Provided By Phil Behnen, CPA, CFE
December is a popular time of year for reflection. Another year has run its course, and the holidays allow us to the opportunity to spend time with loved ones while remembering those who are less fortunate. It’s no surprise that donations to charitable organizations tend to spike at the end of the year. In fact, 31% of charitable donations in 2014 occurred in December.
There’s still time, advocates of non-profit organizations say, to make a year-end donation that’s eligible for a tax deduction. In addition to being altruistic, seasonal generosity can be a favorable strategy when you’re preparing your tax return. Fortunately, once you’ve found a cause dear to your heart there are numerous resources online where you can do your due diligence in verifying the charity’s fiscal health and transparent governance.
Founded in 2002, charitynavigator.org helps donors evaluate where and how to spend their money. Charitable organizations are rated, allowing you to make sure your hard earned dollars are going to a good cause by avoiding charities that might misuse donations. Once a donation is made, there’s not much recourse for the donor if the organization turns out to be unethical or generally unwise with its decisions. Guidestar.org is another useful resource for researching and evaluating charities.
Methods of Donating
In addition to a standard cash donation, real estate and precious items such as jewelry, art and antiques can be deducted when donated to an eligible organization. However, steps must be taken to properly appraise and asses their fair market value. When estimating the value of donated property, it’s best to err on the conservative side since the IRS will penalize taxpayers for overstating the value of donated property. If you’re claiming a deduction of more than $5,000, the IRS mandates completing Form 8283, Section B.
Another donation strategy that we advocate is to donate investments to a charity instead of cash. If you donate stocks and/or bonds that have appreciated to a qualified charity, you can take a deduction on the appreciated value of those assets rather than their basis. Use the price on the date of the sale, averaging the high and low price to get the fair market value.
Charities are allowed to sell investments tax-free, even if there’s a substantial gain. Furthermore, you can repurchase the exact same investments with cash. Not only do you receive a deduction for the full amount of the investments that you gifted to the charity, but you also pay less taxes when you ultimately withdraw your cash that has been reinvested, so it’s pretty much a win-win.
Before donating, it’s imperative to make sure that an organization is a qualified charity under IRS rules. These include corporations, trusts, community organizations, funds or foundations organized and operated in the United States for religious, charitable, scientific, literary, or educational purposes. Other qualified charities include cemetery companies, veterans’ organizations, fraternal organizations and organizations designed to prevent cruelty toward children or animals.
Certain charities in Canada, Mexico and Israel may also qualify. You can search for qualified charities using the IRS’s online search tool. The IRS prohibits charitable contribution donations for money or property given to political candidates for public office and groups that lobby for legal changes. Labor unions, chambers of commerce, Homeowner’s associations and for-profit organizations are also not eligible.
Finally, remember to save all receipts and document when possible. No deduction is allowed for a separate contribution of $250 or more unless you have written confirmation from the charity. When donating paintings, antiques or objects of art worth $20,000 or more, a signed appraisal must be attached to your tax return, and the IRS may request an 8” X 10” color photo of the donated item. Just to be safe, you should keep records of your donations in the form of a cancelled check, credit card statement or a written acknowledgement from the charity. When in doubt, check with your financial advisor for rules specific to your situation.
The above article is for general informational purposes only and should not be construed as tax advice. You should consult with a professional advisor familiar with your particular factual situation for advice concerning specific tax matters before making any decisions.