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Home → All Courses → Business and Economics Courses → How to Maximize Tax Deductions and Increase Your Refund with Simple Strategies → Flashcard

Discuss the rules and regulations surrounding the deductibility of charitable contributions, focusing on both cash and non-cash donations and their respective valuations.



The deductibility of charitable contributions is governed by specific IRS rules and regulations designed to ensure that taxpayers are only claiming legitimate donations to qualified organizations and that the valuations are fair and accurate. Both cash and non-cash donations can be deducted, but they are subject to different rules regarding the amounts that can be deducted and how they are valued.

Cash donations are the most straightforward type of charitable contribution. These include donations made by cash, check, credit card, or electronic funds transfer to a qualifying charitable organization. For a cash donation to be deductible, it must be made to a 501(c)(3) organization that is deemed tax-exempt by the IRS. These organizations include churches, schools, hospitals, and non-profit charities. Donations made to individuals or non-qualified groups are not deductible as charitable contributions. There are also limitations on how much you can deduct for cash donations. The general rule is that for any given year, the cash donations cannot exceed 60% of your adjusted gross income (AGI). If your cash donations are higher than this limit, you can carry over the excess amount and claim it in your next tax return for up to 5 years, subject to the yearly AGI limitations. For instance, if a taxpayer has an AGI of $100,000, the maximum deduction they can claim for cash donations in that year is $60,000, although if they donated more than that, the rest could be carried over.

Non-cash donations include items such as clothing, furniture, household goods, and vehicles. The rules for non-cash donations are more complex than those for cash donations because they require a fair market value to be established. The fair market value (FMV) is what a willing buyer would pay a willing seller for the items. For non-cash donations, the deduction you can claim is generally limited to the lesser of the fair market value at the time of contribution or your cost basis (how much you paid for the items). If you donated clothing or household items that are used and not in good condition, the deduction you can claim is even lower and not really worthwhile. The fair market value can be determined by referencing similar items sold at thrift stores, online marketplaces, or by reviewing valuation guides, depending on the nature of the donated item.

For non-cash donations that are below $250, you generally do not need to have any specific paperwork, but you should keep a written record of your contributions, including the organization's name, the date of donation, and the description and value of the items donated. For non-cash contributions over $250 but not over $500, you will need a written acknowledgment from the charity, which should include details of your contribution and whether you received any goods or services in exchange for your donation. If you have non-cash contributions of over $500, the tax rules become more stringent. Form 8283 needs to be completed, where you are required to provide more details about your donations. For donations valued between $500 and $5,000, you must have a written acknowledgment from the charity, and for donations valued over $5,000, you may also need a qualified appraisal.

Certain types of property have their own specific regulations. For instance, when you donate a vehicle, like a car, boat, or airplane, the deduction you can claim is usually the gross proceeds the charity receives from the sale, not necessarily the vehicle's fair market value, unless the charity plans to use the vehicle for charitable purposes. If the charity sells the vehicle, you cannot claim the full FMV, and instead you are limited to the gross proceeds, which is usually far less than the FMV. Also, if you donate property that has appreciated in value over time, such as stocks or real estate, you can deduct the full fair market value, provided that the gain on the property would have been long-term capital gains if sold by you. There are some limitations, specifically that the deduction cannot exceed 30% of your AGI.

In summary, the deductibility of charitable contributions has specific rules and limitations surrounding both cash and non-cash donations. Understanding the limitations of cash donation deductions to 60% of your AGI, the valuation process for non-cash donations, the documentation needed for various levels of non-cash contributions, and the specific rules for assets like vehicles and appreciated property is essential to avoid any issues with the IRS. To take full advantage of charitable deductions while complying with tax rules, proper documentation, valuations, and knowledge of specific regulations is essential. Always maintain records and seek help if needed from a tax professional.