How to make the most of charitable tax breaksPublished:
When megastorm Sandy devastated parts of the Northeast, people raced to help: They donated money by text and credit card, scoured their closets for items to share and drove to the most ravaged areas to aid in the cleanup efforts.
They were motivated by generosity, not tax deductions, and that is how it should be in a crisis. But a well-placed writeoff does not hurt. The savvier you are about taxes, the further your philanthropic efforts will go.
The writeoff for charitable gifts is one of America's biggest tax breaks – it amounted to $158 billion on more than 37 million returns in tax year 2009, according to Internal Revenue Service data.
That is too much leverage to ignore. Here is our guide to navigating the tax aspects of charitable giving.
Charitable donations, whether of money or stuff, are deductible for tax purposes. To claim the deduction, you need to itemize your deductions on Schedule A of your tax return. If you do not itemize, you cannot take the deduction.
The recipient has to be a qualified non-profit. Donations to individual people are not deductible for tax purposes, even if you are handing a Sandy-swamped stranger a $20 bill to go find food or towels.
And those who contributed almost $6 billion to the most recent election campaigns? Sorry, that is not deductible, reports Lisa Greene-Lewis, a certified public accountant at TurboTax, the tax preparation group owned by Intuit Inc.
If you are not sure whether your charity meets the deductibility standard, you can search the IRS's database of qualified groups.
Even when you give to a qualified non-profit, you may not receive a deduction for the full amount. That is because you have to lop off the fair market value of any benefits, like tickets or merchandise, that you receive. A high-level membership to the Guggenheim Museum, for example, costs $500 but rates only a $215 tax deduction.
PERSONAL GIFTS DO NOT QUALIFY
People have been asking how they can help specific areas and get the tax deduction, says Ron Finkelstein, a tax partner at Marcum, in Melville, New York. "People live on the South Shore of Long Island and they want the money to go to that area. But you cannot give money to the American Red Cross and say, 'I want the money to go to Oceanside.'"
Finkelstein tells those who want to target specific locations to look for a local non-profit rather than a major disaster-relief group. And forget about deducting the help you give directly to individuals in need: "That would be a gift, not a charitable contribution."
CHARITY HAS ITS LIMITS
There are limits on the amount of charitable donations you can deduct, but unless you are a big giver you are unlikely to run up against them.
Charitable deductions are limited to 50 percent of your adjusted gross income for gifts to most traditional charities, such as churches, medical research organizations and educational organization. However, for a smaller number of groups – including veterans organizations, fraternal societies and certain family foundations — the limit is 30 percent. The IRS publishes details on the deductibility for each organization listed on its website (linked above). Charitable donations above those limits can be carried forward to future tax years.
There is a second limit based on what you're giving. While cash is subject only to the broader limitations, contributions of appreciated securities with long-term capital gains are subject to a tighter limit — 30 percent if the group you're giving to has a 50 percent limit, and 20 percent if it's a 30 percent institution. That's because taxpayers already benefit when they donate stocks and bonds that have gone up in value.
If you plan to donate appreciated stock, now is the time to run the numbers to make sure you do not hit the limits, Finkelstein says. That is especially true for retirees, who may have relatively low incomes but have substantial assets to give away.
WHAT YOUR OLD CLOTHES ARE WORTH
If you are donating clothes or furniture or other real property, you have to establish its fair market value so you know how much to deduct. Programs such as TurboTax's ItsDeductible or H&R Block's DeductionPro can help you figure out the right amount, especially if you are giving away a large quantity.
For donations worth more than $250, you need a written acknowledgement from the charity. (For financial donations under that amount, a credit-card statement or canceled check will suffice, while for small donations of stuff a simple receipt is enough.) Items worth more than $5,000 generally require an appraisal.
If you are giving away a car, there are special rules. If it is worth more than $500, you generally can deduct only the smaller of its fair market value or the amount the charity actually gets from its sale.
DON'T FORGET TRANSPORTATION COSTS
Volunteers who travel for philanthropic reasons can deduct the cost of their plane, train and taxi fares, or write off their own car's mileage at 14 cents a mile.
To deduct travel expenses for charitable purposes, the trip's focus does need to be your volunteer work. "If you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses," according to the IRS's publication 526 on charitable expenses.
So, for example, if you work several hours each morning on an archeological dig sponsored by a charitable organization, but the rest of the day is free for sightseeing, you cannot take the deduction.
As with other charitable efforts, to take this write-off the volunteer work you do must be with a qualified organization; you cannot just wander around the storm-devastated Rockaways offering to help. And you will want to keep records about the trip and your expenses.
What about the would-be New York City marathoners who traveled to New York and then ended up volunteering for Hurricane Sandy cleanup efforts after the race was canceled? That is a gray area — but Marcum's Finkelstein says he would not recommend it.
Many of those volunteer efforts were ad hoc rather than through qualified charitable organizations, and fewer still lasted the entire trip. "That wasn't the main purpose of their travel," he says.
Maybe not, but the work they did while they were in the neighborhood certainly helped, tax-deductible or not.
© Copyright 2012 Thomson Reuters.