The IRS allows you to take a charitable deduction on your tax return for qualified donations of cash or property if you itemize your deductions, but the rules can be confusing. For example, how much are you allowed to deduct for donations of items such as clothes? And, what kind of documentation will you need if the IRS decides to take a closer look?
Here are the answers to these and other questions you may have about charitable deduction rules.
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What kind of donations qualify as "charitable"?
A donation of either cash or property can qualify as a charitable deduction if it is given to a qualifying organization. Common types of organizations that qualify include (but are not limited to):
- A Federal, state, or local government -- to be used for public purposes
- A church, synagogue, or other religious organization
- A non-profit organization created for a charitable, educational, religious, literary, or scientific purpose
- A war veterans' organization
- A volunteer fire company
- A civil defense organization
This is not a complete list, and if you're not sure whether a particular organization qualifies, you can read the IRS's complete description, or better yet – ask the organization itself before you make a donation. However, there are some types of contributions that never qualify, including
- Social and sports clubs
- Labor unions
- Chambers of commerce
- Any for-profit organizations
- Any lottery or raffle
- Giving to individuals
- Politicians and political organizations
I donated a bag of clothes (or other property). How much should I deduct?
The IRS allows you to deduct the "fair market value" of items you donate to qualifying organizations, which is admittedly vague and somewhat a matter of opinion.
The key here is to remember that fair market value does not mean retail price. This sounds obvious enough, but if you donate a laptop that you paid $1,200 for six years ago and try to deduct $1,200, you're just asking for an audit. Fortunately, many popular charities provide valuation guidelines for commonly donated items. For example, Goodwill suggests deducting between $1-6 for each t-shirt you donate, between $7-40 for a coat, and $30-$150 for a sofa.
If you donate an item to a smaller organization, or if your particular item isn't listed on a popular charity's list, do your best to estimate how much you could get for the item if you decided to sell it. Websites like eBay are excellent resources for this. For example, if the six year old computer I mentioned earlier is selling for about $200 on eBay, that's a safe amount to deduct.
What if I receive something in return for my donation?
If you make a donation to a qualifying organization but receive a benefit in exchange for your donation, you can't deduct the entire value of your donation. Rather, you qualify for a charitable deduction equal to the difference between the donation amount and the value of the goods you receive in return.
As an example, here's a charitable deduction I plan to claim on my own tax return this year. My wife and I attended a fundraiser dinner for a charitable organization, and paid $100 for our pair of tickets. However, a reasonable value of the dinner itself (if we had gone to a restaurant instead) would have been $40. So, I can use the $60 "premium" I paid as a charitable deduction.
Tax tip: Don't overlook small deductions
One of the most overlooked tax deductions is small charitable donations. It makes sense – after all, most people don't keep track every time they hit the "donate $1" button on the payment terminal at a store, or the $20 they paid the local cheerleading squad at its charity car wash. However, you may be surprised at how much these can add up over the course of a year.
Try keeping track of your small contributions for just a month to start with, and see how much they add up. Just as one example, if you donate $1 at the checkout five times per month, pay $20 for charity car washes, and donate $20 worth of supplies to your child's school bake sale, that $45 in donations could become $540 over the course of a year. Depending on your tax bracket, these small charitable deductions could translate to an extra few hundred dollars on your tax refund check.
Annual deduction limits
In any given tax year, you are allowed to deduct charitable contributions worth up to 50% of your adjusted gross income (AGI). The limit for certain private foundations is 30% of AGI, and the IRS provides a complete description here.
But what if you were either super-generous this year, or your AGI was rather low, and your charitable contributions exceeded the 50% limit? This isn't too common, but does happen. For example, if a retiree lives off their savings and donates more than their investments produce during the year, the limit could easily be exceeded.
Fortunately, in these cases, you are allowed to carry over any excess contributions for up to five subsequent tax years. So, the IRS allows you to take a pretty massive charitable deduction if you qualify. Even so, keep in mind that this is not an excuse to inflate the numbers.
Will your deductions trigger a tax audit?
It's impossible to say for sure whether or not a specific charitable deduction will trigger an audit, but there are ways of knowing if it's more likely.
The IRS keeps extensive data on how much people donate, and knows how much the "average" person with your household income donates per year. According to data from the IRS's Statistics of Income report, here are the average amounts of charitable contributions, as a percentage of AGI for certain income brackets.
|
Income bracket |
Charitable contributions (% of AGI) |
|---|---|
|
$50,000-$55,000 |
3.5% |
|
$55,000-$60,000 |
3.7% |
|
$60,000-$75,000 |
3.3% |
|
$75,000-$100,000 |
3% |
|
$100,000-$200,000 |
2.6% |
|
$200,000-$250,000 |
2.4% |
For example, this implies that if your AGI is $80,000 for this year, a normal amount of charitable contributions would be in the ballpark of $2,400. There's no way of knowing what the threshold will be for setting off alarms at the IRS, but $3,000 in deductions wouldn't be likely to catch an auditor's attention. On the other hand, someone with that income claiming a $15,000 charitable deduction could raise red flags.
Keep the proper documentation, and you'll be just fine
So, if your charitable deductions are significantly higher than the average, there is a good chance that the IRS will want to take a closer look. However, you should never let the fear of a tax audit stop you from taking a legitimate deduction – just make sure you can back up your claims.
For cash contributions, the documentation rules are straightforward. For cash donations of less than $250, a cancelled check or receipt showing the amount and date is sufficient. If the donation is more than $250, make sure you get written confirmation from the charitable organization (many will automatically send tax paperwork to donors).
If you donate property, the rules are a little trickier. Just like with cash contributions, donations valued at less than $250 can be documented with a simple receipt showing the charity's name, the date, and a description of the donation. If the value of your donation is greater than $250 but less than $500, you'll also need written documentation from the organization. If the donated items are worth more than $500, you'll also need to present records showing how you obtained the property in the first place. Finally, donations worth over $5,000 require a professional appraisal.
So, don't hesitate to claim any charitable deductions to which you are entitled – big or small. Just make sure you can prove it actually happened!
The bottom line
Charitable deductions can reduce your tax liability and put a bigger refund check in your pocket. However, before you claim a charitable deduction, make sure the organization qualifies, you haven't exceeded the annual limit, and that you can back up every dollar you claim.
