Most people realize that charitable contributions are deductible, but they may not know exactly how much they can deduct. They may also be unaware of what other limitations or benefits there may be when they are donating to charity. First, it is important to understand the basics – for example, how does the IRS define what a charitable contribution is?
A charitable contribution is a donation or a gift made to certain types of organizations. If you donate money to your neighbor, so he can fix his car, that does not constitute a deductible charitable expense. Qualifying charitable expenses are those given to organizations that fall under a certain provision of the tax laws. These include many religious groups or organizations, state governments, veterans' organizations, various nonprofit groups, and more.
To qualify, contributions must also be made before the close of the tax year. When you donate items instead of money, those items are valued based on their market value at the time of donation – usually, this is NOT how much you spent to purchase the item.
Limitations on Deductions
The amount of the deductions that you take for making charitable contributions cannot exceed 50 percent of your adjusted gross income (AGI). Some organizations have additional limitations, and some private foundations, veterans' organizations, cemetery organizations, and fraternal societies have donation limitation deductions of 30 percent of your AGI. Also, the type of organization may affect how net operating loss carry-backs are used. Any donation to a public charity is subject to the 50 percent limitation.
Additionally, special limitations apply to certain long-term capital gain property gifts. Foreign charitable organizations may have limitations, too. In some cases, donations to foreign charities are not deductible at all.
You may be further limited if your AGI is above certain levels. For example, in 2015, more limitations kicked in if you were a single filer with an AGI over $258,250 or if you were married filing jointly with an AGI over $309,900. These amounts are adjusted from time to time to account for inflation.
Finding the Value of a Charitable Donation
Charitable donations are a great way to not only help the community, but also gain a valuable tax deduction. When you donate anything but cash, however, determining the value of the charitable donation for tax purposes can be difficult.
Fair Market Value
The IRS requires that you determine the fair market value of any property donated to a qualifying charitable organization. The IRS states that fair market value is what a willing buyer would pay and a willing seller would accept for the property.
You can estimate what fair market value would be for property that is valued under $5,000. If the property exceeds this value, then you will need to seek the services of an appraiser. You can also get expert opinions on less expensive items, but most taxpayers choose not to spend the money necessary to do that.
Clothing and Household Goods Donations
Used clothing and household goods are by far the most common examples of donated property. Some larger donation drop points will provide you with what they are likely going to sell your item for at their facility. You can then use this amount as the fair market value for tax purposes. For example, the charitable organization may state that they are going to sell women's shirts for $5.00, regardless of the size, color, or brand. This $5.00 is the amount that you would use for tax purposes, even if you bought the shirt for $80.00 two months ago.
You should also note that used household items must be in "good used condition or better" to qualify for a tax deduction. The IRS does not define this requirement, but many donation centers do. If you are unsure, talk to the donation center that you are considering using to see what they will accept or will not accept.
There is just one exception to this "good condition" requirement. If a single donated item would be worth more than $500, then the item can be in less than good condition, but you must also use the services of an appraiser to determine its value. You will need to use a Form 8283 in this situation.
One of the easiest ways to determine fair market value is to check online for a comparable or similar product. Resale websites often offer a good indication of what a willing buyer would pay for a specific product.