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Charitable giving can benefit your tax return

In addition to a time for exchanging gifts with family and friends, the holidays are often a time when individuals and businesses give to others. Holiday food and toy drives are in full swing and the Salvation Army’s bell ringers are manning their posts across the county.

On a larger scale, this is the time of year that many people are making relatively significant donations to charities and other organizations. And while much of this can be attributed to the holiday spirit, it is also true that the end of the year rush to contribute can mean savings on this year’s tax returns.

If part of your goal in making a charitable contribution is to be able to deduct if from your taxes, ensuring your contribution is eligible for a deduction is extremely important.

“Only contributions to a 501c3 charity, or religious, education, scientific or literary-purpose organization are allowed,” said Virginia Anderson, a CPA with Parker, Mooers, & Cena, PS.

Examples of qualifying organizations are: a church or religious organization; Boy or Girl Scouts; Boys & Girls Clubs; Red Cross; Salvation Army; Goodwill, veterans’ groups, non-profit schools, hospitals and organizations whose purpose is to find a cure for legitimate diseases, a fraternal order that will use the gift for purposes Anderson outlined above, and even federal, state and local governments if the gifts are solely for public purposes. Donations to political parties are not deductible.

Charitable contribution guidelines and restrictions are outlined for each year in IRS publication 526, and the IRS has yet to update the publication for the 2006 tax year.

“As of 2005 the amount of total [deductible] charitable contributions is 50 percent of adjusted gross income for qualifying 501c3 charities, churches, etc,” said Anderson. “A 30 percent limit applies to gifts of capital gain property for which the deduction is calculated using fair market value without reduction for appreciation.”

That 30 percent limit is also applied to veterans’ organizations, fraternal societies, nonprofit cemeteries, and certain private, non-operating foundations. If the gift is capital gain property, the limitation for these organizations is 20 percent.

The IRS has recently been clamping down on the value that individuals claim when making donations of goods, such as cars and old clothing.

“It used to be that people would donate clunker cars to a charity and take Kelly blue book value as a deduction,” said Anderson. “In 2005 you could only take as a deduction what the charity sold it for. If they couldn’t sell it, you got no deduction. You could still take Kelly bluebook if the charity used the car personally in their charity rather than selling it.”

With donations of clothing and household items, items donated must be in “good” or better condition to be deductible. The IRS does not specify how taxpayers should verify that, if there is any question.

The IRS does, however, specify an upcoming change to how cash gifts must be recorded, starting in “tax years beginning after August 17, 2006” — Jan. 1, 2007, for most businesses.

“As a general rule, deductions for charitable donations must be substantiated by canceled checks or receipts from the charity,” said Anderson. “However, in the past, a log or other written record sufficed when cancelled checks or receipts were not readily available. So, for example, if you dropped a $20 bill in the Sunday collection plate or in a Christmas kettle outside of a department store, you could still claim a deduction as long as you kept a record of the donation.

But that’s about to change.

“The new law eliminates this option starting in 2007,” said Anderson. “All charitable donations must be supported by bank records or receipts from the charities.”


(Editor’s note: this article is for informational purposes only, and is not intended as tax advice. Please consult a qualified tax professional with questions about your own taxes.)

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