The IRS Flags Charitable Donations So Do It Correctly

People give contributions to charitable institutions simply because of the light feeling that naturally comes with the act of helping someone. In addition, these kinds of donations are tax deductible. If the IRS sees entries like this in your tax return, it will always take notice. In fact, as of January 1, 2007, the guidelines concerning this type of effort are stricter, requiring individuals to submit more documentation. This limitation, however, did not keep people from making more donations because in the end, helping others is worth anything else. 

Every dollar you donate equates to a certain saving, which is equivalent to your marginal tax bracket. For instance, you'll be entitled to a savings worth $250 or 350% if you make a donation of $1,000 and you are in the 25% or 35% tax bracket, respectively. Your donation will just be equal to $650, as in the case of the 35% tax bracket. There are restrictions to the amount of savings that you can receive though. If your contributions add up to more than 20% of your adjusted gross income (AGI) in a given year, you'll be subjected to the relevant deduction limits set by the IRS. To reiterate, the extent of the restrictions will be dependent on your specific case. The rules will certainly get complicated and ambiguous as your contributions become larger, just be prepared for a probable audit or an IRS problem when that happens.

In some cases, you get to contribute a very large sum of money to a fully accredited non-profit organization because you didn't spend much of your $100,000 AGI. In this case, you would be limited to only a 50% deduction of your AGI, which is equal to to $50,000.

What about situations aside from donating to accredited institutions? If you give out donations to specific individuals or those who simply asked for your assistance, you'll not be entitled to deductions on these. On the other hand, you can convert to deductions the value of your time and effort spent in volunteering for charitable works. 

One tip that several smart givers know and utilize is that they never sell their stocks and simply donate the cash. Wise taxpayers do not hand over straight money, particularly when they can give stock or securities that have appreciated because doing so helps them avoid paying any tax on the income generated from the appreciation. In fact, if you've owned a security or stock for over one year, you can actually deduct the full-market price of that item and yes, without paying tax on the appreciation. For example, if you bought 1,000 shares of common stock in a corporation two years ago at $14 for each share, and on today's market it is actually worth $20 per share, if you donated the actual shares of stock to charity, then you could subtract the full $20,000 and not pay taxes on the gained $6,000.

You may also deduct the wholesale and fair-market value of old equipment, clothes and furniture donated to non-profit organizations. On the other hand, this stipulation has a catch. According to the Pension Protection Act of 2006, you won't be able to deduct any donations of household items and clothing except when they're at least considered in good condition or better. The meaning of 'good' was never made clear but you want to make sure that if it was ever brought up during an audit, you could rightfully claim that you donated items that were in good condition so that you can avoid a probably IRS problem.

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