It is better to give than to receive.
This is definitely true when it comes to your taxes, but like everything else, tax benefits for charitable donations are not as simple as they used to be. So before you bank on those alluring deductions, follow these guidelines first.
- Make sure you’ll be itemizing your deductions. The only way to get a federal tax benefit for a charitable donation is by itemizing deductions. The standard deduction has been raised for inflation, and itemized deductions have been limited, so fewer taxpayers are itemizing.
For example, the standard deduction for married couples increases to $10,000 in 2005. If you don’t have more than that in total itemized deductions, including your donations, you won’t get a federal tax benefit.
- Check your charity. Only gifts to qualifying U.S. organizations qualify for the tax benefit. Most major international charities have established U.S. organizations that qualify, but you want to be sure. You can check the current list of qualifying organizations from the IRS at http://apps.irs.gov/app/pub78.
- Keep receipts and the charity’s acknowledgment. Donors taking a deduction are required to obtain contemporaneous written substantiation for a charitable contribution of $250 or more. The written substantiation must be obtained no later than the date you actually file your return.
If the charity provides goods or services to the donor in exchange for the contribution, the written acknowledgment must include a good faith estimate of the value of the goods or services. The taxpayer is responsible for requesting and obtaining the written acknowledgement, but only has to provide it to the IRS upon audit, not with their tax return.
- Watch adjusted gross income (AGI) limits. Depending on the type of organization you’re giving to and the kind of property you’re donating, you can only deduct up to 50 percent, 30 percent or 20 percent of your AGI in any one year. Any excess will carry forward for up to 5 years.
I know a lovely elderly couple who gave a highly appreciated rental property to a beloved charity. This is generally a great tax move because it avoids the capital gains tax that would result if the property were sold. But part of their motivation was the expected income tax deductions that would come in exchange for their gift.
If only I knew about it before they made that gift, I would have projected the benefit for them. When the income property was gone, and interest rates were down, the only income they really had left was Social Security. Because of the AGI limit, they won’t get the full benefit on their tax returns.
- Donated property is deductible. The deduction is limited to the lower of cost or fair market value. A special form may be required with your return, and an appraisal may be required if the deduction is over $5,000. Deduction rules for donated autos have been tightened.
- Check for special Hurricane Katrina rules. Under special emergency legislation, individuals can deduct certain qualifying contributions in excess of the AGI limits discussed above. Corporations can claim enhanced deductions for apparently wholesome food inventory and qualified contributions of books as part of the normal enhanced deduction of inventory to certain qualified charities.
Individuals can claim additional exemptions for housing displaced Hurricane Katrina victims. A taxpayer who uses a vehicle in providing donated services to a charity for Katrina relief can deduct up to 34 cents per mile instead of the normal 14 cents. (A deduction for your time contributed to charity is never allowed). Reimbursements to volunteers for the costs of using a car to provide donated services may be excluded from their income.
- Consider a charitable trust. The use of charitable lead or remainder trusts for large donations can provide tremendous income tax savings, enabling your gift to go even further. These require the assistance of trained professionals.
Indeed, it is better to give. Just remember to check with your tax adviser to find out just how much.
Michael J. Heiman, CPA MS, is an associate director in tax at SS&G Financial Services. Reach him at [email protected] or (440) 248-8787.