As the year draws to a close, you may decide to donate cash or property to one or more worthy causes. Besides the satisfaction of helping others, there’s another reward for your benevolence: a tax deduction on your 2013 return.
But keep the following points in mind:
- For starters, you may only deduct contributions made to a legitimate tax-exempt charitable organization. Note that a qualified charity cannot be established to benefit a specific individual or family.
- Generally, your deduction is limited to 50% of adjusted gross income (AGI) for the year (30% of AGI for contributions to certain charities and private foundations). Any excess may generally be carried over for up to five years. The deduction for gifts of property have other AGI limits.
- The tax law imposes strict substantiation requirements. No deduction is allowed for monetary gifts unless you maintain a bank record or written communication from the charity indicating your name and the amount and date of donation. For contributions of $250 or more, you must obtain a contemporaneous written acknowledgement from the charity. If you donate property valued above $500, you must file Form 8283 with your return. Independent appraisals are required for property donations above $5,000.
- Typically, you may deduct the fair market value of gifts of property owned longer than one year. Any appreciation in value remains untaxed. For instance, if you donate property valued at $5,000 that you acquired five years ago for $1,000, you can deduct $5,000. But the property must be used by the charity to further its tax-exempt purpose.
- For 2013, individuals age 70½ or older can transfer up to $100,000 from an IRA directly to a charity without paying any tax on the distribution. The downside is that the transfer doesn’t qualify for the charitable deduction; however, it qualifies for your required minimum distribution.