It is common for organizations asking for donations to tout the tax benefits. However, over the years the abuse of this deduction has caused the IRS to increase the requirements to get the deduction on some items. Also, not every person benefits from a tax deduction for charitable contributions.
When it comes to cash donations, determining the deduction is fairly simple. The value of the deduction is the cash given less any benefit. If there is a benefit received the person accepting the donation should make this clear on the ticket, item purchased, or related literature. On a straight cash donation with nothing in return there is no benefit. The situation is more complex when it comes to donating items. There are many different ways to value the item – original purchase price, current value if sold, current value to donor, etc. From a practical perspective, on smaller donations of clothes and household goods a reasonable estimate might be enough. If the value of these donations is over $500 there is a special form that needs to be filed and it could be scrutinized more by the IRS. Furthermore, the rules related to deducting a donation of a vehicle have gone through changes. Vehicles can have a lot of different methods for determining value, which leaves this deduction open to abuse. As such, the IRS now requires more specific valuation procedures that may even require obtaining a tax form from the charitable organization to prove the car value. When donating a vehicle you should be sure to either consult with a tax professional, or donate to a reputable organization that has proper processes in place to meet IRS requirements.
Once it is clear you have a tax deduction for the charitable contribution, the next issue is if this is actually beneficial. Charitable contributions are deducted as an itemized deduction on Schedule A. This means, for people who take the standard deduction and do not itemize there is no tax benefit of a charitable contribution. Additionally, even for people who itemize there can be other limitations on the amount that is deductible. Overall, again you should speak with your tax professional to find out how much you will benefit from a charitable contribution. We should all do our part to give to these organizations but if you are making an additional contribution for year end tax planning or are donating more than you should because you are considering the tax savings you want to make sure it will actually be beneficial.
If you have any questions about your tax return and ability to deduct charitable contributions, or if you are in an audit trying to defend your deductions contact us at Hone Maxwell LLP today for assistance. We can review your case and work with you to determine your options or work towards resolution. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.