The often-quoted pasuk from Mishlei states, “Tzedakah tatzil mi-mavet–Charity saves from death.” That’s great news for those who give tzedakah. But it gets even better; you also get a tax break from the IRS. I know what you’re thinking: “No death AND a tax deduction? Where do I sign up?” While you will have to speak to your local rabbinical authority regarding the no-death aspect, this article can help ensure you maximize your tax deduction. As a side, I highly recommend a great free online tool to keep track of your donations at Itsdeductible.com.
The most common form of charity is cash donations. Assuming you have proper documentation of the donation from a valid 501(c)3 organization, the IRS allows you to deduct as much as 50% of your adjusted gross income. But make sure you maintain records of that donation in case you’re questioned. Here’s a pop quiz: If you have adjusted gross income of $100,000, for example, and you have a deduction for charitable donations of $50,000, the IRS will assume (a) you are an extremely generous human being, or (b) you are lying, and you will be audited. This is not to say you should not be overly generous in your donations if you can; just make sure to obtain the proper documentation.
Another popular form of charity is donating used clothing. A deduction cannot be claimed unless the items are in “good used condition or better.” Do not expect the charity to provide you with an assessed value of your donation. You are responsible for assessing the value of the donated items, whereas the charity merely confirms that you made the donation. Any non-money contribution in excess of $500 requires the taxpayer to attach Form 8823 to his return, which essentially itemizes each item donated with a description, value, cost of the item, etc. There are various tools to help determine the value of the items with the most popular one published by the Salvation Army (salvationarmyusa.org). Due to this burden of assessing the value of each article of clothing, most people just find it easier to deduct $500 even if in reality the assessed value could be a bit more.
You may have seen ads from nonprofits asking for donations of your old cars, or maybe even heard a certain commercial with a jingle containing its phone number that you will never be able to get out of your head. Most people erroneously assume that your donation will automatically trigger a $500 deduction no matter the value. The reason why many people just deduct $500 is because it’s simple and you do not need to provide any documentation with the return if it’s $500 or less. However, in cases where the value is over $500, the amount that you can ultimately deduct will be furnished to you by the organization on a Form 1098-C, which you must attach to your return. If the organization immediately sells the vehicle for more than $500, then your deduction will be limited to the sale proceeds. If it’s sold for less than $500 but is valued at more than $500, then the taxpayer can actually choose to deduct based on the fair market value, but cannot exceed $500. However, this is where you can really benefit: If the organization intends to use the vehicle for its business operations to significantly improve the car before sale to give to a needy person, or sell to a needy person for less than market value, then you may take a deduction equal to the fair market value, which may be well over $500. Ensuring that your vehicle donation is being utilized for one of these uses may be extremely beneficial to both you and the organization.
Another great way to maximize your deduction while benefitting your favorite charity is by donating stocks. Assuming that the stocks have been held for at least one year, not only will the taxpayer not have to pay capital gains tax on the gain, but he can deduct the full market value on the date of the donation instead of just what he paid. For example, you bought 100 shares of stock years ago for $2,000 that are now worth $10,000. If you donate that stock, then you will be able to deduct $10,000. Even more than that, you don’t have to pay capital gains tax on that $8,000 gain.
With a bit of smart planning, you can ensure that your charitable donations not only save you from death, but also save you a whole lot of money in taxes.
Daniel Magence, CPA, Esq. is a partner at Pristine CPA Solutions LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes. He can be reached at [email protected].
By Daniel Magence
