With the spirit of the holiday season in full swing, we often receive questions about charitable donations. A qualified charitable donation might allow a taxpayer to realize a tax deduction for their good deed. Regardless of a possible tax benefit, an individual should give simply for the principle or spiritual gain of giving.
A taxpayer must itemize their tax return through the use of IRS Schedule A, also known as going long form to realize the deduction of qualified charitable donations. A taxpayer has the choice either to take the tax years’ standard deduction or to itemize their deductions. The taxpayer chooses between the standard deduction and itemizing their return by whichever one gives them the greatest tax benefit.
The standard deduction for married filing jointly rises to $12,700 for tax year 2017, up $100 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,350 in 2017, up from $6,300 in 2016, and for heads of households, the standard deduction will be $9,350 for tax year 2017, up from $9,300 for tax year 2016 (Retrieved from https://www.irs.gov on November 30, 2017).
As depicted in the standard deduction amounts above, qualified charitable donations by themselves may not be enough for a taxpayer to itemize their return. We recommend that clients bring their charitable donations records in for consideration as well as other possible deductions.
A qualified charitable contribution is a tax deduction and does not reduce total tax dollar for dollar. Tax deductions lower a taxpayer’s taxable income. Assuming a taxpayer with a marginal tax rate of 15% already has enough deductions to itemize their tax return and they make a $1000 qualified charitable donation the value of the deduction is the reduction of their taxes by $150.
Qualified charitable organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose or that work to prevent cruelty to children or animals. Common qualified charitable organizations are churches, Red Cross, Goodwill, Salvation Army, United Way, Veterans’ groups, non-profit schools, and non-profit hospitals.
If a taxpayer is unsure whether an organization is a qualified charitable organization, they can verify the organization at www.irs.gov. A donation to an organization that is non-profit does not necessarily mean that the donation is automatically qualified. Confirmation of an organization’s status is also available by calling the IRS (toll-free) at 1-877-829-5500.
A taxpayer does not receive any deduction for their charitable contribution of sweat equity or time. However, a taxpayer may be able to take mileage, tolls, and parking with an appropriately filed out mileage log book and paid receipts. In addition, out of pocket expenses while volunteering is considered a cash contribution. I recommend writing the purpose and to whom the expense benefited on the paid receipt. Ideally, the taxpayer uses their credit or debit card as proof the individual paid the expense.
A qualified charitable donation does not include handouts given directly to the homeless or collections at the office for those experiencing difficult times. In addition, donations made to political candidates and their campaigns are non-deductible. However, the State of Ohio Department Taxation offers a credit for particular situations of contributions made to certain Ohio offices.
Finally, when making church or charity donations make sure to pay with a check or an electronic card. The reason is that there is no paper trail with cash whereas checks and electronic cards prove who, what, when, where, and how. The charitable organization in return should provide the taxpayer with a receipt for the donation. The receipt must contain a statement that no goods or services were provided by the organization, if that is the case, in exchange for the donation.
When goods or services were provided in exchange for the donation, the donation amount is netted. For example, a taxpayer donates $1000 to a qualified charitable organization; in return, the organization gives individuals that donate $1000, or more a flat screen TV that has a fair market value of $300 the taxpayers netted qualified charitable donation is $700. The charitable organization’s receipt and statement should reflect these amounts.
Generally, taxpayers must make their charity donation by December 31 to be eligible to receive a deduction for the present tax year. Taxpayers must meet the several recordkeeping requirements to take the charitable donation deduction. The record keeping burden should not deter an individual from the spirit of giving. Charitable_Contributions_Guide_2017
This communication may not be relied upon as written advice. This written advice is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer for following the advice. Other factors may need consideration that would change the opinion presented.