In order for your donation to be deductible, it must go to a nonprofit group that is approved by the IRS. Most often, these are charitable, religious or educational organizations, though they can also be everything from your local volunteer fire company to a group for the prevention of cruelty to animals.
If you're not sure whether the group you want to help is approved by the IRS to receive tax-deductible donations, check online at IRS Search for Charities. This site allows you to enter the name and location of an organization and find out instantly if it qualifies.
Make sure it counts
To write off any cash contributions, no matter how small, you need a canceled check, bank record or a receipt with the charity's name and donation amount. That means that putting cash in the church collection plate or the Salvation Army bucket is a no-no if you want to be able to take a deduction for it.
As with all itemized deductions, timing is everything. You can take the deduction for your contribution in the year that you make it. For example, if you mailed a check to your favorite charity on December 31, you can write it off on that year's tax return. If you charge the donation on a credit card, the write-off is claimed in the year the charge is made, even if you don't pay the credit card bill until the following year.
But a pledge to make a donation is different: Because it's only a promise to make a future donation, there's no deduction until you actually follow through.
Donations are limited
There's also a limit on how much you can deduct. The basic rule is that your contributions to public charities, colleges and religious groups can't exceed 50 percent of your Adjusted Gross Income (AGI). The caps are a bit lower for gifts to other types of nonprofits. When it comes to gifts of appreciated property, the limit drops to 30 percent of AGI. If these restrictions limit your write-off in the year of the gift, the excess deduction carries over to the next year.
Also, keep in mind that you can't write off a contribution to the extent that you get something in return. For example, if you buy a $50 ticket to a fundraising dinner at a church, but the cost of the dinner is $20, you can deduct $30. For donations of more than $75, the nonprofit must give you a written statement telling you the value of what you received in return and reminding you that you can't deduct that portion of your contribution.
There's also a special rule for folks who donate to colleges and universities and receive the right to buy tickets to school athletic events: They can deduct 80 percent of their donation.
Appreciated property
Cash may be king, but if you want a really big tax saver, your best bet may be a donation of appreciated property—securities, real estate, art, jewelry or antiques.
If you have owned the property more than a year, you can deduct its full fair market value and escape income tax on the appreciation. It pays to keep that property the full 12 months before giving it away: For property held one year or less, IRS only allows you to claim a deduction on the price you paid for it.
How a gift is used affects donor value
For property worth more than $5,000 ($10,000 for stock in closely-held firms), you'll need to get a formal appraisal. Not only that, but you'll have to make sure the appraiser is a member of a recognized professional group or meets minimum education and experience guidelines. If you don't, the IRS can disallow your deduction.
If you're donating tangible personal property, such as a work of art, what the charity does with the item affects how much you can deduct. If you donate land so the local homeless shelter can build a new facility to house more people, you can write off the full market value.
But let's say you donate a work of art to the shelter for its fundraising auction: In that case, you only get a deduction for the price you paid for the artwork. What if you donated the piece of art to a museum that will display it as part of its collection? In that case, you get to deduct the full market value.
Contributing household items
Donating used goods such as clothing, linens, electronics, appliances and furniture gets you a write-off for the item's fair market value at the time you donated it, which may be considerably less than what you originally paid.
The IRS has a helpful booklet on this subject, Publication 561: Determining the Value of Donated Property.
Congress has clamped down on donations of household goods to make sure folks aren't inflating the value of their used stuff. No tax deduction is allowed unless an item is in good condition or better. If an item in less-than-good condition is valued at more than $500, you can take a deduction only if you get the item appraised and attach the appraisal to your return. Congress also gave the IRS broad authority to deny deductions for low-value items such as used socks and underwear.
Donating vehicles
If the claimed value of your donated vehicle is more than $500, in most cases your deduction is limited to the amount the car brings when it's sold at auction. The charity has 30 days after it sells your vehicle to issue you a Form 1098-C that shows the sale price. You must attach that form to your tax return or the IRS will disallow the deduction.
There are, however, some situations where you're permitted to claim the car's estimated market value: if the charity significantly improves the vehicle, makes significant use of it, or gives the vehicle (or sells it at a discount) to a poor person who needs transportation. For more information, check the IRS article: IRS Guidance Explains Rules for Vehicle Donations.
Volunteer services
Don't overlook the volunteer work you perform, which may also generate a deduction. You can write off many out-of-pocket expenses you incur to do good work, including what you pay for materials, supplies, uniforms, stationery, stamps, parking and tolls.
You can also deduct the cost of driving to and from your volunteer work, at a rate of 14 cents per mile. If you take public transportation, that bus or rail fare is deductible, too.
But here's the bad news: The value of services you provide as a volunteer don't merit a write-off. For instance, if you're a carpenter and you help a nonprofit group build a home for the poor, you can deduct travel costs and building supplies you buy, but not the value of the work you do. (That's not as hard-hearted as it may seem. If you were paid to do the work, you'd have to report the pay as income, which would drive up your tax bill.)
TAX DEDUCTONS FOR CHARITABLE CONTRIBUTIONS
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