As they say, good deeds are their own reward. Even so, there’s nothing wrong with taking a tax deduction for a charitable donation.
Not surprisingly, the end of the year — a time when people like to wrap up loose ends — is an especially popular time for giving. December takes the top spot for giving, with 18 percent of donations occurring in that month.
And for many, a tax deduction sweetens the deal and makes their spirit even more generous.
Experts do point out that if you’re considering a request for a donation to a charity, do some research before you give. You want to find out as much as you can about the charity to make sure your donation is tax deductible.
“Most people, given their druthers, would like to get the deduction,” said Wade Chessman, a certified financial planner and owner of Chessman Wealth Strategies.
But a tax deduction is not a given each time you open your wallet for a worthy cause.
Get the basics down
Generally, you can deduct up to 50 percent of your adjusted gross income in charitable deductions to qualified organizations. Contributions to private foundations, veterans organizations and fraternal societies are limited to 30 percent of your adjusted gross income.
Bear in mind that you may also take a deduction for non-cash gifts, such as clothing, books and toys and even the cost of ingredients for a big pot of chili for a homeless shelter.
“You can donate just about anything you can think of,” said Stephen Fishman, an attorney and author of “Every Nonprofit’s Tax Guide.” But for items valued above $500, such as artwork, collectibles or automobiles, there’s a catch. You must provide a relatively recent appraisal of the item’s value. The Internal Revenue Service “wants to be sure that the donation is worth what the charity gets when it sells it,” Fishman said.
You will need a letter from the charitable organization you gave to for any donations of more than $250, in case you get audited.
“When people take a deduction, the onus is on the donor to prove that they made the deduction [correctly],” said Eileen Heisman, CEO of the National Philanthropic Trust.
In addition, donations must be charitable gifts, not payment in exchange for goods and services. In 2012, the IRS disallowed $22,000 in donations from a Texas couple, David and Verona Durden, to their church.
The reason? The family could not prove how the money was used, and the church’s documentation did not state that the Durdens didn’t receive any goods or services in exchange for the donation.
In order to take any donation, you must itemize your deductions and file a Schedule A.
Nonprofit or charity?
Typically, only donations to nonprofits organized under the IRS’s 501(c)(3) section are eligible for tax deductions.
“People use nonprofit and charity interchangeably, but they’re not the same,” said Heisman.
There are lots of nonprofits, such as social clubs and golf clubs, but they may not have tax-exempt status. If you believe in an organization’s mission and wish to support it, then by all means do so. Just remember that you may not get a deduction, Heisman explained.
“There are around 30 kinds of nonprofits, but only one kind is a charity,” she added.
For example, welfare and civic groups that are organized as 501(c)(4)s generally don’t qualify for a tax deduction. However, there are two types of 501(c)(4) that do: veterans’ organizations with at least 90 percent war veteran membership and volunteer fire departments.
Get your timing right
To get a tax deduction for 2015, you must make your gift by Dec. 31. Even if your charity is not open that day — though many hire additional staff that day to accommodate procrastinators — you can still receive the deduction if your check is postmarked that day.
Things get a little more complicated when you’re making non-cash gifts, however. Stocks are fairly straightforward. The date you sign over your shares to a charity is the date your deduction is valid. Not so with mutual funds. There, the contribution is made on the date that shares are transferred to the charity. It can take a week or more to transfer shares. Illiquid assets such as real estate also take a long time to transfer.
So leave yourself plenty of time to make sure those assets transfer in time for you to take a donation for this year.
“I recommend donor-advised funds for my clients who want to make donations to multiple charities, but don’t want to keep up with tax receipts of multiple charities.”
Watch out for fraud
Another potential landmine to watch out for are organizations that, despite having names that may sound like legitimate charities, are in fact scams and therefore not eligible for a tax deduction.
“They’re trading on you mistaking them for another charity that’s legitimate,” Heisman said.
Often, these donations are solicited by telemarketing calls.
“Don’t give money over the phone, and don’t give on a street corner,” Heisman added.
To research legitimate charities, use the IRS’s search function to find approved charities. Meanwhile, the charities in the GuideStar.org database have all met the requirements for exempt organizations. The site also has the organization’s most recent 990 tax forms. And Charity Navigator ranks charities to help you see how much of the average donation goes toward the charity’s mission rather than overhead.
Another way to make sure that your donation is going to a bona fide charity is by using a donor-advised fund. The funds will perform the first layer of due diligence to ensure that you’re giving a legitimate charity with tax-exempt status, said Chessman of Chessman Wealth Strategies.
Donor-advised funds are run by mutual funds. You can make a donation into the fund one year and take the deduction, but you can wait to make your donation to a charity in later years.
“I recommend donor-advised funds for my clients who want to make donations to multiple charities, but don’t want to keep up with tax receipts of multiple charities,” Chessman said.
— By Ilana Polyak, special to CNBC.com