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The IRS Flags Charitable Donations So Do It Correctly
By Darrin Mish
People give donations to charitable institutions simply because of the light feeling that naturally comes with the thought of helping someone. Doing so will also qualify them to tax deductions as these contributions are considered non-taxable. If the IRS sees items like this in your tax return, it will always take notice. In fact, as of January 1, 2007, the procedures related to this type of effort are stricter, requiring individuals to submit more documentation. Despite all these, people continue to patronize charitable institutions because in the end, the act of helping others is worth anything. Every dollar you donate translates to a certain saving, which is equal to your marginal tax bracket. For example, you'll be entitled to a savings worth $250 or 350% if you make a donation of $1,000 and you're in the 25% or 35% tax bracket, respectively. Your donation will just be equivalent to $650, as in the case of the 35% tax bracket. Unfortunately, there are limits to the amount of savings that you can get. If your donations total to more than 20% of your adjusted gross income (AGI) in a given year, you'll be subjected to the relevant deduction limits set by the IRS. To reiterate, the extent of the restrictions will be dependent on your specific circumstance. The rules will certainly get complicated and vague as your contributions become larger, just be prepared for a probable audit or an IRS problem when that happens. What if a person doesn't spend much of his $100,000 AGI? As a result, the person will have substantial cash to make him/her qualified in giving out large contributions to accredited non-profit organizations. In this scenario, he/she will be limited to a 50% deduction on the AGI, which means, $50,000. The scenarios above are only applicable to contributions made to fully-accredited institutions. You may also apply for deductions equal to the time and effort you've invested in volunteering to charitable works. However, in the event that you make donations to specific persons or to those who merely asked for your help, such contributions will not merit a tax deduction. Wise givers do not sell their stocks and just donate the cash. They do not hand over straight cash particularly when they can avoid paying taxes on stocks or securities that earned appreciation. The truth is, you are allowed not to pay taxes on the value of the appreciation of stocks or security owned in a full year. Take for instance 1,000 stocks purchased two years ago at $14 per share and now it has appreciated to $20 per share. If you have donated the actual shares to a charitable institution, you can make a tax deduction equivalent to the entire $20,000 and not pay taxes on the appreciation worth $6,000. If you donate old equipment, furniture, and clothes to charity, you can also get deductions equivalent to the fair market value of those items. The Pension Protection Act of 2006 stipulates that these items should be in good condition, otherwise you won't qualify for the deduction. Just be certain that you meet this requirement despite the fact that the term 'good' was never operationally defined. Doing so will help you avoid getting an audit, or an IRS problem altogether.
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