Gifting and Charitable Contributions
Though many of us were taught about the value of donating to charity at an early age, our parents likely explained it simply a way to be nice to others and offer aid to fellow men and women.
But in the current tax code, being generous and charitable isn’t just something friendly; it’s an easy way to lower your tax rate. Simply put, the more you give, the less you have to pay on your taxes – and you may even get some money back. If you get a moral boost out of making donations to charity, even better.
The IRS or state tax commissions have restrictions on which recipients you’re allowed to give to and then deduct from your taxes. Generally, churches or non-profit educational organizations or charitable organizations count as qualified organizations, but individuals, for-profit schools, sports teams, politicians or social clubs, don’t.
The IRS requires that anyone making charitable donations of cash or other gifting must itemize their deductions and also file Form 1040 Schedule A. You also must keep copies of any receipt or acknowledgement of your donation which should describe your gift. You, as the donor, must estimate its value.
You can give as much as you want, and can deduct up to half of your adjusted gross income for the year. You also can donate cash-related tangibles such as airline miles or stock ownership. For a larger amount such as a planned gift, you may need professional advice from an investment manager or estate attorney.
Charities also appreciate non-cash donations, which can be anything from a box of old household items that has been sitting in the basement to a fancy piece of jewelry.
The challenge of this type of donation comes in estimating its fair market value, which can sometimes be subjective, since it isn’t necessarily “how much to part with it,” like haggling at a garage sale, or what you originally paid.
The IRS describes FMV as “the price the property would sell or on the open market… a price agreed upon between a willing buyer and a willing seller.”
The recipient is asked to provide a receipt, especially if the gift’s value exceeds $250, but you, as the donor are required to estimate its value.
Computers are good examples – if you decided to donate the computer you bought five years ago to charity, the current market value would likely need to be much less than you paid for it.
If the fair market value of a donation exceeds $5,000, you’re usually required to have an appraisal of the item, which will give the recipient a good idea of its value, and provide you with valuable documentation for your tax preparation items.
For donations of household items, the criteria is “good used condition or better” which is a good way of separating items that someone could use from junk.
For additional questions about charitable contributions, the Income Tax Center in St. Louis can offer expertise.