Ways to give back, and then get back at tax time
Americans donated $389 billion in 2016. In addition to helping others, taxpayers can use their charitable contributions to help themselves by lowering their own tax liability. For example, a taxpayer with a marginal tax rate of 25 percent could save $25 in taxes for every eligible $100 donation. Taxpayers who want to take a charitable contribution deduction on their tax return should follow these guidelines.
Ways to donate include cash and nontraditional gifts
The first step for taxpayers is simply to give: give cash, give clothing or give household goods. There are other nontraditional ways to donate, like sending a text to give to a charity or donating a vehicle, which could be an eligible charitable contribution deduction if it meets the other requirements.
“While there are a lot of types of charitable giving, there are some restrictions if you want to deduct the contribution. You must have financial investment or basis in the gift. For example, if you donate a gift you received, it may not be an eligible donation for tax purposes if you cannot substantiate your basis,” said Nathan Rigney, lead tax research analyst at The Tax Institute at H&R Block. “Likewise, you cannot receive something of equal or greater value in return for your donation. That makes it a purchase, not a donation, even if the funds go to a charity.”
Give to qualifying charities
Taxpayers must give to eligible charities if they want to deduct their contribution. Most organizations, other than churches and government entities, must apply to the IRS to become a qualified charitable organization. Taxpayers can use the IRS online tool to search for charities’ eligibility.
“You can be generous without being charitable as far as the IRS is concerned,” Rigney said. “Giving to individual friends, family or even strangers for medical, educational or other generous purposes is not deductible because they are not qualified charitable organizations with the IRS.”
Observe December 31 deadline
To deduct their charitable donations on their 2017 tax returns, taxpayers must give by Dec. 31, 2017. If paying by credit card, the gift must be charged by Dec. 31, but the credit card bill does not have to be paid by Dec. 31. If paying with a check, it must be in the mail and postmarked by Dec. 31. The check does not have to clear by Dec. 31 to qualify for a 2017 deduction.
Understand documentation requirements
“Taxpayers must keep good records to substantiate their donations. The substantiation needed depends on both the type of donation and its size,” Rigney said.
For cash donations, taxpayers must have either a bank record, such as a cancelled check or credit card statement, or a receipt from the charity. For cash contributions of $250 or more, the taxpayer must obtain a written acknowledgement from the charity or certain payroll deduction records.
If the donation is not cash, taxpayers will need to have different documentation, including receipts, acknowledgments, appraisals and even pictures depending on the value of the donation.
Taxpayers do not have to submit substantiation documents with their returns, but must have them available to back up their deductions. Taxpayers who make non-cash contributions and claim charitable deductions in excess of $500 must complete Form 8283 and submit it with Form 1040.
Itemize to take the charitable contribution deduction
The final step is to itemize deductions. But, not every taxpayer will benefit from itemizing their deductions. It might benefit them to use the standard deduction if it is bigger than their itemizations. The standard deduction is $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly.
Taxpayers should talk to a trusted tax professional to learn more about their specific situation.