5 Ways to Write Off a Charitable Donation
As Congress contemplates sweeping tax reforms for individuals, virtually everything is on the table. But at least one itemized deduction is often considered a “sacred cow” that can’t be touched.
In all likelihood, the deduction for charitable contributions, currently claimed on lines 16-19 on Schedule A of Form 1040, will be preserved by our nation’s lawmakers.
Charitable donations can take many forms, but here are five common opportunities:
1. Monetary contributions. If you donate cash or make a cash-equivalent contribution to a qualified charitable organization, your generosity is generally rewarded with a deduction for the full amount. The limit for all annual donations, including cash gifts, is 50 percent of your adjusted gross income (AGI). Any excess may be carried over for up to five years.
However, the IRS imposes strict recordkeeping rules for monetary contributions. For a cash donation of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity. Usually, the charity is only too wiling to comply with this requirement.
2. Gifts of property. Furthermore, you may donate property you own, such as securities or artwork, to a charity. Most importantly, if the property would have qualified for a long-term capital gain had you sold it instead of donated it – in other words, you’ve held it longer than a year – you may deduct its full fair market value on the date of the donation. Therefore, the appreciation in value while you owned the property remains untaxed forever.
Note that gifts of property must be used to further the charity’s tax-exempt purpose. For example, if you give a painting to a museum, it must be prominently displayed where the public can see it. Similarly, if you donate clothing to a charitable organization like Goodwill, it must be made available to potential recipients. Also, the current annual deduction for gifts of property is limited to 30 percent of your AGI. Finally, an independent appraisal is required for donated property valued above $5,000.
3. Quid pro quo contributions. If you make a donation and receive a benefit in return, your actual deduction may be reduced. For such a “quid pro quo contribution” for goods or services exceeding $75, the charity must provide a good-faith estimate of the goods and services received and the amount exceeding the benefit’s value. You may only deduct the difference.
Suppose that you and your spouse attend a fundraising dinner that costs $250 a head. If the charity values the meal at $100 per person, your deduction is limited to $300. But most low-cost items and nominal gifts, like a coffee mug featuring the charity’s logo, don’t count.
4. Volunteer services. Although you can’t deduct the value of the time you spend helping a charity, you can still write off your related out-of-pocket expenses. This includes items like supplies, travel, and lodging at a convention where you’re a delegate. However, travel expenses can’t be deducted if the trip is merely a disguised vacation.
If you need special clothing for your charitable activities – for example, a Boy Scout or Girl Scout uniform as a troop leader – you can deduct the cost. Icing on the cake: The costs of maintaining and cleaning the clothing is deductible as a miscellaneous expense (subject to a 2 percent-of-AGI floor).
5. Donor-advised funds. As the name implies, you have more control over a donor-advised fund than you do with regular contributions to charity. Typically, you contribute to a fund managed by a reputable outfit. A minimum gift of at least $5,000 is usually required. The fund may also charge fees, based on a percentage of the deposit (e.g., 0.5 percent to 1 percent), to cover its administrative costs and other expenses.
Notably, you select the qualified charitable organizations to benefit from your gift. Grant recommendations are reviewed by staff members who verify that the charity is eligible to receive tax-exempt contributions. Once the grant is approved, a check is cut to the charity, indicating that the donation was made upon the donor’s recommendation. Alternatively, gifts can be made anonymously.
Should you wait to see if tax reform is enacted before you contribute to a charity this year? Due to the uncertainty right now, it’s best to continue to operate the way you would under the current tax law.
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Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...