Dont Fall For Fraudulent Charities
While we want legitimate charities and the people they serve to benefit from the generosity of caring Americans, we also want to protect those who plan to donate from being scammed by criminals.
Before you donate to a charity you learned about online or through mailings or phone calls, you can go to IRS.gov to make sure the charity is legitimate. Its sad but true: When situations like the pandemic and natural disasters occur, some charities pop up overnight to attempt to profit from peoples good will, and they dont have tax-exempt status. Thats why my organization developed the Tax Exempt Organization Search tool to help prospective donors make sure an organization is eligible for tax-deductible donations. We also have more information available in Publication 526, Charitable Contributions, and on the TEOS site.
Heres another important piece of advice: No matter what charity you decide to contribute to this year, make sure you keep good records when you donate. Get a receipt or some type of written acknowledgement from the charity and retain a cancelled check or credit card receipt. Under the law, special recordkeeping rules apply to any taxpayer claiming a deduction for a charitable contribution.
On behalf of all of my IRS colleagues, we wish you all a safe and happy holiday season.
Sunita LoughCommissioner, Tax Exempt and Government Entities Division
Determining A Donated Item’s Fair Market Value
The IRS uses fair market value to establish the amount you can deduct for almost all donated items. The IRS defines FMV as what a consumer would willingly pay for an item if neither the seller nor the buyer was under any duress to make the sale. Both parties must have reasonable knowledge of the relevant facts.
Some organizations post approximate values for various items on their websites, but these are just guidelines.
For example, the Salvation Army wont tell you what your particular item is worth when you hand it over, but it does list values for items like appliances, clothing, and furniture on its site. And Goodwills values are based on what theyre generally able to sell items for at their locations. Goodwill says that 30% of the items original purchase price should be a close estimate, but this assumes it’s not in awful condition. The IRS indicates that the fair market value of furniture, in particular, should not be judged by this rule of thumb.
How Does The Pease Limitation Affect My Tax Deduction
The Tax Cut and Jobs Act of 2017 removed the Pease limitation from the tax code. The Pease limitation was an overall reduction on itemized deductions for higher-income taxpayers. The rule reduced the value of a taxpayers itemized deductions by 3% of adjusted gross income over a certain threshold. The 3% reduction continued until it phased out 80% of the value of the taxpayers itemized deductions.
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Payments Not Accepted As Allowable Deductions
Not all payments to tax-exempt charities are deductible. The following are examples of payments not accepted as allowable donations:
- Payments for lottery or raffle tickets
- Payments for admission to film shows or charity shows
- Payments for grave spaces
- Payments made for services such as saying prayers or the reservation of a space for ancestral worship
- Purchase of goods in bazaars
- Payments made to a church, a tax-exempt charity, through dropping cash in the donation bag during Sunday masses except where donation receipts could be produced to prove the amount of donation made by the claimant.
Claiming Tax Deductible Donations
Tax deduction is given for donations made in the preceding year. For example, if an individual makes a donation in 2021, tax deduction will be allowed in his tax assessment for the Year of Assessment 2022.
You do not need to declare the donation amount in your income tax return. Tax deductions for qualifying donations will be automatically reflected in your tax assessments based on the information from the IPC . IRAS will no longer accept claims for tax deduction based on donation receipts.
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What Can I Take A Tax Deduction For
In order to make a donation tax-deductible, youll need to itemize your deductions. That means all of your itemized deductions should be greater than the standard deduction. Here are some of the biggest itemized deductions that may apply:
- Unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income.
- Mortgage interest .
- A home equity loan or line of credit interest, but only if used for home improvements, buying, or building.
- Personal property, state, and local taxes .
When planning your charitable contributions for 2022, first calculate your other potential itemized deductions. That gives you a starting point to see how much you would need to donate in order to make a difference in your taxes. Ultimately, the total would need to exceed the standard deduction amount for your filing status.
Lets look at an example of mortgage interest and property taxes, which are two of the most common itemized deductions. If you have a $750,000 30-year mortgage at a 3.5% interest rate, youll pay over $26,000 in interest in the first year. Say the house is assessed at $850,000 and is subject to San Franciscos 1.1801% property tax rate. That makes your annual tax bill around $10,000. In total, you could deduct $36,000 from your tax bill, rather than the standard deduction, which ranges from $12,950 to $25,900.
What Is A Charitable Tax Deduction
The IRS allows taxpayers to take a charitable deduction for donations to nonprofit organizations. If you donate more than the charity reimburses you for the goods or services, you can write off the difference in your adjusted gross income. To take advantage of this deduction, you must submit Form 8283.
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Consider A Qualified Charitable Distribution
If you are taking RMDs, another strategy that can reduce your taxable income is a qualified charitable distribution, or QCD. These are donations made directly from your IRA to your chosen charity. While the gift amount won’t qualify for a charitable deduction, it won’t be considered taxable income either. This effectively deducts the amount transferred to charity from your taxable income, even if you would not otherwise be itemizing deductions. QCDs count toward satisfying your required minimum distribution for the year if it has not already been met. Reducing your taxable income also may be useful for nontax reasons, such as calculating your Medicare premiums. In order to benefit from this strategy, you need to meet a few strict requirements, so make sure you talk to your advisor or accountant first.2
Example: Sally has an IRA with a $10,000 RMD. She directs $1,000 from her IRA to her favorite charity and takes the remaining $9,000 RMD. On her income tax return, she will report only $9,000 of taxable distributions from this retirement account.
What Charitable Donations Are Not Deductible
Some contributions aren’t tax-deductible, including:
- Gifts made to political parties, political campaigns, or political action committees
- Gifts donated to individual people
- Contributions to labor unions, chambers of commerce, or business associations
- Contributions to for-profit schools and hospitals
- Contributions to foreign governments
That still allows for a lot of charitable giving to whittle away at your tax liability, if you choose to itemize.
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Calculate Your Potential Tax Benefit
Enter your donation amount and select your income bracket to estimate your potential savings.
*You may be eligible for a tax deduction for your donation over $2. These figures are based on Australian Taxation Office 2021/22 figures according to your individual circumstances. The amounts shown in the calculator above are a guide only, you should always seek independent financial advice.
How Much Can You Claim In Charitable Donations Without Receipts
It depends on what type of giving you give and how much.
- Cash contributions: Any cash contributions under $250 dont require a receipt from the organization. Any contribution of $250 and over does require some type of written communication from the organization confirming your donation.
- Non-cash contributions: For non-cash contributions, the limit to make a deduction without a receipt is $500. Additionally, non-cash contributions also require an appraisal to determine the fair market value of the item you donated. If the value is $5,000 or less, you just need to hang onto the appraisal with your tax documents in case of an audit. But if the appraised value is more than $500,000, you must submit the qualified appraisal to the IRS with the rest of your tax return.
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New Tax Laws And Charitable Donations
Big changes often have unintended consequences and the Tax Cuts and Jobs Act of 2017 was one of the biggest changes in the history of American tax law. These changes may have an effect on nearly every person who makes a charitable donation. However, it could be children in need who stand to lose the most.
Can I Take A Fair Market Value Deduction For Donating Private S
Yes, it’s possible to deduct the full fair market value of the contribution if the recipient organization is a public charity. But tactically, the answer depends on whether the charity is able to accept private stock as a gift. Most charitable organizations simply dont have the resources, expertise or appetite to efficiently accept and liquidate these types of assets, particularly in a time crunch at the end of the year.
However, Fidelity Charitable has a team of in-house specialists who work with donors and their advisors to facilitate charitable donations of S-corp and private C-corp stock every day . Once you make a donation to Fidelity Charitable and the asset is sold, youre able to recommend grants to your favorite charities, quickly and easily.
And by donating private stock, you generally do not pay capital gains taxes on Fidelity Charitable’s subsequent sale of the stock. There’s a second tax benefit as well: you’ll generally be able to deduct the full FMV as determined by a qualified appraisal.
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Additional Forms You May Need
You must get a written acknowledgment or receipt from the organization for any gift you make for which youre claiming a deduction of $250 or more.
Youll also have to submit Form 8283 for many of these items. Section A of Form 8283 must be submitted for all donations valued at over $500, and really pricey gifts over $5,000 require that you fill out Section B and have an appraisal to support the value.
Household goods and clothing items that arent in at least good, used condition require an appraisal as well as completion of Section B if you claim more than $500 for them.
What Does The New Tax Law Mean For Charitable Donations
The tax incentives for charitable giving havent gone away. Charitable donations to eligible 501 non-profit organization, such as Save the Children continue to be itemized deductions which may reduce your taxable income.
You should keep a bank record or receipt of the transaction. Previously, this requirement was waived for smaller donations granted to tax-filing charities, but thats no longer the case. Managing that requirement may be easier if you donate by check or credit card.
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Entities Taxable Under Mgl C 62
The deduction for charitable contributions under M.G.L. c. 62 is not available to entities taxable under M.G.L. c. 62. Fiduciaries. All fiduciary taxpayers that claim a deduction for charitable contributions, including those that deduct charitable contributions from federal income tax pursuant to Code § 170, shall deduct qualifying charitable contributions under M.G.L. c. 62, § 3 and not under M.G.L. c. 62 § 3. Flow-through Entities.
1. Partners take charitable contributions separately as each partner’s distributive share of the partnership’s charitable contribution. ).2. S corporation shareholders take charitable contributions separately as each shareholder’s share of the S corporation’s charitable contribution deduction. ).
Corporate Trusts. Corporate trusts may not claim the deduction because under M.G.L. c. 62, § 8, a corporate trust is not allowed to claim deductions under M.G.L. c. 62, § 3.
Deduction For Donated Goods Set At Fair Market Value
Charitable contribution deductions are allowed for donations of goodssuch as clothes and household itemsto Goodwill, the Salvation Army, and similar charities. Used clothing and household items must be in usable good condition, and the deduction amount is limited to the items fair market value at the time of contributionfor example, its thrift-store price.
Special rules apply to vehicle donations. If the fair market value of a vehicle is more than $500, you can deduct the smaller of:
- The gross proceeds from the sale of the vehicle by the organization
- The vehicle’s fair market value on the date of the contribution
Conversely, if the fair market value is less than $500, you can deduct the smaller of:
- The vehicle’s fair market value on the date of the contribution
When a taxpayer claims more than $500 in total deductions for non-cash contributions, they must file IRS Form 8283 with their tax return. Some tax preparation software packages include calculators to help determine the fair market value of various items. IRS Publication 561 is a useful resource to help you decide the value of your non-cash contributions.
Only taxpayers who itemize their deductions can deduct donations of property as charitable contributions. The 2021 charitable deduction for nonitemizers is limited to contributions made in cash, but for 2022, the contribution amount and itemizations that will be allowed by the IRS have not been set, as of Jan. 13, 2022.
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For Donations Over $250
For donations worth over $250 you’ll need a “contemporaneous written acknowledgement” from the charity you contributed to.
Basically, this is written proof from the charity. Their statement will need to include:
- The amount of money you donated
- A description if your donation
- An explanation of whether the charity gave you something in return
How to handle quid pro quo contributions
Sometimes, you might get a gift in exchange for your gift â say, concert tickets or a bottle of wine. In that case, the organization will have to describe what they gave you and estimate how much it’s worth.
These are called quid pro quo contributions: âthis for that,â meaning the donor gets something in return. For these, the IRS requires you to subtract the value of that thank-you gift from the donation you made when you claim your deduction.
Claim A Tax Deduction
Your monetary donations and donations of clothing and household goods that are in good condition or better are entitled to a tax deduction, according to Federal law. The Internal Revenue Service requires that all charitable donations be itemized and valued.
Use the list of average prices below as a guide for determining the value of your donation. Values are approximate and are based on items in good condition.
Its a good idea to check with your accountant or read up on the rules before you file you return. Here are some handy IRS tips for deducting charitable donations.
When you bring items to one of our donation locations, you may fill out a paper donation form. The form is required if you are donating computers and other technology equipment so that we can comply with state reporting requirements. Thanks for taking the time to fill it out!
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Corporate Deduction Limit Increased
Prior to the passage of the new laws during the pandemic, the maximum allowable deduction was limited to 10% of a corporation’s taxable income. The law now permits C corporations to apply an Increased Corporate Limit of 25% of taxable income for charitable contributions of cash they have made to eligible charities in 2021. But keep in mind that it doesnt automatically apply, so C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis. For more information about these and other COVID-19 provisions, visit IRS.gov/coronavirus.
Charitable Donations: The Basics Of Giving
Remember the adage Its better to give than to receive? With proper planning, its possible to do both at the same time. Your financial goals may include giving to the causes that are most important to you. As you plan, these strategies can help you make the greatest impact while potentially receiving tax savings too.
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For Noncash Donations Over $5000
Donated something worth over $5,000 â say, fine art or a car? You’ll have to attach a qualified appraisal to your Form 8283. Section B of the form deals with these big-ticket donations.
Whether youâre donating cash, canned goods, or even antiques, your generosity makes the community stronger. Now that you know how to deduct your gifts, it can make your finances stronger too.
Keep giving back, and enjoy those tax breaks!
Soo Lee, CPA
Soo has over 10 years of experience at publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diverse industries, including manufacturing, wholesale and retail, construction, real estate development, banking, finance, and professional and legal consulting. At Pricewaterhouse Cooper, she worked with many foreign-owned companies and advised clients on a broad range of issues, including federal and state tax minimization, determining the optimal structure for new foreign investments, and restructuring and reorganization for existing operations.
Donation Season Is Coming Up
While you may donate to a list of nonprofits every year, it’s probably worth your time to do a little extra planning on how you make those donations. If your itemized deductions barely exceed the standard deduction, consider batching and donating appreciated stocks to get the most out of your donations. If you’re a retiree dealing with big required minimum distributions, use a qualified charitable distribution.
Spending a little time to plan your donations can give you a lot more to spend on the things you care about.
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