Tax Deductible Contributions

‘Tis the season – the hustle and bustle of holiday shopping, mailing "Seasons Greetings" to friends and relatives, and planning our holiday parties. With all the excitement, it is sometimes difficult to think about things like the upcoming tax season and getting our records and receipts in order. If you haven't done so already, now is the time to consider your tax situation and determine whether you may need some additional deductions to reduce your tax liability. This column will address questions regarding charitable contributions.

Update:  August, 2006 - Charitable Contributions

The Pension Protection Act of 2006 has several income tax provisions included in it.  One of these changes effects charitable contributions and unfortunately the change is unfavorable to the taxpayer.  The biggest change is the requirement, effective for tax years beginning after 8-17-06 to maintain a record of every charitable contribution made by check, cash, debit card, credit card or in any other monetary form.  The statute does provide some flexibility.  The record can either be a check, a bank record (like a copy of debit expenditure) or any written record, including a receipt, letter or other similar item so long as it includes the donee's name, the contribution date and the amount of the contribution.  The bottom line is - no record, no deduction. Thus, the $20 cash put in a collection basket on Sunday will no longer be deductible without some written receipt.

Along the same lines, donating household items and valuable old clothing such as ratty sweat shirts and torn jeans also took a hit.  For contributions made after 8-17-06, a deduction will be allowed only if the items are in "good used condition or better".  What is good used condition?  Of course, the statute doesn't define it, so the taxpayers will be left to their own devices in making that call.  In addition to this new restriction, the IRS now has the authority to deny a deduction for the contribution of clothing and household goods that have minimal value.  While clothing is self-explanatory, household items include furniture, furnishings, electronics, appliances, linens and other similar items.  However, food, paintings, antiques, art, jewelry, gems or collections aren't considered household goods.

These new rules don't apply if the deduction is for a single item that has a value of over $500 and the taxpayer includes a qualified appraisal with the tax return.

In order to take a deduction for charitable contributions you must file Form 1040 and itemize deductions on Schedule A. If you have made non-cash donations, you may also be required to file Form 8283 depending on the dollar amount of the donation. If you take the standard deduction rather than itemizing you will be unable to deduct your charitable contributions.

I have made numerous donations throughout the year. How do I determine which donations can be deducted?

You can only deduct contributions made to a qualified organization. Donations to churches, religious organizations, nonprofit charitable and educational organizations, nonprofit hospitals and medical research organizations, utility company emergency energy programs, nonprofit volunteer fire companies, and public park and recreation facilities are some examples of deductible contributions.

You may also be able to deduct some expenses incurred as a foster parent or for an unrelated student living with you. You will need to determine if the expenses are qualified before deducting them on your tax return.

If you are unsure whether you can deduct a donation to an organization, you can ask me, check with the organization, or with the IRS.

I would like to make some charitable contributions, but am not sure what charity to donate money to.

There are many local charities that would benefit from your donation or you may choose to seek out an organization that operates on a national level. You may be interested in checking the Better Business Bureau's web site for a list of qualified organizations. Their web site address is:

www.bbb.org/reports/charity.asp .

I have concerns about how my contributions are being used. How can I be assured that my donation is used as intended?

The Better Business Bureau's Web site can be of assistance on this matter as well. Other web sites to check would be the National Charities Information Bureau www.give.org, or the "most comprehensive resource," as stated in a recent Moneywise article, www.guidestar.org

Do I need to keep records or receipts for my donations?

You must keep records to prove the amount of contributions made throughout the year. For cash contributions of less than $250 a canceled check, receipt, or other reliable written record are sufficient and must include the date, amount and recipient of the contribution. In order to deduct contributions of $250 or more you must have an acknowledgement from the qualified organization or certain payroll deduction record.

Remember, periodic contributions to the same organization, such as weekly payments to your church or religious organization, are treated as individual donations, not as one lump sum for the tax year.

For non-cash contributions of less than $250 you will need to have a receipt from the organization stating the name and location of the organization, date of the contribution, and a reasonable description of the property. This requirement is waived when it is impractical to get a receipt, as is the case with an unattended drop site.

The receipt requirements for non-cash contributions in excess of $250 vary depending on the amount of the contribution. I will be happy to answer specific questions upon request.

How do I determine the value of clothing and household items donated to a local organization?

Generally, non-cash donations are determined by fair market value. Clothing and personal items are usually valued at a price substantially less than the purchase price. Value for these items can be determined by considering the price the items would sell for in a consignment or thrift shop. You may also find values for these items by visiting www.salvationarmyusa.org

Household goods are also valued much lower than the original purchase price. Your valuation of these items can be documented by photographs, cancelled checks, receipts from original purchase or other evidence.

I recently donated a substantial amount to an area college in exchange for reserved seats in the basketball auditorium. Can I deduct the amount of my donation?

Payments made to, or for the benefit of, a college or university, which allows you to buy tickets to an athletic event, can be deducted at 80% of the donated amount. If tickets are included in the payment amount, you must subtract the value of the tickets before calculating the 80% deduction amount. For instance, if you made a contribution of $500 to the college and the price of the tickets was $150, you may deduct $280 [($500-$150) x 80%] as a charitable contribution.

Am I limited to the amount of charitable contributions I can deduct?

Charitable contributions are limited to 50% of your adjusted gross income for the tax year in which you are claiming the deductions. Should your contributions exceed the 50% AGI limitation, you can carry the excess amount forward to the next five tax years, but must use the entire carry-forward amount within the five years.

Some contributions, such as capital gain property, may be subject to 20% or 30% limitations.

For cash contributions made after August 27, 2005 but before January 1, 2006, the 50% of adjusted gross income limitation is suspended. These donations are also exempted from the itemized deductions phase-out for those taxpayers with AGI in excess of $145,950.

By what date do I need to make additional donations in order to include them on my 2005 tax return?

Contributions can be deducted only in the year you actually make them. Generally, you have made a contribution at the time of its unconditional delivery.

When mailing a check, payment is considered to be made on the date the check is mailed. Credit card contributions are made on the transaction date, not on the date the credit card charge is paid by you. Similarly, contributions made with borrowed money are considered to be made when the payment is made to the organization. Repayment of the loan is not relevant in determining the year in which to take the contribution deduction.

©2006 by Dierking Lockie & Associates PC
Elegant Web Design LLC of Sioux City Iowa