Many people are very generous. If you are someone who graciously gives time or money to charitable organizations, there are a few things that you should know. These things are especially important as you begin getting your documents ready to get started on your 2016 tax return.
One of the most common questions about charities that CPAs and tax preparers find themselves answering during tax season is, “How much can I deduct?” The easy answer is that for taxpayers that itemize, contributions up to 50 percent of adjusted gross income (AGI) are generally deductible. There are some contributions that are limited to 30 or 20 percent of AGI. Your CPA can help you figure this out. The unasked question concerns whether significant donations increase audit risk. Sorry. There is no magic number.
One common assumption is that any worthy cause is a tax-deductible charity. This is not the case. The only deductions that are deductible are those organizations covered under section 170(c) of the Internal Revenue Code. Many of the popular social media funding campaigns do not qualify as charities for tax purposes. You can check to see if an organization is eligible by using the IRS Exempt Organization Select Check tool. Keep in mind that there may be eligible organizations that are not listed in the database.
Most people understand that cash contributions are deductible. Confusion arises when donors receive something of value as a result of a contribution. The general rule to know what is deductible is to start with the amount of the contribution and deduct the value of anything received in return. For example, if a donor contributes $250 and in exchange attends a dinner worth $50, then the contribution is $250 less $50 or $200. There are exceptions when the things received in exchange for a donation are very small or “de minimis.”
Donations of goods are also confusing. It is generally the responsibility of the donor to ascertain the value of goods donated. It is not sufficient to simply claim that something is worth a certain amount. There must be a basis for the statement such as an appraisal or a catalog value. Documentation requirements are more stringent as the value of goods increase. For example, the value of clothing and miscellaneous household items donated to a charitable organization may not require as much documentation as an automobile, land, artwork, jewelry, or collectibles. There are special rules for accounting for the value of appreciated property.
One often overlooked item is mileage. If you drive as part of your efforts on behalf of a charity, you may be eligible to deduct mileage.
Another important consideration is documentation. When preparing tax documents, it is always a good idea to document, and charitable contributions are no exception. Many charitable organization routinely send receipts to donors regardless of the amount of the donation. If you need a receipt from a charitable organization, do not hesitate to ask for one. If you donated goods, you will want to have documentation for the value claimed.
It is always a good idea to consult with a professional, particularly if your situation is complicated. Even so, it is also a good idea to have some understanding of the various rules affecting contributions. The IRS has several publications that go into great detail about all aspects of charitable giving.
- Publication 526, Charitable Contributions
- Publication 561, Determining the Value of Donated Property
- Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements
- Exempt Organization Select Check