Charitable Donations and Your Taxes

Every year millions of Americans sit down either on their own or with a tax professional and decide whether to use the standard deduction amount (based on filing status, age, and disability) for their federal tax computation or to itemize their deductions.

The standard deduction is a pre-set amount that the IRS automatically allows a taxpayer to deduct from his or her income before determining how much of your income is taxable for the year. For example, the 2007 filing year the standard deduction for a married-filing-jointly taxpayer's return was $10,700. The standard deduction amount increases each year in an effort to keep up with inflation costs. Therefore, a married-filing-jointly taxpayer would need to come up with more than $10,700 in ITEMIZED deductions in order to make it worthwhile to file a Schedule A rather than use the standard deduction.

Itemized deductions that can be included on a federal tax return Schedule A that are not subject to a percentage of the taxpayer's adjusted gross income include mortgage interest, real estate taxes paid, state and local taxes paid, and charitable donations. Other Schedule A items such as medical expenses, unreimbursed employee expenses, casualty and theft losses, and more are subject to a percentage of your adjusted gross income and will not be covered in this article.

Charitable donations are an often-overlooked and often misused category of deductions on the Schedule A. Many taxpayers are simply uncertain what constitutes a charitable donation and what does not, if there is a limit or a basic amount that can be deducted, and what records need to be kept to support the deduction were they to be audited by the IRS.

First, what constitutes a charitable donation? Charitable donations for tax purposes are cash or non-cash donations to qualified charitable organizations that are donated without receiving anything in return from the organization and without limiting how the organization can use the donated money or goods. For example, monies that are donated to your local church can qualify as a charitable donation. Other examples of qualifying donations include: goods donated to certain organizations like the MS Foundation, Deseret Industries, and other non-profit organizations; donations to schools without receiving goods in return; donations to the Red Cross, Boy Scouts of America, and other qualifying non-profit organizations. If you are uncertain whether or not a certain non-profit organization qualifies for tax purposes, ask a local tax professional.

What about all those school or scouting fund raisers where the kids go around selling items to raise money? Can you deduct anything for that? If your child comes home from school with an order form for, say, cookie dough, keep this general rule in mind: the amount that you pay for the product offered that is over and above what it could be purchased for elsewhere would qualify as a charitable donation. For example, if the same amount of cookie dough retails for $3.50 at the local supermarket and you buy it through the fundraiser for $8.00, then the deductible portion is $4.50 for the cookie dough. It is interesting to note, though, that the IRS made an official ruling concerning Girl Scout Cookies-they said it could not be determined that Girl Scout Cookies have a value greater than the price the consumer is paying for them, therefore NONE of the purchase price can be used as a charitable donation for tax purposes.

Next, there is not a basic or "standard" charitable donation amount that can be claimed on your Schedule A at tax time. There is, however, a limit as to how much you can deduct in any given calendar year. Some organizations qualify for a 50% limit, which means that you can deduct a total of up to 50% of your adjusted gross income to those organizations. Other organizations are limited to 30% of your adjusted gross income. The average taxpayer rarely comes close to donating even 30% of their income, so the limit is rarely an issue. If you have a year you feel you may be affected by this limitation talk with your local tax professional.

Finally, for records that need to be kept: the IRS recently imposed stricter record-keeping measures for charitable donations since many taxpayers were abusing this particular deduction. ANY cash donation (includes cash, checks, credit cards), regardless of dollar amount, must have a dated receipt from the charitable organization in order to be included on your tax return. For small dollar amounts, such as donating $50 to the Boy Scouts as they came around your neighborhood, a cancelled check combined with your bank statement will suffice in lieu of a receipt. No actual cash donations without a receipt can be claimed. This means that if you throw in a $20 bill to the Salvation Army's Santa bucket at Christmas time and don't get a receipt from Santa, you cannot claim the deduction on your tax return. Non-cash donations require receipts from the charitable organization as well, unless it is not feasible to obtain a receipt (such as a drop-off or pick-up service that does not provide receipts). In those instances you can create a detailed listing of what was donated, where and when, and how the items donated were valued. This detailed listing must be kept with your tax records and, if complete, will meet the burden of proof requirement with the IRS.

In addition to cash and non-cash donations, the IRS also allows a mileage deduction for charitable miles. This means that if you are a Boy Scout leader who routinely drives scouts to far off distances you should keep track of your miles! Document when, where, for what purpose, and how many miles were driven and use that record at tax time to take an additional deduction for your qualifying charitable miles driven.

As always, if you are in doubt as to what you can and cannot deduct for charitable contributions, seek the advice of a local tax professional. Additionally, you can research charitable donations on the IRS website www.irs.gov for more information. Remember, when it comes to taxes every dollar counts! Take advantage of every deduction available in order to minimize your federal tax liability.