While the old adage says that “it is better to give than receive”, wouldn’t it be nice if you could have your (charitable) cake and eat it too? In many cases, by deducting your charitable contributions, giving back not only helps others but also can reduce your tax liability. If you want to maximize your charitable deductions to minimize your taxes, check out these tips:
1. The big tax query: take the standard deduction or itemize?
A critical part of preparing your federal tax return is deciding whether to take the standard deduction or itemize your deductions. The federal standard tax deduction amounts for taxpayers who don’t itemize deductions are based on your filing status. The bulk of taxpayers are eligible to take the standard deduction; however, there are three special cases where a taxpayer isn’t allowed to (and must instead itemize their deductions):
- Your filing status is married filing separately, and your spouse itemizes deductions on his or her return.
- You’re filing a tax return for a short tax year of less than 12 months because of a change in your annual accounting period.
- You’re a nonresident or dual-status alien during the year. If you’re eligible to take the standard deduction, the amount of your standard deduction will depend on your filing status:
Since charitable deductions must be itemized, if you want to deduct your charitable contributions, then you can’t take the standard deduction. Itemized deductions are certain expenses you can use to lower your taxes; these may include expenses including, but not limited to:
- home mortgage interest
- real estate and personal property taxes
- gifts to charities
- casualty or theft losses
- unreimbursed medical expenses
- unreimbursed employee business expenses
To figure out what option is best for you, you’re going to have to do some number crunching. If the sum of all your itemized deductions is less than the amount of the standard deduction for your filing status, then you should take the standard deduction.
2. Make sure you’re donating to an IRS-qualified charity
To maximize your potential tax savings, you need to know what you can and can’t claim as charitable contributions. You can deduct your contributions only if you make them to an IRS-qualified charity. Use the following IRS-provided chart for a quick-check of whether you can deduct your contribution:
To check whether a specific organization is eligible for deductible charitable contributions, use this IRS online search tool.
3. Get it in writing! Keep records and receipts
The type of records and receipts you will need to keep depends on the type and amount of the contribution you make.
Cash contributions (cash, check, electronic funds transfer, debit card, credit card, or payroll deduction) under $250
You will need a bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:
- A cancelled check
- A bank or credit union statement
- A credit card statement
- A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution
Cash contribution of $250 and more
You’ll need an acknowledgment letter from the charity. The acknowledgement letter must be written and state:
- The amount of your cash contribution
- Whether the charity gave you any goods or services in exchange for your contribution
- A description and good faith estimate of the value of goods or services that the charity provided to you
Non-cash contributions (i.e., donation of real property, personal property, goods or services)
The records you must keep depend on whether your deduction for the contribution is:
- Less than $250
- At least $250 but not more than $500
- Over $500 but not more than $5,000
- OR over $5,000
For more information about the types of records required for each of these four different value categories, check out the IRS’s Charitable Contribution Publication 526, pages 19-20.
4. Deduct eligible volunteer expenses
Do you volunteer for an IRS-qualified charity? If so, understand that while you can’t deduct the value of the services you provided to the qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. In general, these amounts must meet these four criteria: unreimbursed; directly connected with the services; expenses you had only because of the service you gave; and not personal, living, or family expenses. Here are some more specific examples:
You can deduct as a charitable contribution any unreimbursed, out-of-pocket expenses, such as the cost of gas and oil directly related to the use of your car in giving services to charitable organization. The standard mileage rate is $0.14/mile. However, if you saved your receipts, then you can deduct your actual expenses for gas and tolls. For example, if you drive 20 miles to volunteer at an IRS-qualified soup kitchen, you can deduct the cost of your gas. If your volunteer time also included driving to the store to pick up groceries for the soup kitchen, those miles are deductible too.
Generally, you can claim a charitable contribution deduction for travel expenses incurred while you were away from home overnight performing services for a charitable organization—only if there is no significant element of personal pleasure, recreation, or vacation in the travel.
Incidental out-of-pocket expenses
Most out-of-pocket expenses associated with volunteering at an IRS-qualified charity, so long as they meet the four criteria discussed above, are deductible. Continuing with our soup kitchen example from above, if you bought groceries and cooking utensils for the soup kitchen and were not reimbursed by the charity for these expenses, you typically can deduct the cost of these expenses provided you have receipts for your purchases.
Volunteer uniform expenses
If your volunteer job at a qualified charity requires you to wear a uniform (e.g., a candy striper uniform), you can deduct the costs. Note, if your uniform is suitable for everyday use outside of your volunteering (e.g., khakis and a navy polo shirt), you can’t deduct the expense. Since a candy striper uniform is only suitable for use at the hospital, this uniform would be deductible.
This is a post by Lisa, an attorney from Florida.