Charitable Donations Can Lower Tax Bills 

From IRS website at http://www.irs.gov  

Reference: http://www.irs.gov/newsroom/article/0,,id=104347,00.html

WASHINGTON – As the end of the year quickly approaches, the Internal Revenue Service reminds taxpayers that they may be able to use their gifts to tax-exempt charitable and religious groups to reduce their taxes.

Taxpayers also need to keep in mind some simple steps to make sure they get appropriate benefit for their generous donations.  In particular, there are some important guidelines for donating used cars and other property, such as stocks and bonds.

“We want people to be focused on helping these worthy groups rather than worrying about tax issues,” said Bob Wenzel, Acting IRS Commissioner.  “A few simple steps can help avoid tax headaches.”

The tax benefit for charitable contributions is only available for taxpayers who itemize deductions – about one-third of all filers. Those who take a standard deduction receive no additional tax benefit for their contributions.

In 1999, the last year for which complete data is available, about 35.5 million taxpayers made deductible charitable contributions totaling nearly $125.8 billion.  Of these gifts, nearly $88.3 billion were cash donations.

Only contributions actually made during the tax year are deductible.  For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your 2002 deduction would be $200.  You include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

Those itemizing deductions reduce their taxable income by the total contributed to qualified tax-exempt organizations, with some limits.  The tax saving usually equals the deduction times the marginal tax rate – the top rate for the person’s income level.

For example, an individual with a taxable income of $50,000 donates $2,000 to his or her church.  The tax savings from this generosity will be $540 – $2,000 times the taxpayer’s marginal tax rate of 27 percent.

Donations of stock or other property are usually valued at the fair market value of the property.  For stocks and bonds with an active market, the fair market value is the average price between highest and lowest selling price on the valuation date.

Figuring the value of other personal property can be more complicated.  For example, determining the value of a donated used car requires weighing several factors.   Some car donation program operators have mistakenly suggested that donors can take as a deduction the full value listed in an established used car pricing guide.

The tax law, however, allows a deduction for only the fair market value of the car.  Fair market value takes into account not only the year, the model and the mileage of the car, but also the local market and the vehicle’s condition.  As a result, the fair market value of the taxpayer’s car may be substantially different than the average price listed in an established used car guide.

The IRS also reminds taxpayers to keep appropriate records to substantiate the value of their gifts.  For example, for any single gift of $250 or more, a taxpayer must have a written acknowledgement from the charity by the earlier of the date the person files the tax return or the filing deadline, including extensions.  A person donating property valued at more than $5,000 must obtain a qualified written appraisal.

Taxpayers can find help regarding the donations they make in Publication 526, Charitable Contributions.  A second reference, Publication 561, Determining the Value of Donated Property, answers many of the questions that donors have when they make noncash contributions.

Tax Rules for Charitable Deductions

To be deductible, charitable contributions must be made to qualified organizations. Qualified organizations include, but are not limited to, Federal, state, and local governments and organizations organized and operated only for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals. Organizations can tell you if they are qualified and if donations to them are deductible.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

For a contribution of $250 or more, you can claim a deduction only if you obtain a written acknowledgment from the qualified organization. You generally can deduct your cash contributions as well as the fair market value of any property you donate to qualified organizations. The fair market value of most household or personal items is generally much less than the price paid when new. You should claim only what the item would sell for at a garage sale, a flea market, or a second hand or thrift store. You must fill out Form 8283 (PDF) Section A, if your total deduction for all noncash contributions is more than $500. If you make a contribution of noncash property worth more than $5,000, generally an appraisal must be done. In that case, you must also fill out Form 8283 Section B. Attach Form 8283 to your return. For more information on this requirement, refer to Publication 526.

Generally, if property you contribute increased in value while you owned it, you may not be able to deduct its full value. Refer to Publication 526. You may have to make an additional computation which includes the property's cost to determine the deductible amount of your contribution.

Contributions you cannot deduct at all include contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance. You cannot deduct contributions that you give to qualified organizations if, as a result, you receive or expect to receive a financial or economic benefit equal to the contribution.

Although you cannot deduct the value of your time or services, you can deduct the expenses you incur while donating your services to a qualified organization. If the expenses are for travel, which may include transportation and meals and lodging while away from home, they may be deducted only if there is no significant element of personal pleasure, recreation, or vacation in the travel. Actual costs of gas and oil can be deducted, or you can choose to take 14 cents per mile for using your own car.

Deductions for contributions in excess of 20% of your adjusted gross income may be limited depending on the type of property or the type of organization the donation is contributed to.

For more information, refer to Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property.