Most people, when faced with the choice between paying more on their taxes and helping to improve their communities, would choose the latter without hesitation. Unfortunately, not many people know how to claim charitable contributions — or how to make donations that will benefit them come tax season.
Whether you are looking to maximize your 2014 tax refund or you are looking for tips to make 2015 more tax-friendly, here are some easy tips to make your next IRS payment as small as possible and your community as happy and functioning as it can be.
Give Only to Qualified Organizations
You can’t expect the government to believe your claim of thousands of dollars’ worth of cash donations to random strangers on the street. For one, payments to individuals are never tax deductible, and for another, you and your recipients have no evidence of the transaction.
Instead, if you want to get the most out of giving back to your community, you should make sure that you are donating your money or goods to organizations registered with the IRS. Usually, charitable organizations are happy to advertise their status as qualified for tax deductions, but in the event you encounter an organization you are unsure about, you can search for them online using the IRS’ Exempt Organizations Select Check.
Remember that cash and checks aren’t the only donations you can make to receive deductions on your taxes. The IRS recognizes donations of all sorts of property, from used clothing to appliances and vehicles to entire houses. For example, if you want a time- and money-saving way to get rid of your old boat or vehicle, you might as well donate it to a worthwhile organization and receive a sizeable tax deduction.
Complete the Correct Forms
Different sizes and types of donations require different forms, and if you fail to complete the correct paperwork, the IRS will inevitably misunderstand. Here is a quick summary of the two main forms you must fill out to claim various charitable contributions:
· Form 1040, Schedule A. The 1040 is the form that most Americans use to claim income and deductions. On Schedule A of this form, you should list in detail each individual donation you made. If your contributions total less than $500, this form alone is sufficient.
· Form 8283. The 8283 is specifically for non-cash donations that exceed $500. Section A is specifically for donations that total between $500 and $5,000, and Section B is for donations worth more than $5,000.
Understand the Limits
In most cases, the amount you give should never exceed 50 percent of your adjusted gross income (AGI). Some charitable organizations and types of donations are governed by stricter limits of 30 or 20 percent of your AGI. For most people, this isn’t a problem, as at least 50 percent of their income is earmarked for bills and other necessary expenses. However, if you fear that your past year’s expenses have exceeded these limits, you may be able to claim the excess on next year’s taxes; this process is called “carrying forward” the deduction.
Keep a Record of Your Donations
Charitable organizations that take in large item donations want to encourage such behavior, so they are usually particularly adept at making the donation process as easy as possible. They usually provide their own appraiser, arrange their own pickup service, and they always have perfectly printed receipts for you to keep as a record for your taxes. You should keep any receipts with other important documents you’ll need during tax time.
While large donations of furniture, appliances, vehicles, and houses certainly show your magnanimity, you are much more likely to give small amounts of goods and money throughout the year. To save time and effort, many charities eschew personalized receipts for a boilerplate form you can complete with the details of your donation. No matter how small your donation, it is crucial that you keep each of these forms with a date and itemized list to provide as evidence of your charitable contributions should you be audited.
Recognize the Similarities and Differences of Small-Business Donations
Surveys suggest that more than 75 percent of small businesses give charitably every year, the total contributions amounting to an average of 6 percent of the businesses’ profits, while women-owned businesses donate as much as 10 percent of their profits. Small businesses are major contributors to community causes, and the method of claiming deductions for yearly donations is largely the same as that of individuals. However, small businesses are much more likely to approach the limits of charitable giving — that 50/30/20 percent-line of adjusted gross income — so it is wise for small-business owners to verify with trusted accountants before they file their taxes.