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Deducting Donations – IRS Tax Rules

Posted By Jim On 06/30/2005 @ 9:24 am In Taxes | 15 Comments

With my girlfriend wanting to donate a car, my roommate donating old furniture, and minor cash donations, I thought that I’d do a little research into the rules and procedures governing the deduction of donations from your taxes. It’s a little early, considering 2005 tax returns aren’t due for another ten months (tick tock!), but it’s better to know the procedure before crunch time than scrambling last minute.

Eligibility:
In order to deduct charitable donations from your taxes, you basically need to satisfy two conditions:

  1. Itemize Your Deductions – Folks taking the standard deduction won’t get a tax benefit for charitable donations.
  2. Donate to a Qualified Organization – Normally you can just ask and they’ll tell you, but IRS Publication 78 [3] (it’s been upgraded to a search and is not a PDF) has a list of the common ones.


What You Donate:
The easiest thing you can donate is cash. You deduct the actual cash amount you donate.

The simplest things you can donate is property of some kind – whether it be a car, clothes, furniture, land, or any number of physical item. The general rule is you are able to deduct the fair market value of the item, as governed by the rules of IRS Publication 561 – Determining the Value of Donated Property [4]. The rules for donating cars have changed recently from fair market value being determined by a blue book value to the actual price the car is sold for at auction.

If you donate your time and services, you cannot deduct any of it. You can’t take the fair market value of your service or anything like that, but you can deduct some personal expenses you wouldn’t have incurred had you not donated your services. An example is that you can deduct the cost of transportation to the location you are donating your services but you wouldn’t be permitted to deduct the cost of meals (since you would presumably have eaten regardless of your philanthropic efforts).

When You Donate:
The timing of your donation will affect when you can deduct it. It was easier back before checks and credit cards because you could control when items left your possession. For property, as soon as it leaves your hands you can count it in that year. For cash, the same rule applies as well. For checks and credit cards, you can deduct it the year in which you mail the check or apply the charge – not when the check is actually cashed or when the credit card is paid for.

Deduction Limits:
If you donated less than 20% of your adjusted gross income (AGI), move on, this won’t apply. Otherwise, the rules state that the most you can deduct is 50% of your AGI and, depending on your property, this limit may be capped at 30% and 20%. The rules are pretty extensive and probably don’t affect many people so I won’t go into them, check out pages 9 and 10 of Publication 526 [5] for the rules.

Records:
Since you’ll be reducing how much Uncle Sam gets, they might come ask you about it. For cash donations, if it’s under $250, just keep a receipt of the donation or some other personal record of it. The rules for under $250 are pretty lax since for $20 donation to your church you probably don’t get a receipt. If you donate more than $250, you need to get an acknowledgement from the receiving organization that must meet these criteria: date, donation amount, what you received in return, description and good faith estimate of the value of the donation.

For property donations, the records you must keep are pretty extensive. The rules are basically the same for under $250 (date, location, description of property, and organization) and over $250, except if the property is over $500 but under $5000, you will need to explain: how you received the property, when you received/created it, and your cost basis. If it’s over $5000, then you will need a qualified written appraisal of the property in addition to everything else before it. So to recap, if you donate a $10,000 car you will need to follow the rules for under $250, between $250 and $500, between $500 and $5000, and then the final rule of over $5000 donations. It’s a lot of paperwork!

I hope all this information was helpful and, more importantly, correct. If you notice any inaccuracies or errors, let me know and I’ll fix this post. Thanks!

Helpful IRS Publications:
IRS Publication 526 – Charitable Contributions [5]
IRS Publication 561 – Determining the Value of Donated Property [4]


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/deducting-donations-irs-tax-rules.html

[3] IRS Publication 78: http://apps.irs.gov/app/pub78

[4] IRS Publication 561 – Determining the Value of Donated Property: http://www.irs.gov/pub/irs-pdf/p561.pdf

[5] Publication 526: http://www.irs.gov/pub/irs-pdf/p526.pdf

Thank you for reading!