MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
TAX BENEFITS OF CHARITABLE GIVING
(November 30, 2004) — If giving to your favorite charity is at the top of your list this holiday season, make sure you obtain tax advice as well. While the greatest reward for donating to a charity may be knowing that you’ve helped to make the world a better place, your generosity also earns you valuable tax deductions. The Virginia Society of CPAs explains how to make tax savvy donations and qualify for tax saving deductions.
Basics and Timing
Contributions of cash or property must be made to qualified organizations, such as religious, charitable and educational groups to be deductible. The IRS Web site, www.irs.gov, has an exempt organization search feature to help you determine whether an organization qualifies.
To deduct your charitable contributions, you must file Form 1040 and itemize your deductions on Schedule A. If you contribute cash, your deduction is limited to 50 percent of your adjusted gross income (AGI). A 30 percent limit applies to gifts of property that have appreciated in value and are held for more than one year. A five-year carry-over of the excess is allowed.
As long as you date and mail your check by December 31, you can deduct your contribution for 2004 even if the charity doesn’t receive it until January 2005. Charitable donations made by a credit card are deductible if the charges are made in 2004, even if you don’t pay the bill until 2005. However, multi-year pledges are not deductible until the year in which they are paid. If you made a donation through a pay-by-phone bank account, it is not deductible until the payment date that is shown on the bank statement.
Cash and Property Contributions
Different tax rules apply if you contribute cash and get something in return, such as a dinner. If you receive a benefit (goods or services) in exchange for your contribution, you can deduct only the amount of your contribution that exceeds the value of the benefit received. For example, if you pay $100 to attend a fundraising dinner, only the portion of the ticket price above the value of the meal or entertainment is deductible. If your contribution exceeds $75, you must receive a statement from the charity estimating the value of the benefit you received.
Of course, gifts to charity are not limited to cash. One of the most effective ways to reduce taxes through charitable giving is by donating property, such as stock, mutual funds, artwork and antiques that have increased in value. As long as you have owned the property for more than one year, you are eligible to deduct the full fair market value of the gift and avoid capital gains tax on the property’s appreciation.
Used Items and Volunteer Services
Donations of used items and expenses associated with volunteering are two other categories of charitable contributions. When you contribute used clothing, furniture and household goods, your deduction is limited to the fair market value, which according to the IRS is the amount that someone would pay for such items in a thrift shop.
When volunteering with a charitable organization, the value of your time is not deductible. However, you can deduct out-of-pocket and incidental expenses in connection with the charity, such as stationery and postage. You may also deduct 14 cents per mile, plus parking fees and tolls, when you drive your own car in connection with your volunteer work. And when your charitable work takes you out of town overnight, the cost of transportation, meals and lodging is deductible if there is no significant element of personal pleasure or vacation.
Receipts and Recordkeeping
According to the VSCPA, it is important that you follow IRS guidelines for substantiating your contributions. When your contribution is less than $250, your canceled check or dated receipt is adequate substantiation. But for a single contribution of cash or property for $250 or more, you will need to obtain a written receipt. A canceled check is not enough. The receipt must include the date and amount of the contribution and a description of the property donated, and must state whether you received any goods or services in return. If goods or services were provided, the receipt must show their estimated value.
For contributed property with a value above $500, your personal records must also include information concerning how and when you acquired the property and your cost basis. You must complete and attach Form 8283 to your tax return.
Should you donate an item or a group of similar items worth more than $5,000, all of the previous requirements apply but you must also obtain a qualified appraisal of the gift’s value. Publicly traded securities are excluded from this requirement. For more information on the tax implications of charitable contributions, contact a CPA.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, email@example.com
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