Many taxpayers can take a tax deduction for charitable donations made to qualified organizations. Make sure the organization you’re giving to is legitimate by checking the IRS Tax Exempt Organization Search.
The IRS requires that you get contemporaneous written acknowledgement of your donation for cash and property donations worth $250 or more, and a qualified appraisal for noncash property donations valued at $500 or more. Also, be careful not to donate via wire transfers or gift cards, as scammers often use these methods.
Donations of Cash
Cash donations are an easy and versatile form of charitable giving. They allow donors to remove the value of their donation from their taxable income, and they provide businesses and nonprofits with an immediate benefit. Because of this, it’s important that both businesses and individuals keep accurate records of their cash contributions to meet IRS requirements for tax deductions.
Donations of cash are generally deductible up to 60% of a taxpayer’s adjusted gross income. This percentage can vary depending on the type of donation and the recipient. For example, if you donate to a charity that gives donors a free gift in return, like a tote bag or dinner, you must subtract the value of the gift from your donation.
The IRS requires that you maintain qualifying documentation for any monetary donation, which could include a receipt from the charity with the date, amount and name of the organization, a bank statement or credit card statement, or a canceled check. Often, it is best to get all of this information together at one time for the benefit of your tax return preparer.
Donations of Property
For donors who are willing to part with tangible personal property, such as old clothing or a car, the tax code provides generous deductions. Tangible personal property generally includes any item that can be touched or seen, including furniture, books, jewelry and coin and stamp collections.
Real estate is another asset class that offers significant tax benefits when donated to charity. For example, a CCIM who helps clients dispose of under-utilized assets can obtain a significant charitable deduction based on current fair market value rather than original purchase price.
Special rules can apply when donating certain types of property, such as a conservation easement, food inventories and patents. Donors wishing to donate these properties must make sure that the charity has legally enforceable rights to preserve and use them in accordance with the donor’s intent. Moreover, the property must not be sold for profit. For these reasons, it is generally better for the donor to contribute these properties only if they are free of debt.
Donations of Securities
Donating securities can be a great way to make a charitable contribution, especially for individuals with highly appreciated investments. Publicly traded stock, mutual funds and bonds can be donated directly to charity, resulting in a tax receipt for their fair market value (FMV). By eliminating the capital gains tax liability that would be generated by a sale of these assets, this strategy can help maximize the impact of your gift.
Depending on the individual’s federal and provincial marginal tax rates, this can result in significant tax savings compared to selling the securities and contributing the after-tax proceeds. It is also an effective strategy to use in conjunction with strategies such as tax loss selling during periods of market decline and portfolio rebalancing.
To facilitate the donation of securities, it is usually a good idea to donate them through a donor-advised fund, such as one offered by RBC or other institutions like Fidelity Investments or Vanguard. This can be a convenient and cost-effective way to manage a large number of assets, while retaining the ability to make a wide range of investments.
Donations of Goods
While cash and stocks are the most common types of charitable donations, goods can also be given. The IRS places limits on how much of a donation of goods can be claimed, and the items must be in good condition. A qualified appraiser should be consulted when donating expensive goods such as cars or boats.
Donations of household items, clothing and certain other personal property can be claimed as a charitable deduction. When making a noncash donation, keep records that show the date of the donation, the name of the charity and the monetary value of the donation. You should have two or more proofs of the donation, including a charge card transaction record and an email or letter from the charity.
Business owners can experience a number of benefits from routinely giving back to the community. For example, Squareup reports that a company’s brand image improves when it donates. Employees also appreciate that their employer cares about the community and supports philanthropy.