The holiday season might have you feeling generous, which is always a good thing! Charities know this, and you might be targeted by requests to donate to one cause or another. Go ahead and give to those charities, but make sure you’re following these guidelines first. That way, you can spread goodwill and earn a valuable tax deduction at the same time!
Investigate the charity. Since everyone is feeling more generous at this time of year, con artists often try to take advantage. First, make sure that any charity you’re considering is actually a real charity! Then, keep in mind that you can’t count your donation as a tax deduction unless the charity is approved by the IRS. You can actually find a list of approved charities on the IRS website.
Understand how to value your donation. If you simply donate an amount of money, then you can write off that amount as a tax deduction. But if you donate clothing or household goods to charity, you can only count their fair market value – not the price you paid for them when they were new!
If you receive a gift or prize in exchange for your donation, you must deduct its value from your deduction amount. For example, if you spend $2,000 at a charity auction to win an item worth $1,200, then your deduction is limited to $800.
When claiming donated items worth $5,000 or more, you must first have it appraised to prove its value. Keep a copy of the appraisal with your tax records, just in case you are ever audited.
Hold onto your records. Receipts for your charitable donations must show the name of the charity, date of the donation, and the amount of your gift. Alternatively, you can use credit or debit card statements to prove your charitable donations. Remember to hold onto these records for three years, in the same file as your tax returns. That way, if you’re ever audited, you can prove your charitable donations and you won’t lose the deduction.
For more help with calculating the value of charitable donations, or for answers to any other financial planning questions, call our office and we’ll be happy to help.