How to Maximize Charitable Deductions
The deduction for charitable contributions is easy to claim, infrequently attracts an audit, and the documentation requirements are very liberal. If you already itemize deductions because of home mortgage interest, state taxes, or employee business expenses, you can increase your deductions dramatically by following the steps outlined below. If you have claimed the standard deduction in the past, you may be able to increase your deductions enough to itemize.
Choose your Charity Well
Only a bona fide not-for-profit organization can receive tax-deductible contributions. Gifts to homeless people are not deductible, and they may be enabling a drug or alcohol addiction. Better to give to an organized charity that sponsors food and housing programs for the homeless. Support large national charities to address global issues like world hunger and a cure for cancer; support local charities where you know one or more of the members so that your contribution supports the friendship and ensures that the most benefit inures to your community and its residents.
Give Frequently and Generously
Nothing feels better than a generous heart. On the psychological side, gifting improves self-esteem, stimulates a positive attitude, and is a proven boost to mental and physical health. On the spiritual side, gifting clears negative energy and connects you with your Higher Power. Ancient spiritual practices call for tithing 10% of your income to charity. While this may seem a lot, you may be surprised by how easy and pleasurable it is once you start. Try it for a month or two. The true value of money is not found in how much you keep, but in the meaningfulness of where you send it. You will notice an enhanced feeling of abundance in your own life if you give to others.
Unfortunately, donating your time or services is never tax deductible, even if you gave up some income in the process. However, frequent donations to thrift-shop charities help keep your garage and closets clean and result in great tax deductions. Be sure to make a complete list of what you gave including condition and value. You may find a valuation guide online at http://www.funwithtaxes.com. Be sure to get a receipt and hold on to it. If you donate an item worth $5,000 or more you must get an appraiser to sign Form 8283 on your tax return. Remember that your record-keeping may be scrutinized by an IRS agent, so be thorough and attentive to detail. It looks better to the IRS if you make frequent trips to the thrift shop with a few items than if you make a single trip with thousands of dollars worth of items. For ideal credibility, aim for 15-20 trips each year averaging $300-400 in value. This would result in a deduction of between $4,500 and $8,000 which translates to a tax savings of $1,000-2,700 depending on your tax bracket. I recommend to clients that they keep a separate "clean" trash can in their garage and use it to collect all the "trash" that is usable enough to donate to a thrift shop.
Vehicle and Boat Donations
I hear a lot of ads asking for vehicle donation, but before you donate your car you should consider some important facts. There are some special limitations that apply to vehicle and boat donations, and you are likely to benefit more by selling the car and donating the proceeds to charity. Donating the car saves the hassle but selling usually puts more money in your pocket.
You may deduct unreimbursed expenses incurred in the service of non-profit organizations. These expenses must be directly connected with and resulting from the services you gave, and not personal, living, or family expenses. Our favorite example of this is uniforms for cheerleaders. They meet the IRS guidelines - 1) they are not suitable for everyday use and 2) they must be worn while performing donated services (enhancing school spirit) for a charitable organization (the school). Generally, you may claim a deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. So if you accompany a school class on a European trip, you must be actively chaperoning the kids, not just along for the recreation.
Cash/check donations under $250
For substantiation you need one of the following: 1) a cancelled check, bank or credit card statement, 2) a receipt or letter from the charity, or 3) payroll deduction records such as pay stub or W-2. In figuring whether your contribution was under $250, do not combine separate contributions to the same charity.
Cash/check donations of $250 or more
You must have an acknowledgment from the qualified organization. The acknowledgment must be written, must state whether you received any goods or services in exchange, and an estimate of their value, if any.
For more detailed information and instructions, download IRS Publications 526 and 561 available for free at www.irs.gov.
There are a variety of exceptional ways to utilize planned giving to minimize taxes and preserve your assets. A Charitable Remainder Trust may allow you to avoid capital gains taxes while converting a non-productive capital asset into an income stream for life, all wrapped together with a large, immediate tax deduction. Give us a call to discuss the possibilities at (734) 994-1288.
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