It’s that end of the year time where everyone is trying to get a bigger piece of your pocketbook. For those of you who want to give that money to a charitable organization, here are just a few quick tax tips. I’ve seen a little bit of confusion about them over the last couple of years, and hope this is a step to clear a few things up.
First of all, you have to give to a qualified charitable organization under IRC Sec. 170(c) to get any sort of deduction, which is going to be pretty much any organization asking for your money without giving anything back . Yes, I know giving to your broke roommate may be considered charitable in the general sense of the word, but there’s no deductions associated with that. If you’re looking for a group to give your money to, I’d recommend March of Dimes for obvious reasons, but there are many great organizations out there.
Also note that no deduction is allowed for contributions to terrorist organizations under 501(p)(4). Because I know you were all wondering about that.
You can’t get a deduction for donating service. If, however, you have some unreimbursed out-of-pocket expense related to that service, that is deductible. So when you bought food for the volunteers working at the Special Olympics, that’s deductible. (see note below about how this isn’t tax advice. So if you did donate food food the volunteers of the Special Olympics and want to take the deduction, don’t quote me, see a tax advisor. Point them to Reg. §1.170A-1(g) if you want to impress them).
Most organizations will give you some fancy receipt at the end of the year with the amount you donated on it, but that is not necessary to claim the deduction. Just be sure to keep your own records in the extremely unlikely case the IRS disagrees with your deduction.
You don’t have to just donate cash. Many organizations happily take other types of goods, like Goodwill and Salvation Army. Virtually all will be more than happy to take stock, assuming the stock is publicly traded. Once again, when you donate, keep a record of what you donated and the value of the items. For used goods, those values are going to be approximate.
Things get really fun once tax time comes and you pull out your shoebox of receipts. Charitable contributions are entered on Schedule A of the 1040, or your itemized deductions. That means if you take your standard deduction, your charitable contributions aren’t going to show up. Don’t be discouraged, though—you didn’t get a deduction, but you still did something good with your money, so pat yourself on the back.
The charitable contribution deduction is limited to 50% of your income. That means if you contribute over 50% of your yearly income, you won’t get a deduction of the amount over 50%. I doubt that’s an issue for almost anyone, but just an FYI. If you are extremely giving and do meet that limitation, you can claim the excess in future tax years (up to 5 years).
Donation of goods gets more complicated if the donation is over $500, since you’ll have to fill out a separate form to keep the IRS satiated. As just a quick note on this form, YOU CAN GROUP STUFF TOGETHER! I once saw a return where the taxpayer listed out every individual item they donated to Goodwill. Totally unnecessary. The IRS doesn’t care if you donated a $20 lamp, a $10 bike, a $20 TV, etc. Just put it together. And, like everything else, keep your own records.
Stock donations have even more rules. If you are donating just regular stock that is actively traded on a big stock exchange, and you’ve held the stock for over a year, you can donate the stock and both claim the charitable deduction for the fair market value AND not recognize any gain on the increase in stock price. The charitable organization will recognize the gain, and since they’re a tax free organization, it works out well for both of you. For example, you buy Microsoft stock a year ago for $10 a share, and you donate it for $20 a share, you get a deduction of the $20, and don’t have to pay taxes on the difference.
If, however, you’ve held the stock for less than a year, you only get the deduction on the basis of the stock. Back to our example, if you bought the stock for $10, that’s your basis. If you then contribute it to a charitable organization before you’ve owned it for a year and it is worth $20, you still only get the $10 deduction. This would probably be the most common if you exercised stock options and didn’t want to recognize the gain. Sorry, it doesn’t work like that.
This can get quite complicated, especially if the stock is not publicly traded, or if you own over 10% of the company, or if you are contributing the stock into a charitable organization that you run, etc. But for the basic rules, here they are.
Hopefully something in here helped. Yes, it was dry and dull, but that’s what we accountants have to deal with every day. It’s just another example of how the IRS is slowly sucking out our soul, one code section at a time.
IMPORTANT NOTE: While I’m a CPA, nothing in this post or anywhere on this web site should be taken as tax advice. This is not intended to be used as such, it’s just a helpful push in the right direction. And, as a friendly reminder, while Google is a great tool for finding all kinds of things out, including tax helps, if you want tax advice, hire a professional. If you are a tax professional who stumbled on this page doing research, I hope the code sections helped.