Tax Tip on Charitable Donations

One of my favorite tax questions I ask clients is "how much did you give to charity this year?" For a new client the answer might be, "oh just take the maximum allowable deduction". Before I inform them that there is no such animal, I make it very clear that I am not into mouth to mouth resuscitation. The truth is, if you can prove it, you can deduct what you gave to a qualified organization. What is a qualified organization, what support is needed, and where to deduct the contribution are examined in this article.

First what is a qualified organization? In order to be a qualified organization, the newly formed charity must apply to the Internal Revenue Service for tax exempt status. Annually, an extensive list is published by the IRS which identifies every qualified organization in the United States. This list is on the IRS website, and can be referred to before you contribute to insure the entity is qualified. If you have trouble falling asleep at night because you keep hearing a little kid singing "1 877 Kar Circus, K-A-R-S Kar Circus", they are an example of a qualified organization. Qualified organizations usually include (but are not limited to) churches, educational organizations, nonprofit hospitals, public park and gardens and nonprofit charitable organizations such as One Boston, The Red Cross, The Boy and Girl Scouts, etc. Individuals can never be qualified organizations, especially those running for elected office. So, if you contribute to their campaign, you may get a job, but you will not get a charitable donation. When I tell my clients that they cannot deduct political contributions, I usually see disbelief and sadness in their eyes. The look is similar to when someone discovers that there is no Easter Bunny, no Tooth Fairy, no Sand Man, and that the AFLAC duck cannot really talk.

One of the requirements of claiming a charitable deduction is that you must be able to support the deduction. Charitable contributions under $250, require a cancelled check, bank debit memo, or if cash, a written acknowledgement of the donation. All contributions (cash or check) over $250 require a written acknowledgement from the charity. I know the bell ringers outside Roche Bros do not give receipts, so technically those contributions cannot be deducted because they cannot be supported. This does not necessarily mean that small cash contributions will be ignored by your tax preparer. Every CPA who does tax work has different tolerance levels as to these requirements and what they will enter as charity on a tax return. I know from experience that if you are audited, the IRS agent will usually not bother with the very small cash donations, but will disallow any items over $250 that do not have a written acknowledgment from the charity.

The charitable donations are entered on Schedule A of your tax return. If you have donated non- cash items such as clothing, household goods, toys, etc. you must first enter these items on Form 8283. This form asks for a description of the donation, the charity's name, address, and other data including how the items were valued. The IRS maintains an interactive guide on their web site, which lists a range of acceptable prices for used clothing, appliances, etc. This listing can be used as support for non-cash donations made to organizations such as Morgan Memorial, Disabled Vets, Salvation Army, Cradles to Crayons, etc.

The benefit to you is that you can deduct all of your charitable donations, (as long as they do not exceed 50% of your adjusted gross income), as an itemized deduction. This limit is reduced to 30% or 20% for capital gain type property, artwork and other selected items. Helping people less fortunate than you is a great way to give back to Society. Remember not all of your contributions will qualify, so take a minute to evaluate who is asking for your donation. The volunteers who constantly appear at the intersection of the VFW Parkway and Route 1 are well intentioned hard working (but annoying) people who usually represent a qualified organization deserving of your kindness. However, I would think twice before contributing to The Church and Spaghetti Emporium of St. Ron the Accountant.