Tax Article - Donation Do's and Don’ts

If you donate money, goods or services to charity, you may be able to augment the personal satisfaction you get from the good deed with a tax deduction. But a tax break is no sure thing; you’ve got to follow the rules. Here are some donation dos and don’ts to keep in mind:

Do pick your charity carefully and determine whether you can claim a deduction. You may deduct a donation only if it benefits a qualified organization. Check the IRS database at http://apps.irs.gov/app/pub78 to make sure your intended recipient qualifies.

Also, not everything is deductible. If you contribute your services, for example, you may deduct only your out-of-pocket expenses, not your services’ fair market value. Travel expenses, including meals and lodging, may be deductible — unless a significant element of personal enjoyment is involved.

Contributions of tangible personal property that isn’t related to a charity’s tax-exempt function are deductible, but the amount is limited to the property’s basis. For example, if you donate a piece of antique furniture to a children’s charity to sell in its fundraising auction, you can deduct only your basis. But if you donate it to a historical society to display in its museum, you can deduct the fair market value.

Don’t throw out (or ignore) the paperwork. Following passage of the Pension Protection Act of 2006, recordkeeping for cash contributions got a little tougher. Under previous rules, you could often use personal bank registers, diaries and notes to support a cash donation.

Now, regardless of the donation’s amount, you must have a bank record or written communication from the charity stating the organization’s name and your contribution’s date and amount. Eligible bank records include canceled checks or bank or credit union statements containing the required information.

If you give property valued at $250 or more, you’ll need a written acknowledgment from the recipient. For items valued at $500 or more, you must attach a completed Form 8283, “Noncash Charitable Contributions,” to your return. Donations of property (other than publicly traded securities) valued at more than $5,000 must be supported by a qualified appraisal.

Do extra homework for vehicle donations. If you wish to donate a vehicle, special rules apply. The American Jobs Creation Act of 2004 revamped vehicle donation rules to prevent fraudulent overstatement of deductions.

Before the law passed, a dealer or individual donating a car would use Kelley Blue Book® value to determine how much to deduct on their tax returns. But now, the donor can deduct only the actual price for which the charity sold the vehicle. Additional rules may also apply, so be sure to consult your tax advisor.

Don’t ignore nontraditional options. Consider donating tax-deferred retirement plan assets, such as traditional IRAs or 401(k) accounts, at death. Doing so allows those assets to avoid both federal income and estate taxes (though not all state laws follow federal law). In addition, a provision set to expire on Dec. 31, 2007, allows you, if you’re at least 701⁄2, to donate up to $100,000 of your IRA — but not of your 401(k) — and avoid federal income taxes on the distribution.

During life, you might donate appreciated stock or other securities. Subject to certain limitations, you can take a charitable tax deduction for the stock’s full fair market value while avoiding capital gains taxes on the appreciation.

When all is said and done, there’s nothing wrong with making a spontaneous charitable contribution now and then. But if you want to claim a tax deduction, you’ll need to exercise some foresight and follow-through.

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