There are a number of new tax laws in recent years when it comes to charitable contribution deductions. These are some pretty significant changes, so keep in mind the following as you do your taxes in regard to the cash and non-cash donations you’ve made.
Cash Donations: For cash donations, the big news in 2007 is that deductions will no longer be allowed without receipts. Therefore, tossing cash into the collection plate is no longer a good idea. If you are attached to the collection plate, you could always toss in a check instead. In case of audit, the IRS uses three methods to substantiate charitable deduction:
- Canceled checks
- Credit Card Statement
- Written acknowledgement from the charity (showing the charity’s name, date of donation, and amount)
In years past the IRS preferred receipts for cash donations, but they weren’t really a stickler on this. Simply keeping records of amounts given and dates would have sufficed. Going forward there will be no exceptions to traceable receipts. This means that it’s best to not throw any cash into collection plates or Salvation Army buckets unless you don’t mind foregoing the deduction for small dollar amounts here and there.
Clothing & Household Goods: Beginning back on August 17, 2006, the rules for donating clothing and household items changed so that only items in “good used condition” are deductible. The only way to prove the condition of your donated items is to take pictures and keep them with your tax records. Pictures, along with an itemized receipt, should give you some audit-proof deductions. Always make an itemized list of goods you are donating (description and dollar value for each item), to keep with your tax records. A good resource for determining thrift shop value (or deductible amount of each item) is on the Salvation Army’s website. This is something you should have been doing in years past to substantiate your deductions, but is getting more important as the IRS cracks down. Do not list socks or used underwear on your lists since the IRS will likely disallow them. For any single item valued at more than $500, you can still claim a deduction, regardless of condition, if you submit an appraisal of the item with your tax return.
Note: Americans claimed $9 billion in deductions for clothing and household item charitable deductions in 2003.
Donating Vehicles: The vehicle donation rules are a couple of years old, but new enough that not everyone is aware of the recent changes. If you donate a vehicle to a charity, only the gross proceeds that the charity gets for your vehicle, when they sell it, is deductible on your tax return. The charity will give you a Form 1098-C with the amount, and you will need to attach it to your tax return. You can also deduct fair market value if the charity donates the car (e.g. to Meals-on-Wheels or to a high school shop class) or if the vehicle is sold by the charity to a needy individual at a substantial discount. In these cases you will still need a letter or receipt from the charity that states how the vehicle was used.
Note: In 2000, charities reported getting $32.7 million from sales of donated cars while taxpayers reported $654 million in write-offs from car donations. A lot of these new laws are simply cracking down on perceived areas of abuse.
General Reminders: Keep in mind that you can only deduct charitable donations if you itemize deductions on your tax return and only donations to qualified charitable organizations are deductible. There tends to be a lot of myths out there that donating to individuals or political causes can be deductible. Don’t fall for these myths. The IRS has a good resource on its website where you can find information on which organizations you are allowed to make tax-deductible contributions to.