The Holiday Season is the time of compassion and giving, sharing with those less fortunate. Many of you will claim those donations on your tax returns, so do them right. Here’s a general overview of what to be prepared for.
Charitable donations rules:
- Clothing and Household items – clothing that’s donated has to be in “good used condition or better” in order to be tax-deductible; the same applies to household goods. This rule does not have to be met if a qualified appraisal in included with tax return. If your donation exceeds $250, request a written acknowledgment with as many details of donated goods as feasible.
- Money – to claim a monetary donation you must present a written statement from the charity or a bank statement confirming your donation. This rule applies to any amount donated. Contributions made with credit cards should also display a name of a charity, date of donation and amount.
- Credit card orders – You can deduct your charitable gifts made with a credit card in the year you made the donation. If you contribute in 2013 but don’t receive a credit card statement until January 2014, the donation applies to 2013 tax filing regardless when you actually paid your credit obligations.
- Don’t assume that every donation you make is tax exempt. It’s important that a charity of your choice qualifies for that status. Typically churches, religious, and government organizations are eligible; for other type of institutions (disaster relief, etc) you may refer to Exempt Organizations Select Check created by the IRS to remove any doubt.
There are also donations you cannot deduct. Some of them include: individuals or nonqualified organizations, donations that will generate you a profit, value of your time or personal expenses. Broader discussion of nondeductible contributions is included in Publication 526.
What happens if you overstate charitable donations?
Inflating the value of your donations has a simple outcome, a penalty. It is either 20% or 40% of the amount your underpaid your taxes as a cause of overstating your donations and it depends on the overall underpayment amount and value claimed on your tax return as expressed in percentage terms.
Make sure you keep a very good record of your donations. This is just as important as any other tax related documents you have. The worst thing you can do is to show generosity and then be unable to prove it, which will impact you significantly in case of an audit.