There are many ways you can donate to charity while also giving yourself a few tax breaks. The types of donations you can make are typically divided into two categories: cash and items.
There are restrictions and benefits to both, some outweighing the other. For example, you may have more unwanted material items than expendable cash, in which case, investigating the options for qualified items is more beneficial. In principle, you can donate any amount of cash, or any item, to an organization that wants it or will benefit from it. However, you cannot claim all of these donations on your tax return as a deduction. Overall limits apply to both cash and item donations, ranging from 20 to 50 percent of your adjusted gross income depending on which type of donation you make.
The range of cash and item donations are varied and vast. However, there are generally more restrictions and qualifying factors when it comes to item donations. Cash contributions can be any one of the following as long as they adhere to the contribution limits and are made to qualified charities.
Item donations adhere to stricter restrictions depending on the property in question. Most items must adhere to IRS guidelines. Household items, such as furniture, electronics and linens must be in good condition or better to be classified as tax deductible. Used clothing must also adhere to these standards. However, if the value of the clothing or household item is valued at $500 or more, it does not have to be in good or better condition in order to qualify. However, you must have the item appraised by a qualified appraiser and attach all necessary documentation to your tax return.
In addition to the above exception, appraisal documents need to be obtained if an item is valued at over $5000. It is worth noting that appraisal fees cannot be included in a charitable deduction. The cost of an item’s appraisal might outweigh the benefit of adding the item to your list of deductions in the first place.
Most of the restrictions that apply to cash donations are focused on the documentation and deduction limitations placed on both categories. Unlike cash, item donations require documentation that is more detailed. The fair market value of the item needs to be calculated before it can be claimed. This value is what a buyer and seller would willingly exchange the item for in today’s market. These calculations can be complex. For example, the age of an item may not be the only qualifying factor in calculating a value. Some antiques will increase in value over time while standard items will decrease. Similarly, desirability of an item may be subject to current trends in the market and can affect a fair market value more than expected.
Larger items, such as vehicles, follow even more restrictions. If a vehicle is valued at more than $500, you can either deduct the proceeds that the organization received from the sale of the vehicle, or the fair market value, whichever is lower. You should take all of these factors into consideration when deciding whether you should sell the item privately and donate the cash or donate the item and adhere to the above rules.
When donating a cash or non-cash item to a qualified organization, specific documentation must be included in your return. The rules that apply to donations under $250 are relativity similar between both types. A record of the date, name of the organization and the amount of the donation needs to be submitted. These types of records can include receipts, bank statements and pay stubs. If a receipt cannot be obtained by the organization, a written confirmation from the organization is sufficient. Separate rules apply to both forms of donations as the amount of the contribution increases.
Donations can also be made through your payroll system and must include a pay stub, the name and location of the organization, wage statement or similar documentation from the employer stating how much was donated to the charity.
Donating stock is often a better option than selling the stock and donating the cash. If you are in a higher tax bracket and sell a stock, the amount of capital gains tax that each stock is subject to will be high. However, if you donate the stock, the capital gains tax is often waived, meaning you can donate the entire market value of the stock without paying the tax. Stocks adhere to stricter donations rules because capital gains tax is subject to lower limits. Depending on varying factors, you can only donate 20 to 30 percent of your adjusted gross income per year in these types of capital assets. It is important to note that if your income is lower, the capital gains tax that you would be subject to will not be as high. Therefore, the benefit from choosing to donate your stock or selling your stock and donating the cash will be less extreme. If you have a lower income level, the 20 to 30 percent limit attributed to donating these types of assets will mean you cannot deduct large amounts of donated stock. The 50 percent limit on cash donations will allow you to deduct more of your donations.