The charitable contributions tax deduction is quite lucrative for millions of Americans. About one-fourth of Americans deduct their donations on their tax return, and the average deduction is about $5,800, which could translate into big tax savings on your return. Before you deduct your contributions, however, you need to know the rules and requirements to make sure you qualify and that your deduction is claimed the right way.
The charitable contributions tax deduction: What donations qualify?
The charitable contribution tax deduction can be taken by taxpayers who have donated cash or property to a qualified organization during the tax year.
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What is a qualified organization? Generally speaking, government, religious, and non-profit organizations qualify. Here's a list of some (but not all) of the organization types that qualify for charitable deduction purposes:
- A federal, state, or local government, if the money is to be used for public purposes.
- A church or other religious organization.
- A non-profit organization created for a charitable, educational, religious, literary, or scientific purpose. (As a personal example, one organization I've donated to in the past is a non-profit tutoring center)
- A war veteran's organization (Ex.-The Wounded Warrior Project).
- A volunteer fire company.
- A civil defense organization.
- Other organizations might qualify -- see the IRS's complete rules for the full details.
On the other hand, there are some types of organizations that never qualify for the charitable deduction. Sports clubs, labor unions, donations to politicians, and money/property given to individuals don't count, even if you consider the purpose "charitable."
To take the charitable contributions deduction, you'll need to itemize deductions on your tax return. If your itemized deductions, including charitable contributions, are less than the standard deduction (currently $6,350 and $12,700 for single and joint tax filers, respectively), you won't get any additional tax benefit for your donations.
How much to deduct for your charitable donations
If you make a cash donation to an organization, the rules are straightforward. If you didn't receive anything in return, you simply deduct the entire donation amount. If you did receive something in return for your donation, you can deduct the donation amount, minus the reasonable market value of whatever you received.
For example, let's say that you paid $50 to attend a charity dinner which would have realistically cost $20 at a restaurant. You can deduct $30, the difference between the two amounts.
When you donate property, it can be a little trickier. The IRS allows you to deduct the "fair market value" of the items you donate. This is admittedly subject to interpretation, but just remember that the fair market value does not mean the item's retail price. If you paid $1,000 for your laptop computer five years ago, and then donate it, you need to deduct what you could reasonably expect to sell the laptop for today -- not the full $1,000. A good practice is to look for similar items on websites like eBay to get an idea of its value.
Many major charities provide donation guides, such as this one from The Salvation Army. For example, if I donate some old DVDs, valuing them at $2-$5 each is reasonable, per this guide.
Finally, it's important to note that there is an annual limit for the charitable contribution deduction of 50% of your adjusted gross income (AGI). For some private charitable foundations, the limit drops to 30% of AGI, and you can find a description of this rule here. If you happen to have a particularly generous year, you can carry over any contributions you made for up to five subsequent tax years.
Documentation requirements
The documentation requirements for charitable contributions depend on whether you donated cash or property, and the dollar amount of your donation.
For cash donations, the magic number is $250. If you donated this amount or less, a cancelled check or receipt that shows the amount of your donation and the date when it took place is sufficient. For donations in excess of $250, you need written confirmation from the charitable organization (most do this automatically before tax time rolls around).
If you donate property, there are four categories of documentation requirements:
- If your donation is worth $250 or less, a simple receipt showing the organization's name, date, and the amount of the donation is all you need.
- Donations valued from $250 to $500 need written confirmation from the organization.
- Donations worth $500 to $5,000 also require records that show how you acquired the property in the first place.
- Donations valued at $5,000 or more need a professional appraisal.
Will the charitable deduction increase my audit risk?
Does claiming the charitable contribution deduction make you more likely to get audited? It depends. Specifically, if your deduction is significantly higher than the average American taxpayer claims, the IRS might want to take a closer look.
As of the 2014 tax year, the latest year for which finalized data is available, here's the average charitable contribution deduction for certain income levels:
|
Income Bracket (AGI) |
Average Charitable Deduction (if used) |
|---|---|
|
$15,000-$30,000 |
$2,339 |
|
$30,000-$50,000 |
$2,594 |
|
$50,000-$100,000 |
$3,147 |
|
$100,000-$200,000 |
$4,130 |
|
$200,000-$250,000 |
$5,786 |
|
$250,000 or higher |
$21,596 |
Source: IRS.
While there's no way to know exactly what the threshold for increased IRS scrutiny will be, if your AGI is $85,000 and you claim, say $3,500 in charitable contributions, you aren't likely to stand out. On the other hand, if you claim $15,000 in donations, the IRS may want to double-check.
As a final thought, it's important to note than an increased audit risk isn't a reason to not claim a deduction to which you are entitled. Just keep the documentation requirements in mind -- if you have a relatively high charitable deduction, it becomes extra important to save the proper documentation in case you're asked.
