Making Tax-Deductible Donations this Holiday Season? Check Your List Twice

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Question: Every December I donate money to various local charities.  How do I verify that a charity is recognized by the IRS and eligible to receive tax deductible contributions? 

Answer: The IRS allows you to deduct contributions to “qualified” organizations, which include religious organizations; Federal, State, and local governments; non-profit schools and hospitals; public parks and recreation facilities; Community Foundations; Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, and similar charities; War Veterans groups; and certain charitable organizations designated as “501(c)3” organizations by the IRS. 

The term “501(c)3” refers to the governing section of the Internal Revenue Code.  There are many charitable organizations that are tax-exempt but not qualified to receive tax-deductible donations, including civic leagues, homeowners associations, and social welfare organizations.

The IRS website offers EO Select Check (Exempt Organizations Select Check), which allows you to search for and select an exempt organization and check to see if the charity is eligible to receive tax-deductible charitable contributions.   Be cautious. I searched for exempt organizations in Pacific Grove and found 48 that have been revoked.  The IRS says you may rely on this list to determine the deductibility of your contributions.

Question: How much can I donate and how much can I deduct on my tax return?  

Answer: Different kinds of gifts have different rules, which are outlined below:

Non-cash donations

The IRS allows you to deduct the fair market value of what you donate, which they define as “The price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.”

Get a receipt before you file your return.  If the value of the property (or properties) is over $5,000 ($10,000 for non-publicly traded stock) you also need a qualified appraisal.  Take pictures of items that you donate and keep them with your receipts and appraisals in case you are audited.  Donated items must be in good or better condition.

Donating Vehicles

You can donate your old car or boat, but in general, you can only deduct the amount that the charity sells it for.  And you must get the right paperwork from the charity, including IRS Form 1098-C, or a statement containing the same information.  If the charity uses your vehicle instead of selling it, you can deduct the fair market value at the time of your contribution, and the charity must provide written acknowledgement of what they are using it for and for how long.  Check with your tax professional.

Donating Money

When you donate dollars to charity, keep a copy of your cancelled check or credit card statement showing the name of the charity and the amount, and get a letter from the charity acknowledging your gift.  The letter must include a description and a good faith estimate of the fair market value of whatever goods and services you received in return.  You can then deduct the difference between the amount of your gift and the value of whatever you received.

Donating Appreciate Stocks

You can deduct the full market value of stock you donate.  Your deduction is limited to 30% of your adjusted gross income.  You don't need an appraisal for publicly trade stocks.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.