Charitable contributions are a key part of many taxpayers' annual giving and financial planning. The Internal Revenue Service (IRS) as well as most states with income tax statutes allows taxpayers to deduct certain types of charitable contributions on their income tax returns, potentially lowering their taxable income and tax liability. Understanding how to properly deduct these contributions can maximize the benefits for both the taxpayer and the charitable organizations they support.

Eligibility for Deducting Contributions

To deduct charitable contributions, taxpayers must itemize their deductions using Schedule A of Form 1040. Itemizing is beneficial when total deductions exceed the standard deduction amount. Contributions can be deducted if they are made to qualified organizations, including:

• Nonprofit religious, charitable, educational, scientific, or literary organizations
• Organizations that prevent cruelty to children or animals
• Federal, state, and local governments, if the donation is solely for public purposes

Donations made to individuals are never deductible.  Contributions made directly to a foreign organization are not deductible. To verify the deductibility of a contribution, the IRS has an online tool that searches for all valid U.S. charitable and other eligible nonprofit organizations.  Visit the IRS website at www.irs.gov.

Types of Deductible Contributions

1. Cash Contributions: Cash donations to qualifying organizations are fully deductible. This includes donations made by check, credit card, or payroll deduction.

2. Non-Cash Contributions: Non-cash donations, such as clothing, household items, or vehicles, can be deducted at their fair market value. However, special rules apply to certain types of property. For example, if donating a vehicle, the deduction amount is generally the gross proceeds from its sale by the charitable organization.  Many taxpayers donate their used items - such as clothing, furniture, jewerly, and appliances - to charities such as Goodwill or Salvation Army.  To be deductible, the property must be in good, usabe condition.  To prove the condition, be sure to take pictures of the items.  Both Goodwill and Salvation Army publish on their respective websites a list of typical items donated and their "thrift shop value" which is what the IRS will generally support. 

3. Out-of-Pocket Expenses: Expenses incurred while volunteering for a qualifying organization, such as mileage, uniforms, or supplies, can be deducted. However, the value of the volunteer's time or services is not deductible.

Documentation Requirements

Proper documentation is crucial for deducting charitable contributions. The IRS requires different types of documentation based on the amount and type of contribution:

• Cash Contributions under $250: A bank record (such as a canceled check) or a written communication from the charity showing the name of the organization, the date, and the amount of the contribution.  Cash donations (such as dropping money in the Salvation Army pot at Christmas time) are not deductible.  However, a check payable to the Salvation Army would be.
• Cash Contributions of $250 or more: If any single contribution is for $250 or more, then a written acknowledgment from the charity including the amount of cash and a description of any property contributed.  The letter or acknowledgement must also state whether any property was received by the donor in exchange for their donation, and its value.  For example, a charity has a fund raiser where for a donation of $100, a ticket to a movie or play will be given to the donor.  If the ticket has a value of, say, $30,  the the letter or acknowledgement must state that the donor received a ticket with a value of $30.  That means the taxpayer will have a deduction on their return for $70 (the $100 donated, less the $30 value of the ticket received).
• Non-Cash Contributions over $500: Form 8283 must be completed and attached to the tax return, including details about the donated property.
• Non-Cash Contributions over $5,000: In addition to Form 8283, an appraisal is generally required.  The appraisal must be attached to the return.

Limitations on Deductions

There are limits on the amount of charitable contributions that can be deducted:

• 60% of Adjusted Gross Income (AGI): For cash contributions to public charities, the deduction is limited to 60% of the taxpayer's AGI.
• 30% of AGI: For donations of appreciated capital gains property to public charities, the limit is 30% of AGI.
• 20% of AGI: For donations to certain private foundations, the limit is 20% of AGI.

Excess contributions can be carried forward and deducted over the next five years, subject to the same percentage limitations.

Special Considerations

1. Qualified Charitable Distributions (QCDs): Taxpayers aged 70½ or older can make a QCD directly from their Individual Retirement Account (IRA) to a qualified charity. This can satisfy the required minimum distribution (RMD) and exclude the amount from taxable income.

2. Donor-Advised Funds: Contributions to donor-advised funds are deductible in the year they are made, even though the actual donation to the charity may occur in future years.

Conclusion

Deducting charitable contributions can provide significant tax benefits while supporting worthy causes. Taxpayers should ensure that they understand the eligibility requirements, types of deductible contributions, documentation requirements, and limitations to maximize their deductions. Consulting with a tax professional can also help navigate the complexities of charitable contribution deductions and ensure compliance with IRS regulations.