Getting the most from your charitable deductions
Charitable deductions can be a complex and confusing area of your tax return. Understanding what you can deduct and what you can't deduct can be confusing. Documenting it properly adds yet another layer of difficulty. To help sort it all out, I talked to Kelly Erb, (a.k.a. Taxgirl), and Kay Bell (of Don't Mess With Taxes).
- Erb is a tax attorney who runs her own tax law firm with her husband. She's also been blogging about taxes for the past six years. Before striking out on her own, she clerked for the IRS, specializing in estate and gift taxes. She also worked for a boutique law firm that primarily handled estates and gifts.
- Bell is the author of The Truth About Paying Fewer Taxes, and the founding editor of Bankrate's tax section. She has worked on Capital Hill with the House Ways and Means committee.
Both women offered great tips for getting the most from your charitable deductions while taking care to avoid pitfalls that could get your return flagged.
Should You Be Taking Charitable Deductions?
Most people give at least some money to charity, but few of us take our charitable deductions. In fact, only about a third of households itemize their deductions. The rest simply take the standard deduction, which for the 2010 tax year is:
- $11,400 for a married couple filing jointly
- $5,700 for individuals
For those taking the standard deduction, charitable donations aren't deductible.
If you don't normally itemize your deductions, it's probably not worthwhile to do it just for your charitable giving. The exception would be if you give a large amount to a charity. Bell mentioned folks who tithe 10% of their income to a church as exceptions who may give enough to make the itemized deduction worthwhile.
To find out if you should be itemizing your deductions, Bell suggests you add up your deductible expenses: things like medical expenses, mortgage interest, property taxes, state income taxes and charitable gifts. If the amount you paid on these taken together is more than your standard deduction, you'll want to itemize. You always want to take the largest deduction possible.
If you're itemizing your deductions, you may have overlooked charitable donations. But you don't want to pay more taxes than you're obligated, so keep track of everything you give to charities throughout the year. That includes goods and out-of-pocket expenses, as well as money.
Folks in higher tax brackets will benefit the most from charitable deductions. A deduction reduces your taxable income. So, if you're in the 28% tax bracket and you donate $5000 worth of stuff, you'll take $1400 off your tax bill. If you're in the 15% bracket and you donate $5000, you'd get only $750.
If your total donations for the year add up to $100 of Goodwill giveaways, careful record-keeping to claim them on your taxes may not be worth your time. Erb says keeping good records of donations is worthwhile for most people, though, because you'll be surprised how your charitable donations add up over time.
Handling Cash Donations
Giving cash (or checks or credit card payments) to charities is probably the simplest way to donate. Be sure that you're donating to a reputable charity approved by the IRS. The charity you give to should give you a receipt in return. You simply deduct the total of your cash donations at the end of the year. Be sure to keep your receipts.
Good record keeping is key. You have to have documentation for your gift. Usually it's a receipt from the charity you donate to; most will send you a form letter that serves as both a thank you and a receipt for your taxes. If you don't get a letter from the charity, you need to have some substantiation of your own like your cancelled check. Credit card statements are allowed, Bell says. You don't have to send these documents in with your tax return, but hold on to them in case you're ever audited.
“The burden of proof is always on the taxpayer,” Bell says. “You have to prove your deductions were valid.”
There are a few things to watch out for when you're donating cash. If you get something in return — like a nice tote bag or a dinner — you've made what the IRS calls a quid pro quo donation. You can only deduct as a charitable donation the difference between the amount you paid and the value of the goods or services you received. So if you “donate” $100 to NPR and get a $20 Car Talk mug, only $80 of your donation is deductible. Most large organizations will break this out for you on your receipt. If you received something tiny like a bumper sticker, you don't have to worry about subtracting its value from your donation.
In addition to cash, Bell told me you're allowed to donate stock you've held for at least one year. The value of the stock at the time of the donation is what you're allowed to deduct on your taxes.
Handling Donated Goods
In addition to money, you can also deduct goods you donate. How you deduct them and what kind of documentation you need varies depending on what you donate and how valuable it is. To deduct donated goods, you want to keep a record of what you donated and what the value of your donations was.
Donations of unwanted household items might be the most common example of donated goods. If you take a box of old clothes to Goodwill, you can deduct those as charitable donations. When donating household items to an organization like Goodwill or the Salvation Army, the IRS suggests that you use thrift store prices to determine the estimated value of your donation.
Be sure that anything you donate is in good or better condition. It's actually against the law to take a deduction for donations of used items in poor condition. It's very hard for the IRS to check the condition of your Goodwill donations, Bell says, but the law is designed to make you stop and think before donating.
“Be careful about donating things,” Bell says. “If you wouldn't buy it at a garage sale, I would say just throw it away.”
The goods must also be something the organization can use. You can't donate a Picasso to your Girl Scout troop, as Erb put it. If they don't have a use for it, it doesn't count as a legitimate charitable donation.
You can deduct donations of goods you make yourself, but you can only deduct what it cost you to make the item, not its fair market value. That means that if you donate a hand-knit scarf to your church holiday fair or a tray of cookies to a school bake sale, you can deduct only the cost of the yarn or the ingredients, not the price the items sell for. Basically, you're allowed to deduct your out-of-pocket costs, but not the value of the labor you put into making your handmade goods.
For deductions of goods under $250, you're not required to have a receipt if it's not practical to get one. That means that if you drop a bag of clothes off at a Salvation Army drop box, you're still allowed to deduct them. Erb says it's a good idea to write yourself a detailed note itemizing what was in the bag and roughly how much it would be worth, even if you don't get a receipt. She suggests recording as much detail as possible. For example, “4 men's dress shirts, good condition, $2.50 each”.
While you can claim a deduction without a receipt, there's often no need to. The small extra effort of taking your things into the thrift store and getting a receipt from someone behind the counter can save you a big headache if you wind up being audited. Bell says that it's always better to have a receipt.
If you're deducting $250 to $500 worth of goods, you'll need a receipt and an acknowledgment from the organization. The receipt requirement for this level of donation also means that you can't drop $400 worth of clothes off at Goodwill's dumpster and claim it as a deduction. You need something in writing from the recipient.
If you make multiple trips to Goodwill throughout the year, Erb says it's important to keep good records and receipts even for smaller donations. Donations of similar goods will be counted cumulatively. So while you wouldn't be required to have a receipt for a $100 donation of children's clothing, if you make four similar donations throughout the year, you'd be expected to have receipts for that $400 total donation. If, on the other hand, you give $100 worth of clothes to Goodwill and an old car to the Salvation Army, those are different enough that you wouldn't need a receipt for the clothes. Though it's still a good idea to have one if it's practical to get it.
For donations valued over $500 but under $5000, you need the same written acknowledgment of your gift, and you need to fill out Form 8283, which will require you to have not only a receipt but also to explain how you got the property you are donating. Did you buy it? Was it a gift? An inheritance? For these larger donations, the IRS places restrictions on how they can be valued.
Most donated vehicles will fall into this value range. You want to use special care when donating a car, Bell says. When you donate a vehicle, you get a statement from the charity you give it to after they dispose of it. What they got for the vehicle is what you can deduct. If they don't sell it, or they use it themselves, then you can use the blue book value of that vehicle as your deduction. Be careful not to overvalue the car you donate.
When you donate goods over $5000, you'll need a written acknowledgment of your gift and a qualified written appraisal. If you're donating works of art or collections, special rules apply and you always need an appraisal. In those cases, you will probably want to involve a tax professional. Erb says its a good idea to involve a tax attorney, accountant, or CPA whenever you find yourself scratching your head and wondering how to handle a donation.
“If it's complicated for you, it's probably also worth it to pay somebody,” she says. “You don't want to lose your deduction because you did something silly. It's rare that you're donating $25 of inherited property. You're usually looking at bigger numbers.”
Not only can a tax professional protect you from costly mistakes, they can help you make the most of your donation. If it's something simple, Erb says a good tax attorney will be honest enough to say, “You don't need me for this.” If you do need professional help, the cost of consulting a tax professional should be deductible on your Schedule A under miscellaneous expenses.
Other Deductions You Can Take
You can take as a charitable deduction any expenses you incur in the service of a non-profit. For example, if you buy pizza for your Girl Scout troop and aren't reimbursed by the Girl Scouts, you can count the cost of pizza as a charitable donation. This is true for any out-of-pocket expense, like art supplies or event tickets. You can also deduct the cost of uniforms worn during volunteer work, if you pay for them out-of-pocket.
There are whole volunteer vacation packages sold on the basis of this deduction. If you go to Costa Rica to do volunteer work, you may be able to deduct the entire cost of your trip so long as your primary purpose is volunteering for a legitimate charitable organization.
For local travel, bear in mind that you can deduct mileage expenses for any driving you do for a non-profit organization. Your mileage is always deducted at 14 cents a mile.
What You Can't Deduct
There are some things that seem to many people like they should be deductible — but aren't. Here are a few non-deductible things Erb gets a lot of questions about:
- Your time. Erb says she gets asked about this more than anything else. People give many hours of their time to volunteer efforts, and often donate specific services for which they would ordinarily be paid. Your time is never deductible as a charitable donation, though, even if you can quantify what the time is worth. For example, if you're a massage therapist and donate an hour-long massage to a charity auction, you cannot deduct the cost of the massage as a donation. You can deduct any material expenses for the equipment you use to give the massage, though. While you can't deduct your time, Erb stresses that it's still worthwhile to donate it. “You can't discount the amount of warm fuzzies that you get,” she says.
- Donations to individuals.. No matter how good a cause it is, you can't deduct donations of cash or goods to individuals. For example, if a family at your church loses their home in a fire, and you give $20 to a collection that goes directly to the family, you cannot deduct that $20. (On the other hand, if you give $20 to the church and the church then gives money to the family, you can deduct your donation to the church.)
- Personal expenses. While you can deduct expenses incurred on behalf of a charity, you can't deduct personal expenses incurred while doing volunteer work. Erb gave the example of buying herself lunch while doing free tax returns for the elderly in her community. Not deductible, unlike the earlier example of buying dinner for your whole Girl Scout troop, which is allowed.
- Donations to political organizations or candidates. Be sure you understand whether or not an organization is a qualifying non-profit. Political groups are not — even if they're not associated with a political party. For example, donations to the ACLU are not tax-deductible. Bell says a reputable charity will always be able to document their tax status for you. If they can't, they probably aren't recognized by the IRS.
- Tuition at religious schools. Even though money given to your church is tax-deductible, tuition paid for a Catholic school is not. This is because you're getting something in return for your money, just like the earlier examples with the Car Talk mug and charity dinners.
Common Red Flags
Erb says the biggest red flag is donating too much. The IRS expects you to donate within certain norms, which work out to be about 3% of your gross income. If you claim charitable deductions worth much more than that on your taxes, they'll expect very careful documentation. There might be legitimate cases when you'll donate a lot more than normal. For instance, if you're giving away your father's valuable stamp collection or donating a work of art. Just be sure you have all your paperwork in order.
“If the IRS says ‘no', you always want to be able to say ‘yes',” Erb says.
A related mistake people make, Erb says, is overestimating the value of your donations. Bell says concerns about overestimating the value of donations have led to a lot of changes to the tax laws and increased scrutiny of charitable deductions. No one is really going to pay $30 for your used jeans with the frayed cuffs, so don't say so when you estimate your Goodwill donations. People also tend to err towards deducting too many expenses when they itemize costs for a volunteer vacation. Yes, your plane tickets and accommodations are deductible, but you can't deduct your shampoo or the cost of your new bathing suit.
“You have to be really careful about being greedy on your return,” Erb says. “Take the actual deduction, don't tag on the $80 swim suit. It will get your return flagged. Just take what you're entitled to and move on.”
Erb says it's rare that the IRS will beat up on you for an honest mistake. Generally those who get in trouble are doing something wrong on purpose.
The bottom line take away for charitable deductions is simple: Keep good records and receipts. Ask for help when you need it. Don't be greedy.