Podcast: Giving and Getting Back (at Tax Time)

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Welcome back to Friends With Tax Benefits! 

In the premiere episode of season two, Friends with Tax Benefits hosts Daniel Thrall and Lauren Thomas, will be joined by Mari Pullen, TurboTax Senior Communications Manager. The friends dive into the world of gifting and philanthropy, shedding light on how to donate while staying financially conscious.

In the second part of the episode, Enrolled Agent, Katharina Reekmans, answers your questions about what’s tax deductible and what’s not. And to dig in even further, we have it all laid out for you here too.

Here’s what you need to know about your next charitable tax deduction.

_{The views, information or opinions expressed during the Friends with Tax Benefits podcast series are solely those of the individuals involved and do not represent those of Intuit, TurboTax or any of its brands. The primary purpose of this podcast series is to educate and inform. This podcast series does not constitute financial, legal or other professional advice or services.}

The IRS Definition of a Charitable Donation

Before ramping up those charitable donations, you need to know what the IRS considers as “charitable donations.”

A charitable contribution is when you donate money, financial assets (including securities or business ownership interests), goods or services to an organization. You’ll then deduct the market value of the contribution on your income tax return. Here’s the precise wording from the IRS: “A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.”

“Qualified organization” is the phrase to pay attention to. Unfortunately, the IRS doesn’t allow you to donate money to your uncle or the pizza shop downtown and deduct it from your income taxes.

Generally, you can only take deductions from charitable donations to qualified nonprofit 501(c)(3) organizations. However, not all nonprofits qualify. More specifically, an organization must have a 501(c)(3) status from the IRS. 

Unsure whether an organization qualifies? Use this IRS tool to do some research — and in the meantime, check out these examples:

Qualifying Organizations

• Religious organizations: This includes churches, synagogues, temples, mosques and other religious bodies or associations.
• Governments: Your donation to federal, state and local governments (or any establishment that performs substantial government functions) must be for public purposes only.
• Schools: Not every educational institution qualifies; schools must be nonprofits. 
• Hospitals: Medical organizations must also be nonprofits to qualify.
• War veterans’ groups: This includes posts, auxiliaries, trusts or foundations.
• Nonprofit cemetery companies or corporations: Your cash or other donation isn’t deductible if it’s intended for the care of a specific lot or mausoleum crypt.
• Domestic fraternal organizations: Societies, orders and associations must operate under the lodge system to qualify.
• Charities: An organization must be operated “only for charitable, religious, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals.” This can be a community chest, corporation, trust, fund or foundation, including:
  • The Salvation Army.
  • American Red Cross.
  • CARE.
  • Goodwill Industries.
  • United Way.
  • Boys and Girls Clubs of America.

Non-Qualifying Organizations

• Individuals: That includes friends, colleagues and family members.
• Civic leagues: Although these organizations promote social welfare and are generally non-profits, they usually don’t qualify.
• Foreign organizations: There are some exceptions, including certain Canadian, Israeli and Mexican charities.
• For-profit groups: This generally refers to groups run for personal profit.
• Most legal groups: If a group’s purpose is to lobby for law changes, it doesn’t qualify.
• Most political groups: This includes candidates for public office.

Other non-qualifying organizations include social and sports clubs, labor unions, chambers of commerce and homeowners’ associations. You can still donate to these organizations, of course; you just can’t note them on your income tax return. 

What Counts as a Charitable Donation?

Once you’ve chosen your charity or qualifying organization, it’s time to decide just what kind of charitable giving you’ll do. A cash contribution isn’t the only way to give back. Other things can also be write-offs on your income tax return. Here are just a few examples:

• Items: This includes cars, clothing, artwork, jewelry and even valuable collections.
• Securities: That means you can donate stocks and bonds, then write them off on your taxes.
• Real estate: Houses, land and other types of real estate can be donated and counted as a charitable deduction.
• Some student expenses: Do you have a student living with you? Does a qualified organization sponsor them? If so, you can write off the expenses paid to support them.
• Out-of-pocket volunteering expenses: When you volunteer at a qualified organization, you may be able to write off specific expenses.

Any and all of these may make you eligible for a deduction on your income taxes. There are limits, though. If the value of what you donate is $250 or more, you need to obtain a written acknowledgment from the qualified organization you donated to. If the value of your non-cash charitable contributions exceeds $500, you’ll need to include specific information about the charitable organization and what was donated when you file your tax return. 

A Word On Fair Market Value

When you donate something other than cash, you’ll use the fair market value to determine how much of a deduction you can use on your income taxes. There are different ways to calculate fair market value depending on what you donate. For example, if you’re giving a used coat to your local Goodwill Industries, generally they will offer you a receipt for your donations or you might need to check the prices of similar items at that location. A vehicle, on the other hand, would need to be checked against the prices listed in Kelley Blue Book, which considers the age, condition, model and more of the vehicle.

What Doesn’t Count?

While it would be nice to count every type of charitable giving as a deduction, that’s not the reality. Here are a few things that won’t contribute to your charitable deductions:

• Gambling costs: If you buy raffle, bingo or lottery tickets — even if they’re for charity — you can’t write off the cost on your taxes.
• Group fees: Are you part of a country club, lodge, fraternal order or other group? Unfortunately, the dues, fees and bills for these organizations are not tax deductible.
• Tuition: Even if you pay someone else’s tuition for them, you can’t count this as charitable giving on your taxes.
• Value of blood: While you can do a lot of good by donating blood, you can’t count this as a charitable deduction.
• Value of your time or services: That means volunteering, including work or services donated by your business, can’t be deducted.

FAQ: Special Donation Situations

Wait — volunteering doesn’t count as a donation?

That’s right. Volunteering is one of several “special situations” that seem like they should directly count as a charitable tax deduction but don’t. Let’s take a closer look:

Volunteer Work

People often ask whether volunteer work entitles them to a tax deduction. They may assume, “Ten hours of my time has a market value. If that’s what I gave to Habitat For Humanity, can’t I deduct it?” 

According to the IRS, the value of your time is not necessarily comparable to that of someone else, and the IRS can’t verify what you say your time is worth (or how many hours you really volunteered). You also can’t deduct any personal expenses connected with volunteering, such as the cost of putting your children in daycare. 

What you can deduct are costs that relate directly to your volunteer work, including:

• Actual cost of gas as and oil OR $0.14 per mile for charitable use of your car
• Uniforms or supplies
• Air or bus transportation

Quid Pro Quo

Some charities try to “sweeten the deal” by offering incentives for people to donate more. A charitable tax deduction and free stuff? That sounds too good to be true!

Unfortunately, it is too good to be true. As the IRS makes crystal clear:

“If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.”

Say your church had a charity dance, and everyone bought tickets to participate. You paid $50; all of that money went to your church as a donation. If the fair market value of the ticket is $10, you can only deduct the amount exceeding that — which, in this case, is $40. 

If, on the other hand, you receive something with a fair market value equal to your cash contribution or other donation, you won’t get that tax deduction. 

How To File Taxes With a Donation Deduction

When it comes to making charitable contributions — and getting the deductions you’re entitled to — documentation is everything. 

Any contribution (cash or noncash) of $250 or more requires that you receive a “contemporaneous written acknowledgment” — in other words, a receipt — from the charity you donated to. Then there’s IRS Form 8283, which must be included with your tax return for non-cash donations exceeding $500 in value and noncash property worth more than $5,000. In the latter case, you’ll also need to get a “qualified appraisal” of the property.

Qualified appraisals are required or suggested for other non-cash contributions as well. For instance, donating artwork valued at $20,000 or more requires that a signed appraisal be attached to your tax return.

Is There a Donation Limit?

While you’re free to donate as much as you’d like, there is a limit on how much is considered deductible. Generally, you can only deduct an amount equal to 50% or 60% of your adjusted gross income (AGI). Certain limitations of 20% or 30% of your AGI apply in some cases. 

When Should You Donate?

If you want your charitable contribution deduction, you’ll need to make a donation before the close of the tax year in which you intend to include that donation on your tax return.

Get The Deduction You Deserve

Charity is about more than your income taxes, but if you know the rules, you can get the best of both worlds. That requires knowing the IRS rules, keeping the proper documentation and completing your tax return in just the right way. Luckily, you don’t have to handle everything on your own.

Learn more about charitable contributions in this episode of our podcast, Friends with Tax Benefits: