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Q. Can I get the full scoop on tax write-offs for charitable donations? I give to several causes and wonder if my volunteer work and the used clothing I donate to Goodwill are deductible.
A. For anyone who itemizes deductions on her tax return -- and most homeowners do -- charitable giving is one of the most solid write-offs around. (It's even exempt from the Alternative Minimum Tax, which limits many deductions.) Still, the tax issues around charitable donations are more nuanced than people realize. Many DIY tax filers overclaim their contributions -- an honest mistake that can lead to an IRS audit. Here's what you need to know.
When you give to charity, you not only do a good deed but also get a financial benefit because you can subtract the donation's value from your total taxable income. Let's say you're in the 25 percent federal tax bracket. For every $100 you give, you'll save $25 in taxes. Many states also allow charitable deductions, so depending on where you live, you may get additional tax savings.Is My Charity Eligible?
Before you donate, make sure your organization has tax-exempt status. In general, religious groups, charitable organizations, social agencies, and nonprofit schools and hospitals qualify. To verify a recipient's eligibility, go to the "Exempt Organizations Select Check" page on irs.gov.What Are the Rules?
In order to write off a cash donation, the money must be a gift, meaning you get nothing in return. So admission to a museum isn't deductible, nor is that raffle ticket you bought at the church fair (because you received a chance to win). And a thank-you gift worth more than $10 -- a tote bag, for instance -- must be subtracted from the donation amount for tax purposes. Similarly, if you attend a charity event for which you pay, say, $200, you can deduct only the amount that's left after you factor in the cost of the entertainment or meal. Keep all your receipts, though the charity will likely provide you with a letter stating your tax-deductible amount. For a deduction on this year's return, your donation (if mailed) must be postmarked by midnight on December 31 or the receipt must indicate that the gift was received by then. If you're contributing online, you'll usually get an e-mail acknowledgment.
And, sorry, volunteer work is not deductible. But you can write off certain costs related to unpaid work with an IRS-approved charity, such as mileage to and from a soup kitchen where you help out or plane and hotel costs for traveling to, say, Detroit to help rebuild houses with Habitat for Humanity.
Before giving old clothes and household items to Goodwill or a similar charity, snap photos and write down a realistic value for each item. Many people assume their stuff is worth more than it is -- a red flag for tax agents. A woman's suit, for example, is worth $6.50 to $25; a washing machine $40 to $150. Check the valuation chart on the Salvation Army's website.
Higher-value donations are trickier. If you donate a car worth more than $500, your deduction is its fair-market value or the price the charity sells it for. The same goes for artwork and musical instruments: If the charity resells the piece, that price establishes your deduction. If it keeps the piece, you'll need a fair estimated value or, if you're claiming more than $5,000 in total giving, an appraisal. If you're the artist who created the work? You can deduct only the cost of materials.
Donating stock instead of cash offers an added benefit. If you take cash out of a stock fund, you pay capital gains on any earnings on the original investment, whereas donating the shares directly spares you the tax hit. The deduction amount is the midpoint of the holding's value on the day you donate it.Is There Any Reason Not to Give?
Beyond having to itemize your deductions and perhaps fill out some extra paperwork (such as Form 8283 for noncash donations totaling more than $500), there's really no downside. The IRS sets limits on how much you can write off in a given year -- though a really large gift can be amortized over five years -- but few of us would reach those limits. The bottom line? The tax breaks are just gravy. The true payback is the good feeling you get when you donate to your favorite cause.
Susan Bruno is a certified public accountant and cofounder of DivaCFO.com. She has written on financial topics for the Wall Street Journal and CNNMoney.