The benefits of charitable giving include personal fulfillment along with tax savings. While you are being generous, it is also important to develop your giving strategy.
What documentation does the IRS require for charitable contributions?
It is the responsibility of the taxpayer, not the IRS, to prove the validity of deductions taken for donations. If you are audited. the IRS will require you to provide a detailed itemization, as well as the supporting documentation. Cancelled checks are no longer adequate proof.
For cash donations over $250, you will need a written acknowledgement from the charity stating the date and amount of the donation, as well as a statement that no goods and services were exchanged. If you make multiple donations to the same charity throughout the year, aggregate the donations to determine if you exceed the $250 threshold. Report all of your cash donations in one lump sum.
For non-cash donations, such as clothing, furniture and household items, you must complete a separate schedule for claims over $500. If you make non-cash donations exceeding $5,000, you must obtain an appraisal of the value of the items donated. There are other special rules for donations of automobiles, computers, artwork and other types of property. Maintain detailed lists of the items contributed, as well as pictures, descriptions and methods used to value the contribution.
What percentage of my donation is tax-deductible?
To determine your tax benefit, you must estimate your expected tax liability with and without your charitable contributions and compare the differences. For those that use the standard deduction and don’t itemize, you are not allowed a deduction for charitable contributions. For those that itemize their deductions, in any one year, your charitable contributions can reduce only half of your taxable income, and donations to some types of charities can only reduce up to 30% of your taxable income. The amount that is not deductible can be carried over to future years.
Taxpayers in higher tax brackets generally will receive a larger tax benefit than those with smaller tax liabilities. However, there are many exceptions. For example, if you have a large tax liability due to your salary and other income, the Federal tax benefit you receive from a charitable donation may be as high as 35%. However, if your tax liability is high due to the sale of securities you held for a long time, the benefit you receive may be as low as 15%. While charitable contributions are not tax preference items for the purpose of alternative minimum tax (AMT), if you are in the AMT category, the tax benefit you receive may be between 26 and 28%.