Surprising Charitable Tax Deductions
Are you generous? If so, you probably document major gifts to claim charitable contributions when itemizing tax deductions. It's easy to grab pay stubs that show donations made through payroll deductions or put your hands on an annual statement from your church.
But there are many more ways to save on taxes if you stop and consider all of your charitable acts and do some planning. Start reaping tax benefits by accounting for these everyday gifts. (See also: 16 Great Tax Deductions You May Have Overlooked)
Everyday Donations That Add Up
You have probably given money to a friend's cause or donated things in the past year. Consider these forms of monetary donations and charitable scenarios, which can add to your overall giving.
Sponsoring a Friend or Yourself in a Charity Athletic Event
Charity runs, walks, and bike rides are increasingly popular and many involve sponsoring a participant. According to Philanthropy.com, charities raised $1.69 billion through such events in 2011.
It’s likely that you have sponsored a friend or yourself in the past year. If you gave online, check your credit card or bank statements and/or thank-you emails (especially if you have not deleted any emails) for a record of your donations. If you gave cash, find a receipt acknowledging the donation.
Driving to Volunteer Sites
If you drive to volunteer sites, like the homeless shelter, soup kitchen, or Habitat for Humanity job site, then you can take a mileage deduction as long as you don’t receive reimbursement for travel expenses. Charitable mileage is one of the most overlooked deductions, Don R. Anderson, CPA tells me.
Keep records of your mileage to deduct 14 cents per mile. Though much lower than the business mileage deduction of 55.5 cents per mile, it’s better than nothing. Other out-of-pocket costs relating to traveling to volunteer sites (such as lodging) may also be deductible according to Howard M. Rosen, CPA, JD, AEP.
Preparing Meals for the Homeless
My dad prepares food for the homeless shelter once every few weeks. He makes what shelter organizers request (typically meatloaf and rolls) and takes the items to his church, which coordinates delivery and distribution at a central site. You may participate in a similar program or you may prepare items for a bake sale, chili cook-off, etc. to raise funds for a charitable organization.
Track your expenses for the ingredients and keep receipts from your grocery store or market. Note that you can deduct “out-of-pocket costs” only, not the value of your labor, Howard advises. Plus, you need to give the food to an organization that serves the homeless, not a homeless individual, to get the tax benefit.
If you give money to a charity by texting a specific message, then your mobile carrier should provide you with documentation of the gift.
Donating Purchased Items
Many schools, social service agencies, and other groups collect personal items for their clients. Because many people are reluctant to give money, charitable organizations make appeals for things, such as school supplies for children in families that can not afford them, toiletries for victims of domestic violence or indigent senior adults, or toys and toiletries for Operation Christmas Child.
The cost of purchased items given to charities can be deducted. Keep purchase receipts and information about the charity for your records.
Giving Used Items
You may give used items to Goodwill or other agencies in an effort to declutter your home or office. Or you may donate these things for yard sales benefiting charities, schools, etc.
Donating Money to Small Groups
If you donate to smaller groups associated with churches, synagogues, mosques, etc., then generally you can deduct these amounts just as you can the gifts to the larger institution. For example, if you give money (or things) to the youth group, women’s ministry, or healthcare ministry that are part of the larger organization, then you can include those funds in your charitable giving for tax purposes.
Take note of how the small group and larger organization reports your giving. The small group may not issue a year-end statement but expects you to keep up with your giving through canceled checks and bank statements. The larger organization is likely to provide you with a detailed accounting of your regular giving, but these details may not include gifts to the smaller group. Your job, then, is to make sure that all your giving is accounted for completely but not double-counted.
Giving to Schools and School Groups
Giving to schools, athletic boosters, band boosters, etc. may be less altruistic than donating to other organizations if you have a child who attends the school, plays a sport, or plays an instrument in the band. That is, you and your family may enjoy improvements to the school’s technology that your donations fund, or a better athletic field, etc. Nevertheless, unless you receive a direct benefit (such as tickets to a fund-raising dinner or band concert), this type of giving is deductible.
Even if you do receive a benefit, you may be able to take a deduction. For example, the booster club may sell dinner tickets at $100 for a meal valued at $25. In such a situation, Howard says that the charity should tell you how much of the donation is deductible (in this case, $75).
Tax Rules to Consider
There are a lot of tax rules pertaining to charitable deductions. First, make sure that the recipients of your gifts are qualified organizations:
- Search the “Exempt Organizations” database on the IRS website or call the IRS – Tax Exempt/Government Entities Customer Account Services at 1-877-829-5500
- Ask representatives of the organization for verification of its status, which should provide you with an IRS letter granting tax-exempt status
- Note that some qualified organizations (such as churches and governmental units) may not be listed on the IRS database
Rules worthy of mention (partial list):
- You must complete IRS Form 8283 (PDF) if the combination of all noncash gifts exceeds $500
- Note special rules for donating cars
- Remember to itemize these deductions on your Schedule A (PDF) form
- If one gift exceeds $250, get acknowledgement from the charitable organization (see Schedule A instructions (PDF) – pages A-7 to A-9)
Check with your tax accountant or call the IRS to ask questions, and verify that you are providing all required information and keeping appropriate back-up records.
Strategies to Reduce Taxes When Giving
For larger gifts, you can save even more if you plan ahead and use tax-saving strategies. CPAs Howard Rosen and Gail Rosen (not related) both have advice on arranging gifts in a way to increase tax benefits.
Donor Advised Funds
For those who had a banner year income-wise in a business or perhaps earned an unusually large bonus from an employer, Howard mentions Donor Advised Funds. He shares the reasoning to give in this way:
These funds allow you to "prepay" charitable contributions. Let's say you normally give $1,000 a year to your church or synagogue. You could fund the Donor Advised Fund with $5,000 and then use the fund and any earnings it obtains to fund your annual giving program for the next 5+ years. You get to deduct the full $5,000 now (in the year your income has jumped), taking advantage of the higher tax rate [which means a higher deduction for charitable giving]. In addition, the earnings are not taxed and are available for future charitable contributions.
Donations of Appreciated Stock
Gail says that you might give stock to your favorite charity to avoid capital gains tax:
Consider donating appreciated stock from your investment portfolio instead of cash. This way you derive a deduction for a donation to charity equal to the fair market value of the donated property. The donor does not have to recognize the gain on the donated property. These rules allow for "doubling up," so to speak, of tax benefits, plus avoiding tax on the appreciation in value of the donated property.
Learn more about doubling up from a tax expert.
Calculations to Determine Tax Benefits
Don tells me that one of the “most commonly misunderstood issues with charitable giving is that even though a donation may be tax deductible, it still may not change your final tax bill…A single person giving $100 per week to his or her church and no other Schedule A amounts will have a total annual contribution of $5,200, but will use the $5,800 standard deduction, thus the donations while ‘tax deductible’ do not further reduce the tax bill.”
To see if your giving makes a difference on your taxes, he advises the following approach:
The best way to monitor this is by keeping track of your year-to-date Schedule A amounts (itemized deductions such as property tax, home mortgage interest, and charitable giving) versus your standard deduction (for 2011: $11,600 married filing jointly; $5,800 for singles or married filing separately; $8,500 for head of household).
But until you add up and account for EVERYTHING, you won’t realize the full (tax) benefit of your charitable acts.