Dozens of tornadoes in late April were responsible for the deaths of more than 300 people and billions of dollars in property damage in Alabama, Georgia, Mississippi, and Tennessee. There has been an outpouring of support to help these tornado victims. While tax results should not be the only factor in lending a hand or making a contribution, it can influence your decisions. Here are five tax rules to know.
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1. You must itemize to take any deduction for charitable contributions. Be as generous as you want or can afford to be, but only those who itemize their personal deductions can get any tax benefit from them. Individuals who use the standard deduction—65.8 percent of all filers use the standard deduction—cannot deduct any charitable contributions. If you want to make a $10 donation, whether or not you can deduct it, consider texting on your mobile phone (REDCROSS at 90999; Salvation Army’s GIVE at 80888).
2. There is no deduction for your time and effort. If you contribute your services to help the victims, you do so out of personal generosity; no tax deduction is allowed. For example, if you are a construction worker who donates your time and skills to help rebuild homes, you cannot write-off the amount that you normally would have charged for these services. You can deduct all of your out-of-pocket expenses if you itemize. Thus, if you drive to Tuscaloosa, one of the hardest hit areas, you can write-off your car or truck mileage at the rate of 14 cents per mile. If you buy building materials, that expenditure is deductible. Keep a written record of your charitable driving, along with receipts or other proof of your out-of-pocket expenses for charity.
3. You must meet substantiation requirements. Without required written proof, you can’t deduct anything. Cash donations of any amount must be substantiated by a bank statement, canceled check, credit card statement, or other written proof. If the donation is $250 or more, a canceled check or bank statement isn’t enough; you must receive a written acknowledgment for your gift from the charitable organization.
If you are donating used clothing and household items for which you want a deduction, you need a receipt from the charity unless it is impractical to receive one (for example, you add clothing to the Goodwill drop boxes). If you can get a receipt, all the better. You can use IRS Publication 561, Determining the Value of Donated Property to help you fix the amount of the donation for used items.
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4. Tax-deductible donations must be made to IRS-approved charities. Obviously, if you give to the American Red Cross or the Salvation Army—both well-known charities, you don’t have to worry. If you are donating to any organization you are not familiar with, especially those that may be set up specifically to accept donations for tornado victims, be sure to check whether the organization is eligible to accept tax-deduction donations.
The IRS’s Publication 78 is an online cumulative list of organizations that is continually updated to reflect newly-approved charities. If you want the biggest bang for your charitable buck, you may also want to check on how much of your donation goes to helping victims versus paying the organization’s administrative costs. Do this at Charity Navigator, Charity Watch, or Volunteer Guide.
5. You may be able to transfer IRA funds to charity. If you are age 70 and a half or older, you can transfer up to $100,000 from your IRA directly to a public charity. The transferred funds are not included in gross income. These funds count toward your required minimum distribution for the year. However, there is no double tax benefit; the transfer is not tax deductible. This transfer option is good for eligible individuals who do not itemize because it saves income taxes (the distribution that would otherwise be taxed to the IRA owner becomes tax free) even though no charitable contribution deduction can be taken. This favorable tax rule expires at the end of 2011 unless Congress extends it.
Final word: Find more details about deducting charitable donations in IRS Publication 526, Charitable Contributions. If you are concerned about how the tax rules affect you, consult with your tax advisor.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s 1001 Deductions and Tax Breaks and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.