That means that Tax Season is right around the corner. If you are like many people, or maybe you’re not, you have hopefully started to plan your deductions and how you can reduce your tax bill for the year. You may be wondering how you can legally do it. In cases where you are paid on 1099, or self employed, and no deductions are made, every little bit helps. Of course if you are self employed, you should be paying estimated taxes, and hopefully the burden of paying taxes at the end of the year won't be so bad...
Charitable contributions are one good way to reduce your tax bill. Not only will it help those qualified organizations, they can also help you reduce your tax bill. It may be a good time for a good house cleaning and determine what you don’t need, and go donate. There was an article in the San Diego Union Tribune written by Nicole Anzia this morning “Charities Welcome Home De-Cluttering” listing some items that it may be time to get rid of. Some of the items they list are luggage, books, glassware, and picture frames. I’d go further to add clothing, furniture, tools, old computers (with the hard drives removed of course), and if you are inclined, good old fashioned cash will help too.
How much can I donate and when can I deduct the donation?
As with all tax questions, that depends. There are limits to how much can be donated. I’ll refer to IRS Publication 526. There are maximum dollar amounts that you can contribute. For example, married filing jointly the limit is $309,900 (single, married filing single, Head of Household all have different limits). However, to go one step further, there is an additional limit of 50% of your Adjusted Gross Income. And, even one step further, you may be further limited to 30% or 20% depending on the type of contribution and the type of organization. Donations must be deducted in the year it is donated in most cases.
What is a qualified organization?
As a general rule, qualified organizations include non-profit groups that are religious, educational, charitable, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. Most organizations (other than churches or government) must have applied to the IRS to qualify (IRS Publication 526). You cannot claim a donation just because you gave it away to your neighbor or someone in need.
What is required for documentation?
Records are required to be kept for the three categories of contributions:
1. Cash Contributions
2. Noncash contributions
3. Out-of-pocket expenses
For cash contributions less than $250 you must have one of the following,
1. bank record that could be one of the following: canceled check, bank or credit union statement, or a credit card statement.
2. A receipt from the organization
3. A payroll deduction record.
For cash contributions more than $250:
1. You need the bank record, and additionally, you must have an acknowledgement from the organization. It must include the amount, whether the organization gave you goods or services in return, and a good faith description of any goods or services described. You must have this acknowledgement from the organization before you file, or the due date of the filing extension.
Non-Cash deductions less than $250
Must have a receipt from the organization. However, a receipt is not required if you use a drop box where you cannot get a receipt. You should keep a list of everything that you dropped off, however, so that you can substantiate in the event of an audit.
Non-Cash deductions more than $250, less than $500
You must have acknowledgement from the qualified organization. If you donated more than one item or more than one contribution, you must have a separate acknowledgement for each or a single acknowledgement listing separate items or donations.
Non-Cash deductions between $500 and $5,000
You need the acknowledgement and in addition, a description of how you got the property, the date you got the property, the cost basis including any adjustments to the basis if held less than 12 months, and if held more than 12 months you must include the cost or other basis.
Non-Cash deductions more than $5,000
The requirements for deductions between $500 and $5,000 apply, and in addition, you must include an appraisal of the property from a qualified appraise.
What about Volunteering?
You cannot deduct your time for volunteering, however, you can deduct out-of-pocket expenses directly related to the services, and mileage for travel. Please note that mileage for volunteering is 14 cents per mile (you can deduct actual costs for travel in lieu of mileage if you keep detailed receipts).
How do I claim the deductions?
Deductions are claimed on Schedule A and in some cases for non-cash contributions, IRS Form 8283 may be required. Note that you must be able to itemize your deductions. Therefore, not everyone can claim the deductions.