When Hurricane Sandy devastated parts of the Northeast, people raced to help: They donated money by text and credit card, scoured closets for items to share, and drove to the most ravaged areas to aid in the cleanup. They were motivated by generosity, not tax deductions, and that is how it should be. But the savvier you are about taxes, the further your philanthropic efforts will go.
The write-off for charitable gifts is one of America’s biggest tax breaks — $158 billion in tax year 2009, according to the IRS. Here is a guide to it:
■ The basics: Charitable donations, money or stuff, are deductible. Itemize deductions on Schedule A of your tax return. If you do not itemize, you cannot take the deduction.
The recipient has to be a qualified nonprofit. Donations to individuals are not deductible, even if you handed a Sandy-swamped stranger $20 for food.
If you are not sure whether your charity meets the standard, search the IRS’s database of qualified groups: http://www.irs.gov.
Even when you give to a qualified nonprofit, you might not get a deduction for the full amount. That is because you have to lop off the fair market value of any benefits, like tickets or merchandise, that you receive. A high-level membership to the Guggenheim Museum, for example, costs $500 but rates only a $215 tax deduction.
■ The limits: There are limits on deductions, but unless you are a big giver you are unlikely to run up against them. Charitable deductions are limited to 50 percent of adjusted gross income for gifts to most traditional charities, such as churches and educational institutions. For a smaller number of groups, including veterans organizations, fraternal societies, and certain family foundations, the limit is 30 percent. Donations above the limits can be carried forward to future tax years.
In addition, contributions of appreciated securities with long-term capital gains are subject to a tighter limit: 30 percent if the group you’re giving to has a 50 percent limit, and 20 percent if it’s a 30 percent institution. That’s because taxpayers already benefit when they donate stocks and bonds that have gone up in value.
If you plan to donate appreciated stock, run the numbers to make sure you do not hit the limits. That is especially true for retirees, who may have relatively low incomes but substantial assets.
■ Old clothes: If you donate clothes, furniture, or other real property, you have to establish the fair market value so you know how much to deduct. Programs such as TurboTax’s ItsDeductible or H&R Block’s DeductionPro can help you figure out the amount.
For donations worth over $250, you need a written acknowledgment from the charity. (For financial donations under that amount, a credit-card statement or canceled check will suffice, while for small donations of stuff a simple receipt is enough.) Items worth more than $5,000 generally require an appraisal. There are special rules for cars. If it is worth more than $500, you generally can deduct only the smaller of its fair market value or the amount the charity gets from a sale.
■ Transportation costs. Volunteers who travel for philanthropic reasons can deduct the cost of the plane, train, and taxi fares, or write off their own car’s mileage at 14 cents a mile.
The trip’s focus must be the volunteer work. “If you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses,” according to the IRS’s publication 526.
So if you work several hours on an archeological dig sponsored by a charity but the rest of the day is for sightseeing, there’s no deduction.