if your small equipment rental business has the legal designation of a Subchapter-S Corporation, you will need to make all of your charitable contributions in your individual name.
Second, you may only deduct contributions made to qualified organizations. According to the Internal Revenue Service, qualified organizations include non-profit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. Other organizations that can achieve qualified status include those supporting national and international amateur sports, war veterans, fraternal societies, non-profit cemeteries and a state or Indian tribal council government (if the gift is for public use such as a park or hospital). An organization can tell you if it meets the qualifications imposed by the IRS to accept tax-deductible donations. If you want to independently verify the qualifications of a non-profit organization, you can check out IRS Publication 78 at your local library or online (www.irs.gov), or you can call the IRS directly at (800) 928-1040.
Third, there are limits on the total amount that you can deduct in a tax year. In nearly all cases, total deductions are limited to 50 percent of your adjusted gross income on your individual tax return. In a few cases, however, deductions are limited to 30 or 20 percent. For more information on these additional limitations (they generally pertain to capital gains or the type of organization), check out the IRS web site at www.irs.gov.
In addition to requirements governing qualified organizations, the IRS has rules around what can and cannot be deducted. You may deduct money or property you give to:
- Churches, synagogues, temples, mosques and other qualified religious organizations
- Federal, state and local governments, if your contribution is solely for public purposes (i.e. to reduce the public debt)
- Non-profit schools and hospitals
- Public parks and recreation facilities
- Charities such as Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, etc.
- War veterans' groups
Additionally, you may deduct expenses paid for a student living with you, sponsored by a qualified organization and out-of-pocket expenses incurred while serving a qualified organization as a volunteer.
Likewise, the IRS provides a list of non-deductible charitable contributions. You may not deduct 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 whose purpose is to lobby for law changes
- Homeowners' associations
- Political groups or candidates for public office
Additionally, you may not deduct the cost of raffle, bingo or lottery tickets, dues paid to country clubs, lodges or similar groups, tuition, the value of your time for services or the value of blood given to a blood bank.
Proper accounting of property contributions
You can deduct just about any type of property that is donated to a qualified organization. Examples of common property types are real estate, stocks and bonds, vehicles, furniture, working appliances, clothes and toys. You cannot deduct the donation of a partial interest in a property (i.e. you donate part of your interest in real estate or a partnership) or the right to use property (i.e. the use of a rental vacation home to a charity auction).
The key issue with donating property is to properly determine and document fair market value. The IRS defines fair market value as "the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts."
Whenever possible, it is best to retain a third party valuation of property that is donated even if the value is less than $5,000.
For instance, if you donate a vehicle, you should be able to document the value from a free online web site such as www.edmunds.com or www.nada.com. For real property it is advisable to have a fair market value appraisal done. A "drive-by" estimate from an appraiser or real estate agent can be obtained for $100 to $150, while a full market appraisal by a qualified appraiser will cost $300 to $500. For marketable stocks and bonds, simply use the market value on the date of the donation. A stock value and many bond values can be obtained from an online web site such as Yahoo Finance or from the Wall Street Journal. If you can't readily find the value of the donated stock or bond, call a broker for the value and ask for written documentation.
It is more difficult to value items such as used clothing, toys, appliances and furniture. If an item is used, it cannot be valued at the price for which you paid when it was new (unless it is something collectible that has a ready market by which to document fair market value). The IRS guideline is to value items such as these based on what they would sell for in a consignment or thrift shop. Most taxpayers, however, don't have time to cruise the aisles of the local Goodwill store to determine fair market value of donated clothes, refrigerators and sofas. I recommend purchasing software such as It's Deductible (offered by Turbo Tax) to provide independent fair market valuation of items such as these. You will need to keep a detailed list of all items contributed and the condition of each item.
If you have ever been audited, you know that the burden of proof falls on the taxpayer to validate all deductions that are claimed. Here are the key recordkeeping tips pertaining to charitable contributions:
- Gifts of $250 or more: You can claim a deduction for a contribution of $250 or more only if you retain an acknowledgement from a qualified organization or applicable payroll deduction records (i.e. for United Way contributions). All contributions of $250 or more must be documented separately either in the form or separate acknowledgements or by line item if from the same organization in the same year.
- Gifts of less than $250: For contributions of less than $250, you need to retain one of the following: 1) a cancelled check; 2) a credit or debit card receipt; or 3) a checking or credit card statement. The record should include the amount, date posted and the payee.
- Car expenses: If you use your vehicle in giving services to a qualified organization, you should retain a log of mileage, dates and organizations for which you used your auto. You can then claim the standard IRS mileage deduction for the total miles driven.
- Out-of-pocket expenses: You can deduct un-reimbursed out-of-pocket expenses related to service performed for a qualified organization if you keep records that include the amount, date and organization. If the expense exceeds $250, you also will need written acknowledgement from the organization.
- Recordkeeping for property contributions: You should retain a receipt from the organization recording the date and property given for each donation of property. You will be required to file Non-Cash Contribution Form 8283 with your tax return if the total amount of property given exceeds $500 in value in a given year. And if you claim a deduction of over $5,000 for a donation of one property item or a group of similar property items, you must also obtain a qualified written appraisal of the property from a qualified appraiser.
John D. Rockefeller, Jr. once said, "Think of giving not as a duty but as a privilege." If you are one of the 80 percent of Americans who give away some of your hard-earned money to those less fortunate, then you have experienced this privilege alluded to by Rockefeller. And if you follow the guidelines for giving outlined above, you will also remain in good standing with the IRS when tax time rolls around.
J. Tol Broome, Jr. is a freelance business writer from Greensboro, NC with credits in Nations Business, Entrepreneur and Journal of Commercial Lending. He also is a banker with over 21 years of lending experience.