There are some charitable contribution deductions that are well-understood and well-utilized. For example, if you wrote a check to your alma mater for $2,000 last year, there is no way you'll forget to deduct it on your tax return this year.
However, there is a lot about charitable deductions that aren't as widely understood. What exactly qualifies as a charitable contribution? How much should you claim for donations of physical items like clothing? And how much of a deduction can you take this year?
What is a charitable contribution?
Basically, a "charitable contribution" refers to any donation of money or property to a qualifying organization. This can include, but is not limited to:
- The U.S. federal government, or a state or local government, if the funds or items are to be used for public purposes
- A non-profit organization that was created for a charitable, educational, religious, literary, or scientific purpose, or to prevent cruelty to animals
- A church, synagogue, or similar religious organization
- A war veterans' organization
- A nonprofit volunteer fire company
- A civil defense organization
- A domestic fraternal society, operating under the lodge system (only if the donation is used for a charitable purpose)
- A nonprofit cemetery company
How much are my donations worth?
Well, for cash and items that you have an appraisal for in hand (like a car or boat), this is easy. If you give cash to a qualifying organization, you can write off the actual dollar amount, and if you give appraised property, you can deduct its appraised value.
The only time you can't deduct the full amount of your donation is if you receive a benefit in exchange for your donation. For example, many people donate money to a charitable organization and receive, say, tickets to a baseball game in return. In this case, you can write off the amount of your donation, minus the fair market value of the benefit you receive.
When donating property, it gets a little trickier. The IRS says that you can deduct the "fair market value" of the property, which is defined as the price at which the item would change hands between a willing buyer and seller.
One of the most common charitable donations is giving clothing or other property to an organization such as Goodwill or Salvation Army. Fortunately, to make your life easier, the Salvation Army issues a guide that can help you value your donations.
You'll need to be able to document any monetary contributions, regardless of the amount, with bank records, payroll deduction records, or written confirmation from the organization. And the IRS requires that you have documentation for all contributions (cash or property) valued at $250 or more.
Don't forget the little things
Now, obviously if you donated a large sum of money or a big-ticket item like a car, there's no way that you're going to forget about it when tax time rolls around.
However, too many people don't remember (or don't care) to deduct small charitable contributions they made throughout the year. Maybe you wrote a small check to your alma mater. Or maybe you paid for supplies for your child's bake sale at school.
These are relatively small, but they can add up throughout the year. I'm not saying you need to save all of your receipts every time you donate a dollar at the cash register, but you should start paying attention throughout the year when you give money or goods to a charity or non-profit. You might be surprised at how much you really give over the course of a year.
How generous can you be?
With a few exceptions, you can donate up to 50% of your adjusted gross income (AGI) if you choose to do so. Deductions of contributions to certain private foundations are limited to 30% of AGI, and for a complete listing of which organizations qualify for which maximum deduction amount, check out the description from the IRS here.
The point is, you can be extremely generous and still take full advantage of a charitable deduction of up to half of your income in most cases. However, that doesn't mean it's a good idea to inflate your numbers in order to boost your tax refund.
Abusing the privilege is a big red flag
Before you decide to get "creative" with your charitable deductions, there is one fact to keep in mind. The IRS keeps track of how much people donate, and knows precisely how much the average taxpayer within your income bracket donates per year.
If your total is much higher than the average, it could catch the attention of the IRS, which will probably want to take a closer look. Now, you should absolutely claim all of the deductions to which you are entitled, and if you were super-generous this year, so be it. Just be sure you can back everything up in the event if you're asked to prove it.