Simple Steps Can Help Taxpayers with Charitable Donations
Reviewed and used with special permission from the IRS by: Brenda Procter, M.S., State Specialist & Instructor, Personal Financial Planning, University of Missouri Extension
As the end of the year approaches, the Internal Revenue Service reminds taxpayers that they may be able to use their gifts to tax-exempt charitable and religious groups to reduce their taxes.
Taxpayers also need to keep in mind some simple steps to make sure they
get appropriate benefit for their generous donations. In
particular, there are some important guidelines for
donating used cars and other property, such as stocks
The tax benefit for charitable contributions is only available for
taxpayers who itemize deductions - about one-third of
all filers. Those who take a standard deduction receive
no additional tax benefit for their contributions.
In 2000, the last year for which complete data is available, about 37.5
million taxpayers made deductible charitable
contributions totaling nearly $140.7 billion. Of these
gifts, nearly $98.2 billion were cash donations.
Only contributions actually made during the tax year are deductible.
For example, if you pledged $500 in September but paid
the charity only $200 by Dec. 31, your 2008 deduction
would be $200. You include credit card charges and
payments by check in the year they are given to the
charity, even though you may not pay the credit card
bill or have your bank account debited until the next
Those itemizing deductions reduce their taxable income by the total
contributed to qualified tax-exempt organizations, with
some limits. The tax saving usually equals the deduction
times the marginal tax rate - the top rate for the
person's income level.
For example, an individual with a taxable income of $50,000 donates
$2,000 to his or her church. The tax savings from this
generosity will be $500 -- $2,000 times the taxpayer's
marginal tax rate of 25 percent.
Donations of stock or other property are usually valued at the fair
market value of the property. For stocks and bonds with
an active market, the fair market value is the average
price between highest and lowest selling price on the
valuation date. Figuring the value of other personal
property can be more complicated.
For example, determining the value of a donated used car requires
weighing several factors. Some car donation program
operators have mistakenly suggested that donors can take
as a deduction the full value listed in an established
used car pricing guide. For additional information, see
IRS News release 2001-112, "IRS and State Charity
Officials Urge Care When Making a Car Donation."
The tax law, however, allows a deduction for only the fair market value
of the car. Fair market value takes into account not
only the year, the model and the mileage of the car, but
also the local market and the vehicle's condition. As a
result, the fair market value of the taxpayer's car may
be substantially different than the average price listed
in an established used car guide.
The IRS also reminds taxpayers to keep appropriate records to
substantiate the value of their gifts. For example, for
any single gift of $250 or more, a taxpayer must have a
written acknowledgement from the charity by the earlier
of the date the person files the tax return or the
filing deadline, including extensions. A person donating
property valued at more than $5,000 must obtain a
qualified written appraisal.
You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.
Taxpayers can find help regarding the donations they make in IRS
Publication 526, "Charitable Contributions." A second
reference, IRS Publication 561, "Determining the Value
of Donated Property," answers many of the questions that
donors have when they make noncash contributions. Both
publications are available at the IRS Web site,
www.IRS.gov, or by
calling 1-800-TAX-FORM (1-800-829-3676).
Source: IRS News Release Service, IR-2003-134
Last update: Tuesday, May 05, 2009