Lending a Financial Helping Hand
As millions of people throughout the Northeast attempt to recover from the disaster caused by Hurricane Sandy, many Americans are wondering how they can help the victims rebuild their shattered lives. However, with many people still struggling to pay their own bills in this weak economy, the prospect of donating money to others in need may seem out of reach.
Fortunately, the federal government provides plenty of incentives for those individuals who are looking to help others in their communities. If you are willing to jump through a few hoops and keep accurate records of your charitable giving, you will be able to make a difference in the lives of others while simultaneously saving money on your taxes. It is the epitome of a win-win situation!
Of course, when it comes to the subject of taxes, things are usually more complicated than they seem. Although most people are aware that charitable donations, whether in the form of cash or property, are fully tax-deductible, this is beneficial only if you itemize your deductions on your tax return. If you receive a larger tax break by taking the standard deduction, then your charitable donations will not provide any tax benefits. However, if you itemize your deductions, which is likely the case if you currently have a mortgage, you can reduce your tax burden through charitable giving. For those in the highest marginal tax bracket, the savings could be as much as 35% of the total donation, which means that each dollar donated would only cost you $0.65.
Given the enormity of the potential tax break, the IRS has put rules and limits in place in order to reduce the potential of fraud, and it’s extremely important to adhere to these rules. If you ever get audited, you will need to provide evidence of all charitable donations for which you took a deduction. If you fail to do this, the IRS likely won’t be very charitable to you!
If you plan to make donations of any kind, proper record keeping is essential. Generally speaking, for a donation of less than $250, a receipt from the charity or a bank statement is sufficient to verify the donation. However, for larger donations, you will need to obtain a written confirmation from the charity. Regardless of the donation amount, you should always obtain as much supporting documentation for your gift as possible to reduce any potential complications if the donation ever comes into question.
Charitable contributions get even more complicated when you donate property. If you give away more than $500 worth of non-cash goods during the course of a year, you will need to file additional documentation, IRS Form 8283, with your tax return. Non-cash donations of more than $5,000 — with the exception of publicly-traded stocks — will also require the services of an appraiser to verify the fair-market value of the item(s) donated.
Finally, it is important to note that only donations to approved charities are tax-deductible. So charitable contributions to the American Red Cross or Habitat for Humanity are perfectly valid deductions, but donations to institutions, such as a political party or business association, are not. In addition, donations to individuals, no matter how needy, and volunteer hours, no matter how valuable your lost wages, are not legitimate deductions.
The rules regarding charitable donations may seem a bit tangled, but the vast majority of people who give small cash contributions and clothing/household goods donations can just keep their receipts and that’s enough. For those with more complicated contributions, Pathway Financial Planning can help sort out the particulars and ensure your gifts are well received.
