If you don't obey these IRS rules for deductions, being in a charitable mood in December could lead to a horrible mood swing next April.
Tis the season when we all feel a little more charitable toward our fellow man. A Red Cross survey says more than nearly 60 percent of Americans will donate at least $50 between Thanksgiving and Christmas this year, while just over 30 percent will give at least $100.
You can be sure most of those Americans will claim their holiday donations on their next income tax return. And you can equally sure some of them will mess it up. Here’s how to make sure you don’t get Scrooged by the IRS…
1. Right charity, right tax form
Records won’t matter if the charity isn’t legit. As the Illinois CPA Society succinctly puts it, “Contributions of any kind are not deductible unless the donation is made to a qualified charity.” So how do you find out who’s qualified? The IRS has has a section of its website dedicated to helping you find out. But generally this means an organization that files taxes as a 501(c)(3) organization, or a church. Political parties and candidates are not qualified organizations.
You also have to itemize your deductions on Form 1040, Schedule A. If you don’t itemize, you can’t deduct your contributions.
2. Your time isn’t money to the IRS
Many charities call a donation of your time precious, but the IRS calls it worthless. Even if you work professionally as, say, a cook for $15 an hour, and you spend four hours preparing dinner for the homeless, you can’t deduct $60 of your taxes – despite the fact you can prove beyond a shadow of a doubt the value of your time.
But you can deduct out-of-pocket expenses you incur while donating your time, such as food, hotel, airfare, tolls and other travel costs. For 2010, the IRS says you can deduct 14 cents per mile driven in service of charitable organizations.
3. Be careful donating used stuff
Cleaning out your attic doesn’t mean cleaning up on your tax return. The IRS says, “Clothing and household items donated must generally be in good used condition or better to be deductible.” So no clothes with holes and no appliances that don’t work with a flip of the switch.
Here’s a rule of thumb from Goodwill’s Taxes and Your Donation: “If you’re unsure whether your item qualifies for a tax deduction, then consider this: if you would give it to a relative or friend, then the item is most likely in good condition and is appropriate to donate.”
As to the value you should place on your donated stuff, Goodwill also offers this list of prices at which they typically sell stuff in their stores as a guide. For example, they sell computer monitors for $5 to $50, so that’s all you should write off. A woman’s shirt? Just $2 to $12. Here’s a similar guide from the Salvation Army. For more details, see IRS publication 561.
Also, the IRS says your donations have to be useful and not just valuable. So furniture and computers are fine, but be careful if you want to donate valuable art, antiques or collectibles: they have special rules. For example, say you have a sculpture that you bought for $50 at a yard sale, then find out years later that it’s worth $5,000. If you donate it to a private charity, your write-off may only be $50. But if you donate it to the right organization – say, a non-profit museum that will add your sculpture to its collection – with an appraisal, you may be able to deduct its $5,000 current value. So if you’re donating something like art or antiques – especially if it’s worth more than you paid for it – definitely talk to a tax pro first.
4. Keep those receipts
It doesn’t matter how little you give, the government wants a record of it. So you need a receipt or a canceled check. If you donate more than $250 in cash or property, you need written acknowledgment from the organization that includes the amount of cash or a description of any property you contributed, including a good faith estimate of value.
What if you donate by text message? Apparently your phone bill counts, too – as The Wall Street Journal learned when it grilled IRS officials about this cutting-edge donation method.
5. Be honest and on time – or else
So what happens if you deduct more than fair market value (simply the price a willing buyer would pay a willing seller)? And what if you make your donation after Jan. 1 but claim it on your 2010 taxes? Well, you could get audited. You might think, “There’s no way I’ll get a visit from the tax man for such a puny violation.” But as Forbes magazine reported earlier this year, IRS agents are using computers and the Post Office to generate millions of letters to errant taxpayers. So don’t tempt fate.