More On Tax Planningfrom The Advisor's Professional Library
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
As tough as the economy is, Americans in significant numbers continue to support local and national charities and to deduct the contributions on their tax returns. Unfortunately, the IRS sometimes disallows the deductions.
The IRS wants taxpayers to be aware of several things before they deduct charitable donations, and has come out with nine helpful tips. Some are pretty obvious: For instance, you have to give the IRS an itemized list of your deductions.
Others deal with more complicated issues. For example, how much can you deduct for the three-year-old pickup you gave to the local food kitchen that delivers to homebound people? Or, how much can I deduct for a pledge I made at midyear that I don’t have to fully pay out until next year?
Then there are the organizations themselves. The IRS points out that not every “charity” is eligible for a deduction, and that this year 275,000 U.S. groups automatically lost their eligibility.
1) Trust, but Verify: You love the charity and its work. But hold on. Before you write a check to the organization, make sure it qualifies for a deduction. Just ask, or if you prefer to be discreet, look up the group in IRS Publication 78, Cumulative List of Organizations.
2) You Must Itemize: You may say “duh,” but not everyone realizes you have to itemize deductions in order for your charitable contributions to be deductible. You do this by using Form 1040, Schedule A.
3) What You Can Deduct: Besides cash contributions, you can generally deduct the fair market value of most property you donate to a charity, whether it’s a boat, a car or an old blazer. Special rules apply to some types of property.
4) Quid Pro Quo: Say your contribution entitles you to free admission to a sporting event or charity banquet, or to receive other goods or services. How much can you deduct? The IRS says only the amount exceeding the fair market value of the benefit you received.
$250 or more: You’re required to have a written acknowledgment from the charity that includes the amount of cash and whether it provided any goods or services in exchange for the gift. For property you donated, the acknowledgement must describe the items and provide a good faith estimate of their value.
$500 or more: You have to complete a Form 8283, Noncash Charitable Contributions, and attach it to your return.
Noncash property worth more than $5,000: Generally, you have to get an appraisal and complete Section B of Form 8283.
9) Tax Exemption Revoked: The bad news is you just heard that one of your favorite charities automatically lost its tax-exempt status in June because it didn’t file required annual reports for three consecutive years. The good news is that the check you sent the group earlier in the year remains deductible—this tax year. But be aware: Any group on the auto-revocation list that doesn’t get reinstated will no longer be able to receive tax-deductible contributions.
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