The government is not against the idea of people sharing their financial resources or property with charitable organizations that help others. In fact, the tax code specifically includes a tax deduction for the value of charitable contributions, which in turn lowers a filer’s tax liability annually. However, tax filers need to manage the documentation of their charitable gifts carefully if they are going to be included in a tax return. Because this area can be so subjective, the IRS has had to tighten up the documentation requirements on filers claiming charity tax deductions.
First off, any charitable gift, money or property, that will be included as a tax deduction needs to go to a recognized and qualified charity or non-profit entity. You can’t just donate to anybody’s help outfit and then claim it. The organization needs to be recognized as a charity or non-profit organization by the IRS. This typically occurs through what is known as the 501 3 C process. Entities approved can include churches, help organizations, non-profit community organizations, and full-fledged charity organizations. In comparison, political organizations and political candidate campaigns are not qualified and do not count for deductions. To compare and be sure if an organization is qualified you can use the information from IRS Publication 526 – Charitable Contributions to be sure.
The claiming of the deduction occurs as part of your tax return filing. When itemizing your deductions, the charitable contributions will come up as an option. Your deduction will then get listed on IRS Schedule A, which is then attached to the filed Form 1040.
Many people think that if they pay for an event that says the ticket is for a charity program, that the entire cost of the ticket is deductible. This is not the case. The tax filer has to adjust the payment for the value of anything received. So, if the filer pays for a ticket to a charity baseball game that costs $50, but a normal game at the event site costs $20, the filer can only deduct the $30 difference, not the full value of the ticket paid. This is because the filer received a benefit in the form of the game.
Donation of personal property generally should be valued at what the property is currently worth on the used fair value market. Fair market value essentially means what someone would pay for the item, knowing the full condition of the property and not having any requirement to buy it or sell it. Clothes, for example, need to be in a usable condition, not torn up and soiled. Thus, for example, valuing a large plastic bag of 20 or 30 items of clothing at $20 is likely reasonable. Claiming $400 for that same bag is clearly out of the question. Further, any kind of a vehicle donation has special rules that apply, typically involving how the value is appraised.
When donating a financial payment, it’s not enough to have a flyer. The filer needs to keep a record of the receipt of payment, the cancelled check if possible, a copy of the payment itself if not cash, and bank statements. Word of mouth or anecdotal statements are insufficient proof of a cash charity donation. One of the issues happening with modern technology is that many people are now donating with smart phones. For documentation purposes the filer will still need to retain a record of the transaction from his electronic payment software or website as well as any text messages confirming payment and the transaction. Bank records will also show the funds moved via the electronic payment tool.
Any donation that is worth more than $250 in value must have specific documentation on file. This includes a bank record and receipt for cash payments, as well as an appraisal or valuation method document for property. Any deduction totaling more than $500 in aggregate requires the filer to also fill out IRS Form 8283 and attach to his filed tax return. For donations over $5,000, the filer needs to make sure to fill out Part B of the Form specifically. This requires documentation of a licensed appraiser.
Because charitable donations and related deductions are such a unique, case-by-case situation, IRS Publication 526 – Charitable Contributions should be referenced. Additionally, IRS Publication 561 – Determining the Value of Donated Property is also available. Both manuals can be downloaded via the Internet from the IRS’ website at www.IRS.gov. Additionally, hardcopies can be requested and sent by mail by calling 800-TAX-FORM (800-829-3676).
Sources:
IRS Publication 78, Cumulative List of Organizations
IRS Publication 526, Charitable Contributions
IRS Publication 561, Determining the Value of Donated Property
IRS Instructions for Form 8283, Noncash Charitable Contributions