Tax Time: Top Tips for Reporting Charitable Deductions

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With April 15 fast approaching, now is the time to make the most of charitable tax deductions.  Many people give significant amounts to charities, schools, religious institutions, and other nonprofit organizations, with an accompanying expectation of tax deductibility.  Through such giving, donors not only help worthy causes but also can reduce their personal tax liability through itemized deductions.  Here are some top tips for maximizing the charitable tax deduction.

1)         Use the right tax forms.

To take advantage of the charitable deduction, taxpayers must use IRS Form 1040 along with its Schedule A for itemized deduction.  Schedule A effectively reduces the total amount of income subject to taxation, but it is not available for use with IRS Form 1040-EZ.  Itemized deductions often allow for greater tax benefits than the otherwise applicable standard deduction.  For example, filers with large mortgage payments and/or extensive charitable giving may be able to deduct more by itemizing their deductions than they would by simply taking the standard deduction.  The 2014 standard deduction is only $6,200 if single or married filing separately, $12,400 if married filing jointly, or $9,100 if filing as a head of household.  If itemizing deductions results in higher tax savings than the standard deduction, make sure to use the Form 1040 and accompanying Schedule A.

2)         Get (and keep) proper contribution documentation.

Various written substantiation requirements apply for charitable contributions, depending on the amount and type of donation.  For example, a taxpayer will need records of all “cash” contributions (including payments made by check, credit card, or other funds transfer method).  Any single contribution of more than $250 must also be evidenced by a written acknowledgment (a receipt) from the organization that meets specific IRS requirements. 

Accordingly, charitable organizations should ensure that their donors receive accurate and tax-compliant charitable receipts. Receipts need to include the following information:  the donee’s name; the total amount contributed; the contribution date(s); and whether the organization provided the donor with any goods or services as a result of their contribution (other than token items).  If any goods or services were provided, then the receipt should include a brief description and good faith estimate of their value. 

3)         Deductions are available for some volunteer expenses.

Volunteers often incur out-of-pocket expenses while performing volunteer work for nonprofit organizations.  Certain expenses, such as those for transportation, lodging, meals, or the purchase of tangible materials for the organization, may be deducted if they are directly related to performing volunteer services, are unreimbursed, and are otherwise reasonable.  Expenses incurred for personal reasons are not deductible, however, such as a trip primarily for personal pleasure or for a spouse traveling with a nonprofit leader (unless the spouse has official work responsibilities).  For mileage that is tracked and documented, the “charity” rate of 14 cents will apply, which is substantially lower than the business rate applicable for paid staff.  Notably, no deduction is available for a person’s time spent volunteering for the organization. 

The tax substantiation rules likewise apply for volunteer expenses, so nonprofits and volunteers should maintain reliable written records.  Donee organizations need to provide charitable receipts for any unreimbursed expense of more than $250.

4)         Non-cash contributions are subject to special rules.

Special rules apply to certain contributions of property, such as donations of clothing or household items, vehicles, property subject to debt, inventory from a business, and patents.  Note that special receipting, tax reporting, and other restrictions apply to vehicle donations.  In addition, appraisals are required for certain types of donations over a specified dollar amount.  Overall, it is the donee organization’s responsibility only to provide a good faith estimate of a donated item’s value, and it is the donor’s legal responsibility to comply with applicable legal requirements for more accurately reporting donation values.  Check IRS Publication 526 for more information, or contact an attorney for specific guidance.

5)         Contributions must be made to qualified organizations.

A contribution is tax-deductible only if made to a qualified recipient organization.  Qualified donees include US religious, charitable, and educational organizations (Section 501(c)(3) organizations), veterans’ organizations, certain fraternal societies, the federal government, and others.  Deductions may also be available for contributions to charities in other countries to a very limited extent, such as Canada, Mexico, and Israel.  Notably, donations to Section 501(c)(4) lobbying and advocacy organizations and to PACs are not tax-deductible. 

6)         Membership dues may be deducted in some cases.

Membership dues to 501(c)(3) organizations may be deducted as charitable contributions in some cases.  Special rules apply depending on the benefits each member receives in exchange for his or her contribution.   Alternatively, to the extent that a business may pay for its employees’ membership dues, they may be deducted as a business expense on its corporate return without the 10% limitation for corporate donations.  For more information, see our firm’s separate article on membership dues.

7)         Note financial limits for deductibility.

Two key limits apply to the availability of charitable deductions, as follows.   

First, the maximum amount of one’s adjusted gross income that can be deducted is generally 50%, regardless of the actual amount of charitable contributions.    Contributions only to organizations described in section 170(b)(1)(a):  religious organizations, schools, hospitals, the government, public charities, and others qualify for this limitation.  Further, the maximum amount is lowered to 30% for contributions to private foundations, veterans’ organizations and qualified fraternal societies. Specific limits also apply for contributions of “capital gain” property.  (One silver lining:  any disallowed charitable contribution amount may be carried forward to future tax years.) 

Second, and new for 2014 tax filings, the total of all itemized deductions (including the charitable deduction) when added together, may be further limited based on a tax filer’s adjusted gross income.  This limitation applies if adjusted gross income is more than $305,050 if married filing jointly or qualifying widow(er); $279,650 if head of household; $254,200 if single; or $152,525 if married filing separately.  Such individuals will need to complete an itemized deductions worksheet to determine their limits.

8)         Giving is good!

The above-listed strategic tax considerations for charitable giving are critical for maximizing the financial benefit of charitable gifts.  But perhaps more importantly, the annual tax exercise of tallying up contributions and completing Schedule A provides donors with a wonderful opportunity to consider how they have meaningfully contributed to improving the world.  In short, taxes may be painful, but reflecting on one’s charitable contributions should feel great.  (And there’s always next year – more opportunities to help others through giving, to feel good, and to keep reducing one’s taxes through itemized deductions!)