Ten Tips for Taxpayers Making Charitable Donations

Every year, millions of taxpayers itemize their deductions on their federal tax return. One of the most common itemized deductions is a donation made to a charitable organization.

Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations.

Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.

Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the donor’s name, or a payroll deduction record.

Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.
Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.

To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.
An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Form 8283, Noncash Charitable Contributions
Publication 526, Charitable Contributions

Do You Barter?

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Bartering is the most ancient form of commerce. While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair.

Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Here are a few things you should know about bartering:

Barter Exchange

A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

Barter Income

Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter - barter for another’s products or services - you will have to report the fair market value of the products or services you received on your tax return.

Taxes Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Reporting

The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

Don't Miss Out on Those Credits and Deductions

Earned Income Credit (EIC)

The EIC is designed to offset the burden of Social Security taxes for low-income workers. You can claim this tax credit even if you have no tax liability. You may qualify for the EIC if your earned income and adjusted gross income are less than:

$12,880 ($15,880 if Married Filing Jointly) with no qualifying children.
$33,995 ($36,995 if Married Filing Jointly) with 1 qualifying child.
$38,646 ($41,646 if Married Filing Jointly) with more than 1 qualifying child.

Child Tax Credit

You can claim $1,000 for each child. The 2008 Child Tax Credit begins to phase out when your AGI is more than these limits:

$75,000 if Single, Head of Household or Qualifying Widow(er)
$110,000 if Married Filing Jointly
$55,000 if Married Filing Separately
If your income tax is reduced to zero and your earned income is more than $8,500 (for 2008), you may be eligible to claim the additional Child Tax Credit.

Saver's Credit

If you qualify, you could get a tax credit for up to half of what you contribute to a qualified retirement plan or IRA. Claim the Saver's Credit if you meet all the qualifications:

You're age 18 or older.
You aren't a full-time student.
You aren't claimed as a dependent on someone else's return.
Your AGI doesn't exceed $26,500 ($53,000 if Married Filing Jointly, or $39,750 for Head of Household).

Education Tax Benefits

Even if you don't itemize your tax deductions, you could save money with these education credits and deductions.

Hope Credit — A tax credit equal to 100% of the first $1,200 and 50% of the next $1,200 per student for tuition and related fees, with a credit maximum of $1,800 per student. It's restricted to the first 2 years of college and can be claimed only twice per student.

Lifetime Learning Credit — A credit of 20% of your annual tuition and related fees, with a credit maximum of $2,000 per return. The tax credit may be claimed for an unlimited number of years.

Tuition and Fees Deduction — You can deduct up to $4,000 per student for tuition and fees.

Student Loan Interest Deduction — Deduct up to $2,500 per return for interest paid on student loans.

Exclusion for Savings Bond Interest — Some or all of the interest received from eligible bonds issued after 1989 may be excludable if qualified higher education expenses for the year are at least as much as the proceeds of the redeemed bonds. Note: You can't use the same expenses to claim more than 1 of the above benefits, and other restrictions apply.

Medical Expenses

If you spend more than 7.5% of your adjusted gross income on medical expenses, such as insurance (but not your pre-tax premiums), prescriptions, other out-of-pocket expenses, and mileage to and from medical facilities, then you may deduct the amount that exceeds that figure. Keep in mind, you must itemize income tax deductions to claim medical deductions.

Moving Expenses

Even if you don't itemize income tax deductions, you could deduct moving-related expenses. Your move must meet the following qualifications:
Your move must be job-related.

Your new job would have increased your commute by more than 50 miles if you hadn't moved.
You must be employed full time for at least 39 weeks during the 12 months after you move. If you're self-employed, the applicable figures are 78 weeks and 24 months, respectively, and at least 39 of the weeks must be in the first 12 months.
Your moving expenses can't be reimbursed by your employer.

State & Local Taxes

If you itemize income tax deductions, you have the option of claiming your state and local sales tax or state and local income tax for the year. Be sure to determine which amount will be larger, because you can't claim both. If you choose to deduct income tax, include your withholding and estimated tax payments for the current year as well as any balance due from a prior year. If you credited an overpayment from last year's tax return to his year's estimated tax payment, be sure to include that amount too. If you're subject to Alternative Minimum Tax (AMT) and have a state tax refund, it may be better for you to claim the sales tax deduction even if it's smaller than the income tax deduction. If you choose to deduct sales tax, you can deduct either the actual amount you paid or the amount from the table in the Schedule A instructions. You can add to the amount in the table the sales tax you pay on a car as well as other items specified in the instructions.

Charitable Donations

If you itemize income tax deductions, you may deduct your charitable donations. You'll want to keep good records or all your donations.

Money Donations — Receipts are required for all money donations.

Item Donations — Give new or used goods to charity and deduct their fair market value. Special rules apply to donations of vehicles and to donations of appreciated property (property that is worth more than you paid for it).

Volunteering — Deduct 14¢ per mile while driving for charity. You can also deduct other out-of-pocket expenses.

Out-of-pocket Job Expenses

Keep track of job expenses not reimbursed by your employer. You could deduct these costs:

Driving expenses (the non-commuting kind)
Travel expenses
Uniforms
Union dues
Continuing education expenses

Self-employment Tax Deductions

If you're self-employed, you could qualify for additional income tax deductions. If you work out of your home, there are even more opportunities to claim your expenses. Here are a few examples:

Deduct half of your self-employment tax.

The Section 179 Deduction generally allows you to write off up to $250,000 of business property other than real estate purchased in 2008. Higher limits may apply.

If you use a part of your home exclusively and regularly for business, you can deduct the business portion of rent, mortgage interest, real estate taxes, utilities, insurance and repairs.

You can establish a retirement plan that may allow you to make contributions that exceed the amount you can contribute to a traditional IRA or Roth IRA. This deduction is not allowed for self-employment tax purposes.

AMT Credit

If you were subject to the AMT in a prior year and you're not subject to the AMT this year, you may be eligible to claim the minimum tax credit. Up to 50% of the amount carried to 2008 from years before 2006 may be refundable.

Claiming Overpaid Taxes

If you're eligible for any of the above tax credits, the IRS allows you to reclaim your lost money by filing an amended tax return for prior years. However, you can file an amended return only for up to the past 3 years.

Additional Resources:
Tax Estimator
Education Credits & Deductions
Job Deductions
Saver's Credit
Deductions

Related IRS Forms & Publications

Schedule A (Form 1040) - Itemized Deductions
Schedule A (Form 1040) Instructions
Form 4952 - Investment Interest Expense Deduction
Form 5129 - Questionnaire - Filing Status, Exemptions and Standard Deduction
Form 8283 - Non-cash Charitable Contributions
Form 8283 Instructions
Publication 501- Exemptions, Standard Deduction and Filing Information
Publication 502- Medical and Dental Expenses
Publication 526- Charitable Contributions
Publication 529- Miscellaneous Deductions
Publication 936- Home Mortgage Interest Deduction