Q: Tax Playa, can I deduct money and property that I give to charities?
Matt, Coventry RI
A: In general, taxpayers can deduct money and property they give to charities. In practice, however, this deduction is not available to most taxpayers, and isn't particularly lucrative, anyway.
For more information on charitable contribution rules, consult IRS Publication 526, "Charitable Contributions."
The first, big, headline thing to tell people about charitable contributions is that they probably don't benefit from them. Unless you are one of the following taxpayers, you can stop reading unless you turn into one:
- A homeowner with at least $50,000 left on a mortgage note
- A church-attendee who tithes
The reason? 70% of taxpayers don't itemize their deductions. Instead, they take the standard deduction ($5350 for singles, $10,600 for couples in 2007). Most people start itemizing when they buy their first home, but there are some young tithers out there I've encountered. In addition, very high income taxpayers will have their itemized deductions partially phased out.
Many people also mistakenly assume that charitable contributions reduce their taxes dollar-for-dollar. Like any tax deduction, the value depends on your marginal tax rate. Most households that itemize are in a combined 30% federal-state marginal tax bracket, so that is the most they can expect to receive.
In order to take a tax deduction, your contribution must be to an approved organization. The IRS keeps a list of approved charities, and you can link to it from the general publication. That means no deductions for the homeless guy, no deductions for your favorite political cause, and no deductions for your cash-strapped brother.
Deductible charitable contributions come in two varieties: cash and non-cash. Below are the rules for each:
- Cash Charitable Contributions. These contributions can be cash, a check, credit cards, etc. They most often take the form of direct contributions to charities, or regular weekly church contributions. You can only deduct 50% of your AGI (getting a rollover for what remains). In order for a charitable contribution of cash to be deductible in 2007, one generally must receive an acknowledgement from the organization.
- Non-cash Charitable Contributions. These generally take the form of household goods and automobiles. You can only deduct 30% of your AGI (getting a rollover for what remains). You should get an acknowledgment from the charity, have an idea of basis in the donation, and (in the case of donations over $5000 or autos), an appraisal of fair market value from the charity. Donations must be in good-used condition or better, unless they are appraised for more than $250.
In addition, taxpayers can now contribute $100,000 directly from an IRA to a charity if they are over age 59 and 1/2. These contributions count toward the IRA required minimum distribution rules.
It makes almost no sense to make regular cash contributions to a church unless you know you will be getting a receipt at the end of the year. It also makes little sense to hold onto household goods for years and years, waiting until an itemization year. Finally, older Americans who no longer itemize (or those who took an early distribution from an IRA) may want to consider making their entire charitable donations from their IRA.