According to the Network for Good, 30% of all online charitable contributions in 2015 were made during the month of December. This is not surprising as the gift-giving spirit around the holidays inspires many people to donate to causes near to their hearts at that time. Fortunately for us taxpayers, a donation to an IRS qualified charity can provide a tax deduction regardless of when it was made throughout the year. Summers, in particular, are a great time of year to think about donating. First, you can give cash without the stress of holiday spending. Second, you can donate non-cash items and declutter your home at the same time. Here are some tax tips on deducting charitable donations posted by the IRS on its website:
1. Make sure to donate a qualified charity. You cannot deduct donations to individuals or political organizations or candidates. Use the IRS Select Check tool to check the status of the charity to which you would like to give.
2. Be aware that your deduction may be limited. If you receive something in return for your donation, you can only deduct the amount in excess of the value of what you received in return. For example, if you donate $50 to a qualified charity and receive a ticket to a fundraising dinner valued at $30, you may only deduct $20. In addition to this rule, there are AGI limits on charitable donation deductions. Generally, donations may only be deducted up to 50% of AGI. See Publication 526, Charitable Contributions for more information.
3. If you donate non-cash items, there are several things to keep in mind. For donated property to be deductible, it must generally be in good condition. Also, the amount of the deduction for donated property is generally its fair market value. There are special rules for cars, boats, and other types of property. See Publication 526, Charitable Contributions, for more information on these rules. See also Publication 561, Determining the Value of Donated Property.
4. Be diligent with recordkeeping. There are very specific substantiation rules regarding charitable donations. The amount and type of your donation will determine what kind of record you must keep. In general, you must have a written record of any cash you give to claim a deduction. For donations of $250 (cash or property) or more, you must have a written statement from the charity stating the amount and/or a description of the property you gave and whether or not you received anything in return.
The IRS has a section on its website dedicated to information relating to charitable contribution deductions. More guidance can also be found in Publications 526 and 561.
Donating an automobile with a fair market value of more than $500 has a few twists and turns when taxpayers claim a deduction.
Taxpayers donating to charity a qualified vehicle, car, truck, boat or aircraft valued at over $500 must obtain from the charity either a Form 1098-C or a similar contemporaneous written acknowledgment of the contribution. They should attach this documentation to their return.
The acknowledgment must provide the following information:
➜ Donor’s name
➜ Donor’s Social Security number
➜ Vehicle’s identification number
➜ Description of each donated item
➜ Good-faith estimate of any goods or services provided by the charity in exchange for the vehicle
The fair market value of any goods or services received by the donor reduces the amount of the charitable contribution deduction.
The acknowledgment also must contain the amount of sales proceeds if the vehicle was sold in an arm’s-length transaction. For a vehicle sold in an arm’s-length transaction with no material improvements, the amount of the donation is limited to the amount of the sales proceeds.
If the charity retains the vehicle for its own internal purposes, the acknowledgment must state that as well. Under those conditions, the taxpayer can deduct the fair market value of the vehicle.
If the charity sells the vehicle to a needy individual at a price below fair market value, the taxpayer is allowed to claim the fair market value as the deduction amount, provided the sale furthers the charity’s purpose. Most of these types of charities have as their purpose helping needy individuals by providing them with good-quality, low-cost automobiles.
When itemizing deductions, taxpayers should deduct charitable contributions on Schedule A and attach it to their Form 1040 tax return. In addition, they should remember to attach a copy of their 1098-C or similar acknowledgment.
©2015 CPAmerica International
With tax season 2014 fast approaching, a few tips regarding donating property seem in order.
Specifically, clothing, household items and cars are the most common items donated to qualified organizations.
To receive a tax deduction, you need to donate the property to a qualified organization. A qualified organization includes nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.
If you ask organizations whether they are qualified, most will be able to tell you.
The IRS has an online resource at IRS.gov. Click “Tools” and then “Exempt Organizations Select Check.” This online tool will allow you to search for qualified organizations.
The general rule regarding contributed property is that the amount of the charitable contribution is the fair market value of the property at the time of the contribution.
There are some special rules regarding clothing and household items. You cannot take a deduction for clothing or household items you donate unless the items are in good used condition or better.
The IRS is trying to stop people from donating items that are basically worn out and of no use to anyone. So, unless your donated items are in good condition, you will not be allowed to take a charitable contribution deduction.
Now let’s define the term “household items.” Household items are considered to be furniture, electronics, appliances, linens and other items. Some examples of items that are not considered household items include food, paintings, jewelry and collectibles.
Used clothing and household items are usually worth far less than what you originally paid for them. These items are difficult to value because they do not lend themselves to fixed formulas or methods.
A good habit to follow is to prepare a detailed list of the items you plan to donate. You should put a value on every item donated. Located next to the item should be its thrift shop value.
What thrift shops are selling the various used clothing and household goods items for is a good indication of the fair market value. Some of these thrift shops and charities actually have price lists that you can use as a guide.
Determining the fair market value of a car you donated is no problem if the value of the donation you are claiming is $500 or less. You can use a used car guide or a blue book to determine the fair market value of the donated car.
When using one of these guides, you should be honest about the condition of the vehicle. Very few people have cars in excellent condition. Most cars would probably fall into the average category. In addition, use the private sale price, not the higher dealer retail value.
If you are claiming a deduction of more than $500 for the car, the rules are a little more complicated. You will be able to deduct the smaller of the actual sales price of the vehicle received by the donee organization or its fair market value on the date of the contribution.
The donee organization will provide you with a Form 1098-C, which shows the gross proceeds from the vehicle sale. This 1098-C form must be attached to your return if you are mailing it in or transmitted as a PDF file if your software program allows you to attach it.
If you do not attach your Form 1098-C in some fashion, the deduction for the car will be disallowed by the IRS. This form serves as a type of control mechanism against taxpayers claiming inflated values for the used cars that they have donated – a problem with this type of donation in the past.
The key to donating clothing, household items and cars successfully is to know the rules for determining fair market value. Be reasonable when you are applying those rules. And always request some type of documentation from the charity when you donate.
©2014 CPAmerica International
At the beginning of the year, the IRS released its annual list of “Dirty Dozen” tax scams. The list covers a variety of scams, ranging from schemes perpetrated by taxpayers themselves (such as hiding income offshore or implementing abusive tax structures) to scams that are committed against taxpayers without their knowledge (such as phishing or stealing individuals’ identities to claim their tax refunds). While the IRS noted that there is an increase of these scams during tax season, taxpayers must be vigilant throughout the year, especially when it comes to fake charity schemes.
Impersonating charitable organizations has been around for quite some time and often occurs after major natural disasters. Scam artists will pose as legitimate charities to get money or private information from taxpayers by using various methods. One approach is to contact individuals via phone or email asking for donations or personal financial information. Another way is to create websites for fake charities where individuals can “donate.” Not only do these people lose their money, but they are also making themselves vulnerable to further theft by giving up their personal financial information. Other scam artists will contact victims of natural disasters directly and claim to help them file casualty loss claims and get tax refunds.
There are several things people can do to protect themselves against these types of scams.
Saving money and getting your finances on track is not always an easy thing to accomplish. One of the most helpful things to do to accomplish these goals is to create a budget. There are many different reasons why someone would want to create a budget including retiring early, paying off debt, stop living paycheck to paycheck, etc. Once you have decided to create a budget, a good place to start is by going over your spending during the past few months. By doing this it will help you assess how you are spending your money, and identify what areas of spending could be cut or reduced.
Separate your expenses into categories representing essential living expenses and discretionary expenses. The essential expenses include such items as rent, utilities, car payments, gas, insurance, and all other items that are necessary living expenses. The discretionary expenses include all other expenses that are not necessarily needed. To determine a limit for your discretionary expenses, take your monthly income, subtract all of your essential expenses, and the amount remaining is what would be available for the discretionary expenses.
To make your budget more effective allocate a portion of your income to savings. As a guideline, a good amount to save is between 10-20 percent of your monthly income. This will help for any future expenses, whether foreseen or unforeseen. It is important to set aside funds in case of an emergency. For example, you should have three to six months of living expenses set aside in an emergency fund.
Some things to consider that you may find helpful when you are trying to save money include cooking at home instead of eating out at restaurants, making coffee at home instead of the daily $5 latte, not waiting until your gas tank is running on empty so you have a choice at what gas station to stop at instead of the closest one to you, reducing the time you keep the air conditioner/heat on in your house, etc. There are many ways to cut your spending, even a small amount of savings here and there can add up.
It is important to create a budget that is both doable and realistic. If you are someone that has a discretionary expense that you are not willing to give up then make sure to factor it into your budget. If you don’t factor these expenses in your budget it will be impossible to stick to it, and will lead to overspending.
As you are cleaning house before the relatives come to visit, you may come across a number of items that you no longer need or want but could brighten someone else’s holiday season.
Many charities are looking for toys your children have outgrown or usable clothing that has gone out of style. Here are some tips for making someone else’s holidays a little brighter, while saving some tax dollars for you at the same time:
1. Only donations to qualified charitable organizations are tax deductible. Providing help directly to a family in need may fill you with the holiday spirit, but it will not secure a tax deduction for you. Maybe you can find a local church, temple, synagogue or mosque to act as a go-between.
➤ You must itemize your deductions to claim charitable contributions on your return.
2. If you receive a benefit because of your contribution, such as event tickets or a discount at a local restaurant, then you can deduct only the value of your contribution that exceeds the value of the benefit received.
3. Cash contributions, regardless of amount, must be substantiated by a bank record, like a canceled check or credit card receipt, showing the name of the charity and the amount of the gift. A written acknowledgment from the charity showing the date and amount of the gift will also suffice. Dropping a check in the kettle or asking the bell-ringer for a receipt takes some of the luster off the gift, but it’s a requirement if you want the tax deduction.
➤ The rules for a deduction of monetary donations do not change the requirement that you obtain an acknowledgment from a charity for each deductible donation – either money or property – of $250 or more. However, one statement containing all of the required information may meet both requirements.
4. If you have money taken out of your paycheck for charity, keep a pay stub, a Form W-2 or other document furnished by your employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
5. For 2013 only (unless Congress extends it again), an IRA owner who has reached the age of 70½ or older can make a direct transfer of up to $100,000 per year to an eligible charity, tax free. This means that amounts directly transferred to the charity from your IRA are counted in determining whether you have met the IRA’s required minimum distribution, but they will not be considered a taxable withdrawal. Some restrictions apply: Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
6. If you donate a noncash item, you can generally deduct the item’s fair market value – what the item would sell for in its current condition. Keep notes on how you determined the value. A picture of the item may also help if your tax return is audited.
➤ If the items you donate include used clothing and household items, there is an additional requirement that the deduction be allowed only if the item is in good used condition or better.
➤ On the other hand, if the item is worth more than $500, even if it is in less than “good” condition, you may still be able to claim the deduction if you go through the effort of obtaining an appraisal.
7. The rules for the donation of a car, truck, other motor vehicle, boat or airplane are a little different. Rather than using the fair market value of the donation, you generally are limited to deducting the gross proceeds the charity receives from its sale if the value of the item is more than $500. You must obtain a Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes, or a similar statement, from the charity and attach it to your tax return. Other rules apply if the charity doesn’t sell your donation within a specified time period.
8. If the total of all your noncash contributions is over $500, your tax return must also include a Form 8283, Noncash Charitable Contributions.
9. Special rules apply to donations of appreciated goods, like stock or jewelry, or difficult-to-value items, such as artwork. If you plan to make these kinds of donations, check with your tax adviser.
Contributions are deductible in the year made, so be sure to get those gifts in by Dec. 31. Credit card charges made before the end of the year are deductible even if you pay the credit card bill next year. Similarly, checks written and mailed by the end of the year are deductible this year even if they are cashed in 2014.
You can also take some time out of your busy schedule to volunteer at a shelter, deliver a meal to a shut-in or shovel snow for an elderly neighbor. You won’t get a tax deduction for the value of your time, but you will brighten someone’s day – maybe even your own. ■
©2013 CPAmerica International
With the year-end quickly approaching, it’s a good time to start planning your charitable donations. Donating not only allows you the opportunity to help others in need, it can also provide you with tax benefits.
The following are guidelines to help you maximize your tax benefits:
Donations of $250 or less require either a bank record, written receipt, or letter from the qualified organization.
Donations of $250 or more require a bank record or written receipt, AND an acknowledgement from the organization stating the amount of cash contributed, if any benefits were received, and a description of these benefits.