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The IRS Flags Charitable Contributions So Do It Correctly
By Darrin Mish of Law Offices of Darrin Mish
Apparently, one of the best reasons to give a charitable contribution is because when you give, you actually get something in return for your good deeds. Simply knowing that you have made a difference in someone else's life gives a general good feeling. If these are reflected in your tax returns, the IRS pays attention as these qualify you to a tax deduction. In order to receive these deductions, you literally have to jump through hoops first. As of January 1, 2007, more documentation is required for deductions related charitable contributions. However, even with the new requisites and a possible IRS problem, in the end it's still worth the effort to help other people out. For every dollar that you contribute, you are entitled to a tax benefit that is equal to your marginal tax bracket. For instance, you can save up to $250 if you are in the 25% tax level bracket and you donated $1,000. In the same way, a donation of $1,000 will translate to $350 worth of savings if you are in the 35% tax level bracket. In the second example, the cost of your donation is just $650. Limits on this benefit are also imposed, though. If you end up giving so much charitable contributions that it totals to more than 20% of your AGI (your adjusted gross income) within the same year, you might qualify to be subject to set deduction limits that would go into effect. What kind and how high are these limits? Depends. Just be aware that the rules will get complicated and ambiguous, worse, it could even cause your tax return to be flagged by the IRS. What if a person does not spend much of his $100,000 AGI? In this case, he/she can donate substantial amounts of money to fully accredited charitable institutions. As a result, only 50%, or $50,000, will be deducted from his/her AGI. What about situations other than donating to accredited institutions? If you donated to specific individuals or those who simply asked for your help, you will not be entitled to deductions on these. Another deduction you can take is the value of your time when you volunteer and are basically giving your time and effort. Wise givers simply give the cash equivalent of their stocks. This is utilized to avoid paying taxes on stocks and securities that have appreciated If you own certain stocks for a full year, you are allowed to deduct that value from your taxable income and not pay taxes on the appreciation. Take for example 1,000 stocks brought two years ago at $14 per share and now it has appreciated to $20 per share. If you've contributed the actual shares to a charitable institution, you can make a tax deduction equal to the entire $20,000 and not pay taxes on the appreciation worth $6,000. If you donate old equipment, furniture, and clothes to charitable institutions, you can also get deductions equal to the fair market value of those items. According to the Pension Protection Act of 2006, however, deductions are only allowable when household items donated are in good or better condition. Even though there was no clear and established definition of the term "good", you may want to ensure that all items donated meet this criterion. Otherwise, you will be up for an audit, or worse, an IRS problem. |
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