Which Charitable Contributions Are Tax-Deductible?
Money Girl explains when making a charitable donation can also be a money-saving tax break.
Laura Adams, MBA
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Which Charitable Contributions Are Tax-Deductible?
Making a charitable contribution is always good for the soul—but did you know that it can also be good for your wallet?
A reader named Lori asks:
“I purchased a painting from a non-profit foundation. Later, I received a letter stating that the profits of the sale will benefit the organization. Does that mean that my purchase is tax-deductible?”
If you’re like Lori, you’ve probably purchased something from a charity or made a donation to a non-profit organization and then wondered if you should claim it on your taxes.
In this episode, I’ll tell you what kinds of donations and purchases are tax-deductible, so you never miss a money-saving tax break..
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Most contributions of money or property that you make to a qualified organization are tax-deductible. That means you can subtract them from your taxable income, which reduces the amount of tax you have to pay.
What Is the Standard Tax Deduction?
While this tax perk sounds fantastic, there’s a hurdle you have to jump over to qualify for it. Charitable contributions are deductible only when you itemize deductions on Schedule A of Form 1040opens PDF file , instead of claiming the standard deduction on your taxes.
Taking the standard deduction is always easier than itemizing deductions. However, for about one out of every 4 taxpayers, itemizing results in a lower tax bill.
So get familiar with all the deductible expenses on Schedule Aopens PDF file , like mortgage interest, unreimbursed expenses for your job, medical expenses, and charitable donations. Then keep track of them throughout the year, so itemizing may be an option for you at tax time.
If the total of all your deductible expenses is higher than the no-questions-asked standard deduction, you’ll come out ahead by itemizing.
For 2013, here are the standard numbers by tax filing status that you’ll need to beat in order to make itemizing pay off:
- Single: $6,100
- Married filing jointly: $12,200
- Head of household: $8,950
- Married filing separately: $6,100
There are even higher standard deductions for those who are 65 or older or blind.
Which Charitable Contributions Are Tax Deductible?
Now that you know that itemizing deductions is required for a charitable contribution to cut your tax bill, let’s discuss what types of charitable contributions are tax-deductible.
When you receive something in return for making a charitable donation, you can only deduct the amount that exceeds the fair market value of the benefit received.
Donating cash to a charity is a straightforward, allowable deduction. But where things get muddy is when you purchase something that benefits a charity, like a silent auction item or artwork—like Lori did.
When you receive something in return for making a charitable donation, you can only deduct the amount that exceeds the fair market value of the benefit received.
For example, let’s say your child’s school is raising money for a field trip. They’re selling tickets to a fundraising dinner, valued at $100, and you buy a ticket for $150. Since the amount you paid to the charity exceeds the value of the dinner, you can deduct the difference, or $50.
So, Lori must compare what she paid for the artwork against its estimated fair market value. But how do you do that?
How to Determine Fair Market Value
A qualified organization must give you a written statement if you make a payment of more than $75 that’s partly a contribution and partly for goods or services. It must give you a good faith valuation of what you bought and explain that you can only deduct the amount you paid that exceeds it.
If you donate personal belongings to a charity, like clothes or household goods, you also need to estimate their fair market value for tax purposes. They must be in good used condition or better to qualify as an allowable deduction.
There’s no set formula to calculate fair market value for inexpensive items, but it’s usually far less than the retail price. Consider what an item would probably sell for on sites like eBay or Craigslist, or in a consignment or thrift shop in its current condition.
If the property you donate is valuable or unique in some way, refer to IRS Publication 561, Determining the Value of Donated Propertyopens PDF file for more information.
Records to Keep for Charitable Donations
No matter if your contribution is cash, check, or property, you must keep a record that includes the name of the organization, the date of the contribution, and the amount. For a contribution of $250 or more, you also need written acknowledgment from the organization that describes your donation, including a good faith estimate of its value.
For a contribution to be tax-deductible, it must be made payable to a qualified organization, never to an individual. Qualified charities include a wide variety of organizations, including schools, religious organizations, veterans’ groups, fraternal societies, and government branches.
To see a full list or check the status of a specific organization, use the Exempt Organizations Select Check tool at irs.gov. For more information about making large donations refer to IRS Publication 526, Charitable Contributionsopens PDF file or speak to a qualified tax accountant.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.