Making a charitable donation should feel good in and of itself. But doing so can feel even better when the effect on your tax bill is positive. Here are a few fundamental ways to donate the right way.
Research your recipient
To claim a deduction for your contributions, you must donate to an organization that the IRS considers "qualified." But qualified once doesn't mean qualified forever. Every year, many nonprofits lose their tax-exempt status because they fail to file annual reports with the IRS for three consecutive years.
These organizations can apply for reinstatement, but if they don't do so on a timely basis, you won't be able to deduct your contribution to them. To see whether a charity is qualified, use the IRS' "Exempt Organizations Select Check" tool at http://apps.irs.gov/app/eos.
Assess your assets
The form of donation you choose -- cash, security, real estate or personal property -- can affect your deduction. For example, if you donate an appreciated security you've held for more than one year, it would be considered long-term capital gains property. And you could deduct its fair-market value, rather than your "basis" in the security (generally what you paid for it).
However, the calculation varies for some types of assets. For instance, if you donate a car and the organization sells it and uses the proceeds, your deduction would be generally limited to the sale amount.
Know your limits
While you can contribute as much as you'd like to charity, the IRS limits the amount you can deduct in a given year.
Deductions for donations of cash and unappreciated property are limited to 50 percent of your adjusted gross income if they're made to public charities or operating private foundations (30 percent if made to nonoperating private foundations). But deductions for donations of long-term capital gains property are limited to only 30 percent of your AGI (20 percent if made to nonoperating private foundations).
Although excess contributions can be carried forward for up to five years, keep these AGI limits in mind before making a donation. If you don't, you could find that a donation you made because you wanted to save taxes this year won't provide a tax benefit until next year.
Keep good records
You must maintain records that confirm contributions for which you're taking a deduction. The records required vary, depending on the type and amount of the donation.
For monetary donations, if the amount is less than $250, you'll need either a canceled check or credit card statement showing the donation date and amount and the organization's name, or a receipt from the organization that shows the donation date and amount. Donations of $250 or more require an acknowledgment from the organization that also describes any goods or services you received from the charity in exchange. Read Full Article
For assets other than money, if your donation is worth less than $250, you'll need:
A receipt with the organization's name,
The contribution date and location, and
A description of the item donated.
Keep your own records that show, among other information, the fair-market value of the donation and the calculations used to determine it.
If you contribute noncash assets that are worth at least $250, but less than $500, you'll need the information noted above, plus a donation acknowledgment from the organization that includes a good-faith estimate of its value. The record-keeping requirements continue to grow as the value of contributions increases.
In most cases, you don't have to submit the documentation with your tax return. But, if you're audited and you lack proper documentation, you could be denied the deduction and be liable for back taxes, interest and penalties. Typically, it's sufficient to keep charitable deduction documentation for three years after you file the tax return on which the deduction is claimed.
Be safe, not sorry
If you're unsure about the tax impact of any major charitable donation you're considering, it's better to be safe than sorry. Work with your tax adviser to
determine the ideal asset to donate and what your deduction may be.
This has been a general discussion and is not intended as advice to anyone.
Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien. His "Money Matters" column appears monthly. He can be reached at n.grill@GRILL1.com.