Even though the U.S. is steadily rebounding from the recession, times are still tough. According to the Bureau of Labor Statistics, the unemployment rate is still hovering around 7%. And the gap between the poverty line and the middle class continues to widen. It can be a stretch for households to donate to the less fortunate during the holiday season, but as the old adage goes, it is better to give than to receive. And, when it comes to your taxes, that couldn’t be more true. Charitable donations can actually lessen the amount of taxable income you have and reduce the taxes you owe the IRS.
Charitable donations are tax deductible, but there are some guidelines you need to follow. The rules can be tricky. When in doubt, seek the help of a certified tax professional. To get you started, here are some tips for deducting charitable donations from your taxes:
1. Donations must be money or property. It isn’t enough to want to give. You actually have to transfer cash or goods to qualify for a tax deduction. When it comes to cash contributions, there are limits to how much you can donate. Typically, cash contributions of up to 50% of your adjusted gross income can be deducted, or 20% if the contribution is the asset of capital gains. If you donate cash beyond these restrictions, your contribution can be carried over for the next 5 tax years. If you are contributing property, different rules apply. For instance, the fair market value of your contributed property must be assessed, you need to receive written acknowledgement of a donated vehicle worth more than $500, and written appraisal of a property’s fair market value is required if it is over $5,000.
2. Keep a record of your donations. Make sure you keep accurate, written records of all the charitable contributions you plan to deduct on your taxes. Records must include transaction details, such as the name of the charity, the amount of the donation, and the donation date. Bank statements and checks are acceptable written records, and charities often provide a written letter of acknowledgement or receipt for donated items. Keep these records with the rest of your tax paperwork for easy access when you need to refer to them.
3. Deductions must be itemized and go to a qualified organization. When you file your taxes, you must use Form 1040 and list your deductions on Schedule A. Itemizing your deductions can save you money beyond the standard deduction. But just make sure the total of your itemized deductions is greater than the standard deduction, or you might end up paying more than you have to. Also, be sure that your donations are going to a qualified organization. Charities are required to have tax-exempt status, and while churches and other religious institutions are not, they are still considered qualified organizations.
4. Not all contributions are tax deductible. You may be in the giving spirit, but that doesn’t mean that all contributions are tax deductible. Contributions to political campaigns, individuals, professional associations, labor unions, and for-profit schools and hospitals are not eligible to help you get a break on your taxes, and may even wind up getting you audited instead.
Authored by Financial Social Media (financialsocialmedia.com)