Charitable Planning

As you may know, you can deduct qualified charitable contributions on your taxes, which is one reason why December is such a great month for many charities. Not only is everyone is in the holiday spirit, but they are also preparing for tax season.

However, beyond simply writing a check, there are many other ways you can help the less fortunate while lowering your tax bill. The IRS gives generous allowances for many types of donated items, but it’s up to you to save your records and know how much you’re entitled to deduct.

The Basics
Organizations That Accept Tax-Deductible Donations

For your donation to be a valid tax deduction, you must contribute to an organization on the IRS’s list of qualified charities. Many major charities and religious groups are on the list, but if you donate to a smaller group and you’re not sure whether your contributions are legitimately tax-deductible, check the IRS database of qualified charitable organizations.

Keep in mind that you can never deduct donations to foreign charities – however, many foreign charities have an American branch to which you can contribute a tax-deductible donation.

Donation Maximums

Charities appreciate your donations in any amount, but the IRS does have maximums on how much you can deduct from your taxes. You don’t need to worry about donation maximums if you contribute 20% or less of your AGI to charity. Otherwise, you may be able to deduct a contribution amount up to half your AGI. However, this limit is reduced to 20% or 30% for donations to certain types of organizations or for donations of certain types of property. Consult IRS Publication 526 for more detail.

If you donate more than the deduction limit, you can carry over the extra to the next year’s taxes and deduct it then.

Deductibility Codes

If you’re planning to make a large contribution, ask the organization or check its deductibility code in the IRS database. The IRS may list one of eight deductibility codes to let you know of any specific rules that apply to donations to a particular organization. If there’s no deductibility code listed, then the organization is a public charity to which donations of up to half of your adjusted gross income (in most cases) are deductible.

Here are each of the IRS deductibility status codes:

  • PC: A public charity. Deductibility limitation: 50%
  • POF: A private operating foundation. Deductibility limitation: 30%
  • PF: A private foundation. Deductibility limitation: 30% (generally)
  • GROUP: Generally, a central organization holding a group exemption letter, whose subordinate units covered by the group exemption are also eligible to receive tax-deductible contributions, even though they are not separately listed. Deductibility limitation: Depends on various factors
  • LODGE: A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes. Deductibility limitation: 30%
  • UNKWN: A charitable organization whose public charity status has not been determined. Deductibility limitation:Depends on various factors
  • EO: An organization described in section 170(c) of the Internal Revenue Code other than a public charity or a private foundation. Deductibility limitation: Depends on various factors
  • FED: An organization to which contributions are deductible if made for the use of a Federal Governmental unit. Deductibility limitation: 50%
  • FORGN: A foreign-addressed organization – generally, these are organizations formed in the United States that conduct activities in foreign countries. Certain foreign organizations that receive charitable contributions deductible pursuant to treaty are also included, as are organizations created in U.S. possessions. Deductibility limitation:Depends on various factors
  • SO: A type 1, type 2 or functionally integrated type 3 supporting organization. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. Deductibility limitation: 50%
  • SONFI: A non-functionally integrated type 3 supporting organization. Deductibility limitation: 50%
  • SOUNK: A supporting organization of unspecified type. Deductibility limitation: 50%

The Process

To deduct your charitable contributions, you need to itemize your deductions. Just be sure to check that your itemized deductions are less than the standard deduction you’re eligible to take.

If you choose to itemize, fill out Schedule A and follow the instructions to claim charitable contributions. If the total value of non-cash donations exceeds $500, you must fill out Form 8283 with specifics about what you donated to which organizations and how much the items were worth.

Records to Keep

If you ever donate $250 or more at a time, you need a receipt from the organization. If not, your canceled check or other documentation is all you need. For example, if you give a regular weekly donation of $25, you don’t need a receipt as long as you have some kind of record, even though your eventual contribution is far greater than $250. You can certainly ask for a receipt for any amount donated, and many organizations send you a total at the end of the year.

When you get a receipt, be certain that it has the total amount you contributed or a description of any item you donated along with the value of it. If you receive anything in return, have that included on the receipt as well. The charity might have to handwrite the receipt, and if it does, request that it records its official name (the one registered with the IRS) and address. You may need this information when you file.

If your contribution level is below $250, keep your canceled check, credit card receipt, or written record from the charity, or just draw up your own simple record for your file. Include the date, official name of the charity, and the amount. If you’re donating to an event like a 5K or walk-a-thon, make sure you get the name of the organization, not the individual event. If you made a donation via text message, keep the phone bill or other record of the text.

Simply file these records with your other tax paperwork – you don’t need to send all of these receipts and files to the IRS.

Receiving Items in Return for a Donation

Everyone loves free stuff, but when NPR offers you a tote bag in return for making a donation, you must subtract the value of the tote bag or any other items received from your charitable donation. The charity can usually tell you the value of the items you received, and it likely included it on your receipt. For example, if you attend a fundraising dinner and pay $100 per ticket, your receipt will show your $100 donation minus the value of your dinner. Only the part of your donation that didn’t pay for your dinner (or tote bag) is tax deductible.

If you receive any intangible religious benefits, such as admittance to a ceremony or having a reading performed for a relative, you should also make a note of it. However, there’s no subtraction from your donation.

Non-Cash Donations

With text message services and online donations making it quick and easy to donate cash, it’s easy to forget the many other ways of supporting a charity or cause. Sometimes, it’s a little harder to quantify the value of non-cash donations, especially items of personal value. But often these non-cash donations are the most important ones an organization receives, and they’re usually tax deductible for you. For non-cash donations in excess of $500, you must fill out and file Form 8283.

Clothing and Household Items

When you donate household items or assorted clothing, you generally only deduct the value of items that are in good condition. To determine the value of your donation, you have to use the price the item would raise in a thrift store, not what you paid for it. While rips and dents don’t mean that a charity can’t put your donation to good use, clothes and appliances that are damaged beyond repair don’t have any value when it comes to deductions. If your clothes or household items aren’t in good condition but are worth more than $500, you need a professional appraisal.

Before you donate, lay out the items and make a list of what you’re going to contribute. For example, how many dress shirts and how many t-shirts; how many sneakers and how many pairs of dress shoes. You can visit a thrift store to see the prices of similar items, use Goodwill’s online valuation guide, or check with the Salvation Army to get general guidelines on prices. Be honest about the condition your items are in and what kinds of prices they might fetch.

Once you have this accurate inventory, you’re ready to take your donation to a drop-off center. The employees there won’t necessarily do an inventory for you or spend a lot of time on a detailed receipt, so make sure you have a good record before you leave the house. If you think your total donation is worth more than $250, ask them for an official receipt and show them your estimate of what your donation is worth. The IRS isn’t going to count how many socks you donated, but they may notice if your estimates are overly optimistic.

Stock or Mutual Funds

Many large charitable organizations are happy to accept shares of stock or mutual funds. When you donate an asset, you need a record of the value on the day that you donate it – that’s the day you mail it or complete an electronic transfer.

In many cases, donating a stock that has increased in value is a better tax move than contributing the same amount of cash. By doing so, you avoid capital gains tax and net a bigger deduction because you can write off the entire value of the stock, not just what you paid for it. For example, if you bought a share at $10 and watched it go up to $100, then your donation is worth a $100 deduction. If you sold the stock and donated the profit, you’d have to pay capital gains tax first, which would reduce the donation amount (and your deduction). By transferring the share before selling, you can deduct more, and the charity gets a more valuable contribution. Be aware though, when contributing the full amount of stock (and not just your cost basis), the amount you can deduct is limited to 30% of your AGI.)

Also keep in mind that you can only get a deduction for the current value of donated shares (as opposed to your cost basis) if you’ve held them for at least one year. If you donate assets you’ve held for less than 12 months, you can only deduct your original purchase price.

Cars, Boats, or Airplanes

If you have a car, boat, plane, or other vehicle to donate, you can get a pretty nice tax deduction for doing so. These donations are more straightforward than other non-cash contributions. When you donate a vehicle to a qualified organization that’s worth more than $500, you should receive a Form 1098-C reporting the value of the vehicle. This form lists the value of the car and the date of the donation, which is all you need for your tax paperwork.

If your vehicle is worth less than $500 (and you don’t receive Form 1098-C), you can generally deduct the fair market value of the vehicle on the date of your contribution as long as your cost basis in the vehicle wasn’t less than that amount. You can use the private party value from the Kelley Blue Book as the fair market value.

Art, Jewelry, Antiques, or Collectibles

Donating collectibles or jewelry can be tricky, because their value is very subjective. If you consider your items to have a value of $500 or more, you will need to obtain some kind of proof of their fair market value. Three common forms of proof are:

  1. A catalog listing the price of a similar item
  2. Information about a recent sale of a similar item (on eBay, for example)
  3. A professional appraisal

While an appraisal can be expensive, if you believe the value of your donation is $1,000 or more, it may be worth the cost to get the official assessment and the documentation that comes with it. Plus, you can claim the cost of an appraisal as a miscellaneous itemized deduction subject to the 2%-of-AGI limit.

Mileage and Reimbursements

If you did volunteer work for a charity and used a personal vehicle or took public transportation solely for volunteering, you can deduct mileage or the cost of your public transportation as a donation to charity. The mileage you can deduct for tax year 2015 is 14 cents per mile, and you can also deduct tolls and parking fees.

Any other items that you purchase for a charity while you are volunteering are considered a donation, such as if you purchase pens or painting supplies that the charity needs for a project. However, the value of your personal time is not tax deductible, even if you are performing a service that the organization would otherwise have had to pay for.

Planning Ahead

When you’re planning your charitable contributions with tax deductions in mind, remember that you’ll only see a tax benefit if you itemize. If you don’t have a lot of other deductions on your Schedule A – such as mortgage interest and real estate taxes – it may not make sense to itemize since you’re itemized deductions may not exceed the standard deduction you’re eligible for.

Final Word

Charitable contributions help you improve the world and your tax bill. The rules can be complicated, but it’s worth your time to know what you’re entitled to deduct and get your maximum refund.

Have you made any donations this year, or are you planning to make any next year? Do you have a tax strategy for charitable donations?

For more information, please contact Tom Cooper, CFP.

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