If you made tax-deductible donations to charity in 2017, there's more that you need to know than just the dollar amount. The IRS tends to take a closer look at charitable contribution deductions (especially large ones), so here's what you need to know to make sure your charitable deductions are legitimate, for the right amount, and meet the IRS's strict documentation requirements.
What is a qualified charity?
Perhaps the most important thing to confirm is whether the organizations you donated to meet the IRS definition of a "qualified organization" for purposes of the charitable deduction. I realize that some cases are obvious, but this isn't always true.
Some examples of qualified organizations include (not an exhaustive list):
- Churches or other religious organizations.
- Most nonprofit charitable organizations.
- Most nonprofit educational organizations. If you donate to your child's school, for example, it could fall into this category.
- Nonprofit hospitals and medical organizations.
- Nonprofit volunteer fire companies.
- Nonprofit organizations that maintain public parks.
On the other hand, there are certain types of organizations that don't qualify for the charitable deduction, despite the fact that they may certainly have "charitable" intentions. Specifically:
- You can never deduct a contribution to an individual. For example, if a family you know lost their home in a fire, and you give them $500 to help rebuild, it's certainly a noble and generous gesture, but it isn't deductible.
- You can't deduct contributions to chambers of commerce, civic leagues, country clubs, labor unions, political organizations and candidates, or most foreign organizations.
- You can never deduct your time. For example, many people think if they earn $20 per hour at their job and take four hours out of their day to help a charity, that gives them an $80 deduction. This is not correct.
- You can't deduct personal expenses of any kind.
If you're curious whether a certain organization qualifies or not, the IRS has a Select Check tool that can help. Not all qualifying organizations are listed, but it's still a good place to start.
Did you get a benefit in return for your donation?
Another situation where you can't deduct a charitable contribution is when you receive a benefit in exchange for your donation. For example, let's say that you win a cruise in a charity auction. You paid $1,500, and the fair market value of the cruise is $2,000. Even though it may have gone to a qualifying organization, you can't deduct the $1,500 contribution.
However, you can deduct a portion of a contribution if the benefit you receive is worth less than your gift. Let's say that you attend a charity banquet that costs $100. The meal could be reasonably expected to cost $30 in a restaurant. You can take a charitable deduction for the $70 difference.
One special situation is if you donate to a college or university in exchange for the right to purchase athletic tickets. In this case, you can deduct 80% of the donation, but the cost of tickets themselves are never deductible. It's also important to note that the Tax Cuts and Jobs Act eliminated this benefit. Donations in exchange for the right to buy athletic tickets will not be deductible starting in 2018.
Know how much you can deduct for property donations
If you donate cash, the amount of your charitable deduction is easy to calculate. You can deduct the entire amount you donated, minus the fair market value of any benefit you receive, as discussed in the previous section.
When you donate property, it's a bit more complicated. You are allowed to deduct the fair market value, or the amount you could reasonably expect to get if you sold the property on the open market. For example, if I donate a used laptop computer that I paid $799 for, but could realistically sell for $300, I have to use the latter amount.
Admittedly, there is some grey area here as to what "fair market value" is. One technique I use when donating items to charitable organizations is to make use of websites such as Ebay and Craigslist. See if you can find an identical (or similar) item listed for sale and print the listing to use for value-documentation purposes. Some common charitable organizations publish "valuation guides" that can be used when donating things like clothing and household items.
Finally, it's worth mentioning that large assets like cars and boats have special requirements that you can find in IRS Publication 526.
Be sure you have the correct documentation
Tax audits aren't very common -- fewer than 1% of all returns are audited. However, there's always a chance, and having large deductions for charitable contributions make an audit more likely. So, it's important to know the documentation requirements for your contributions.
For cash contributions, you'll need a bank record (such as a canceled check), a receipt from the organization, or a pay stub if you make donations through payroll deductions. For cash contributions of $250 or more, you'll also need written acknowledgement of your contribution and its amount from the organization.
For contributions of property, there are four "tiers" of documentation requirements, depending on the value of the donated property.
- For donations worth less than $250, you need a receipt from the charitable organization showing its name, the date of the contribution, and a description of the property.
- For donations of more than $250 but less than $500, you'll need a written acknowledgement from the charitable organization (not just a simple receipt), including a good faith estimate of the value of property contributed.
- For donations of more than $500 but less than $5,000, you must also be able to document how you got the property, when you got the property (approximate is fine), and your cost basis in the property.
- For donations of more than $5,000 worth of property, you'll also need a qualified written appraisal of the value.
If you have property donations in the latter two categories, I strongly urge you to consult a tax professional to make sure you've met the documentation requirements in a manner that would satisfy the IRS in the event of an audit.
Do it right
The charitable contribution deduction is one of the most commonly used tax breaks, but it's also one that the IRS tends to pay close attention to, especially for taxpayers with high levels of contributions relative to their income. So, it's important to make sure that you're not only claiming the appropriate amount, but also that your deductions are legitimate and well documented.