Know the Rules for Charitable Giving

By Marcia Richards Suelzer, Toolkit Staff Writer

'Tis the season to be charitable. Although every charity will tell you the need is year-round, the holiday season usually prompts an increase in charitable giving. While lowering your tax bill might not be the primary reason for your generosity, most people know that charitable contributions made to qualified organizations may help you save taxes. However, as with every area of tax law, if you want to get the maximum benefit, you must carefully follow the rules.

Only Itemizers Can Claim a Deduction

People who use the standard deduction cannot claim a charitable contribution deduction. In order to deduct your contributions, you must file Form 1040 and itemize your deductions on Schedule A. Generally, if you have a home mortgage, you will be an itemizer. To get an idea if if makes sense for you to itemize, total up the following:

• your state and local income (or sales) tax;
• your property taxes (real and personal);
• any unreimbursed employee expenses (reduce your expenses amount by two percent);
• any allowable casualty/theft losses;
• any medical expenses (reduce your expenses by 7.5 percent) and
• the amount of your planned charitable contributions.

Once you have this total, compare this to your allowable standard deduction for 2011. The standard deduction varies based upon your filing status:

• Single or Married filing separately, $5,800
• Married filing jointly or Qualifying widow(er), $11,600
• Head of household, $8,500

If your deductions are more than your standard deduction, it makes sense to itemize. (Special rules apply for those who are 65 years of age or older, who are blind or who can be claimed as a dependent on someone else's return. If this is you, you will need to consult the Form 1040 Instructions to determine your standard deduction.)

Think Ahead. If you are very near the itemization threshold, consult the Form 1040 Instructions for a complete listing of all the possible itemized deductions that you may be able to claim. Or, you could consider increasing your contribution amount.

Not Every Organization Qualifies as Tax-Exempt

If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. You cannot deduct contributions made to specific individuals, political organizations and candidates. You will often hear the term "501(c)(3) deduction," which is the Internal Revenue Code subsection that most charities use to qualify for tax-exempt status, although charities can qualify under other subsections. The following are common types of charitable organizations.

• Churches, a convention or association of churches, temples, synagogues, mosques, and other religious organizations.
• Most nonprofit charitable organizations such as the National Alliance on Mental Illness, the Red Cross or the United Way.
• Most nonprofit educational organizations, including the Boy (and Girl) Scouts of America, colleges, and museums.
• Nonprofit hospitals and medical research organizations.
• Utility company emergency energy programs, if the utility company is an agent for a charitable organization that assists individuals with emergency energy needs.
• Nonprofit volunteer fire companies.
• Public parks and recreation facilities.
• Civil defense organizations.

Warning. Even if the organization falls into one of these categories, it still must have applied for and have been granted tax-exempt status. And, it must have been tax-exempt at the time you made the contributions. You can check an organization's tax-exempt status on the IRS website. It is especially important to check if you are contributing a small, local charity or to a church that is not part of a nationally recognized denomination.

Value of Gift Determines Amount Deductible

If your charitable contributions consist of cash contributions to your favorite charity and you do not receive any merchandise in exchange for your contribution, then it's easy to determine your deduction. In most cases, it will be the amount that you contributed. However, if you receive a benefit, such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

Example. You donate $75 to your public television station during its pledge drive. In return for this contribution, you receive a travel book that sells for $25 in a book store. The amount of your deductible contribution is $50. The receipt that you receive from the charity should indicate the value of the gift item.

Donations of stock or other non-cash property are usually valued at the fair market value of the property.

Tip. Fair market value is generally 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.

Used clothing and household items must generally be in good or better condition to be deductible. Special rules apply to vehicle donations.

Tip. For information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Proving Amount Deducted

Cash contributions. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. (Remember, the value of merchandise received reduces the amount you can claim.)

Tip. Making a donation by texting a certain number on your phone is rapidly becoming a very popular way to make a small donation for emergency relief. According to the IRS, if you make text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

Non-cash contributions. For a contribution not made in cash, the records you must keep depend on the amount of the contribution that you claim. Special rules apply for donations of used automobiles based upon the amount that you claim as a deduction.

Need More Information?

Refer to Form 8283 (Noncash Charitable Contributions) and its instructions, as well as Publication 526, Charitable Contributions. (Note: Publication 526 is not yet updated for the 2011 tax season, but the information is substantially unchanged from 2010). The IRS has also has a YouTube video on charitable contributions, which can be found here.