Along with an avalanche of catalogs and holiday greetings from family and friends, you may also find your mailbox inundated with donation requests from charitable organizations. This is the time of year nonprofit organizations ramp up efforts to raise money before the end of the year. It’s also a great time to remind taxpayers that charitable donations also provide tax breaks in return, say the experts at the Pennsylvania Institute of Certified Public Accountants (PICPA).
Year-end charitable contributions are a win-win situation for both taxpayers and charities. Remember to follow smart practices for giving to make sure organizations receive your gift in time and you receive the appropriate tax credit.
Smart Giving Strategies
Regardless of whether you’re donating to your favorite charity or giving to a new organization this year, follow these tips to ensure everyone benefits from your donation.
Only donations to qualified charitable organizations are deductible. If you’re not sure whether an organization is qualified, ask to see its letter from the IRS. Many organizations will actually post their letters on their websites. You can search online using IRS Exempt Organizations Select Check. Churches, synagogues, temples, and mosques are considered de facto charitable organizations and are eligible to receive deductible donations, even if they’re not on the list. Guidestar and Charity Navigator also allow you to learn more about a charitable organization’s tax-exempt status.
Cash deductions must be substantiated by a bank record (such as a canceled check or credit card receipt, clearly annotated with the name of the charity) or in writing from the organization. The writing must include the date, the amount, and the organization that received the donation. You don’t have to submit the receipt with your tax return, but you need to be prepared to show it if you are audited.
Be an itemizer.
To claim charitable deductions on your tax return, you must itemize your deductions on Schedule A of your Form 1040.
Do the math.
If you receive something in exchange for your donation – no matter how big or small – the donation is deductible only for the amount the donation exceeds the value of any goods or services received.
Be sure to keep good records of all donations. If you donate noncash items, you’ll need to be able to substantiate the value of your donation.
Know your limits.
There are limits on the amount of charitable contributions you can deduct. The specific limitations can be fairly complicated, so consult your certified public accountant (CPA) if you contribute more than 20 percent of your adjusted gross income.
Keep an eye on the calendar.
Donations must be made by the end of the tax year for which you want to claim the deduction. If you put a check dated Dec. 31 in the mail by that day, you're okay. The same goes for donations charged by year's end to your credit card – even if you don't pay the bill until next year.
If you have money taken directly out of your paycheck for charity, keep a paystub, Form W-2, or other document showing the total amount withheld, along with the pledge card showing the name of the charity.
Donate appreciated property.
Taxpayers can donate appreciated property instead of cash to a charity, which yields double the bang for your buck because an individual can deduct the property's fair market value on the date he or she gives the gift and avoid paying capital gains tax on the appreciation. The deduction of appreciated property is generally limited to 30 percent of adjusted gross income.
A CPA Can Help
Wondering how to maximize your year-end charitable donations? A CPA can help you analyze your current situation and determine the best course of action. If you have questions about your taxes and personal financial planning, visit the CPA Locator