As we approach the end of the year, people will be thinking of making charitable donations in order to offset their tax bill. If it is so for you, it is crucial that you know the rules of making tax deductible charity donations. Fortunately, the IRS shows you what is required to do so.
First off, you must ensure your charitable contributions of money or property are made to qualified organizations i.e. organizations that are recognized as charitable societies under section 170(c) of the Internal Revenue Code. Then you should itemize your deductions when submitting your tax return. Generally, you may deduct up to 50% of your adjusted gross income, but 20% and 30% limits may apply in some cases.
The 50% limit of adjusted gross income is calculated without regard to net operating loss carrybacks. And this applies to all public charities (code PC), all private operating foundations (code POF), certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2 ½ months following the year receipt and certain private foundations that pool the contributions received in a common fund and the income and corpus of which are paid to public charities.
The 30% limit applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE). Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30% adjusted gross income (computed without regard to net operating loss carrybacks.
Bear in mind that if you receive a benefit out of donating, you must deduct the value of this benefit and claim the net balance of your deduction. For example, if you buy a charity dinner ticket and attend the event, your cannot claim the full amount of the ticket price because you received the benefit of the dinner. So you must assess the value of the dinner and net off this value from your ticket price before submitting the net balance for tax deduction.
Donations may be made either in the form of cash or kind i.e. other forms of assets such as properties. If you donation is in cash, it can be deducted at face value subject to the limits stated above. If you donate property, it has to be valued at fair market value and its value deducted. There are special rules that apply to vehicle donations.
Finally, regarding cash donations, you must maintain accurate records of your donation showing the name of the organization, the amount and the date of contribution. This can be in the form of official receipts, check buds, payroll slips, bank records etc.