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Important Tips for Claiming Charitable Donations Tax Breaks

December 27, 2012 By

Though Christmas has past, it’s still not too late to donate to a charity for the 2012 year! You can save on your tax bill by deducting these charitable donations. Taxpayers are encouraged to contribute money or non-cash items to charities, but for the donation to be deductible, it must meet the set IRS requirements.

Organization’s Tax Status: Only contributions made to eligible charitable organizations are deductible. The IRS is constantly revising its list of qualified organizations, revoking some that fail to comply with its set regulations, and you have to check its website to find the compliant institutions to channel your donations to. If unsure, simply ask the organization you intend to donate to whether it is tax-exempt or not.

Itemized Deduction: To deduct charitable contributions, you must itemize them on Schedule A of Form 1040.

The Fair Market Value: Donors are free to contribute either cash or non-cash items. For all non-cash goods, their fair market value must be established. There are some special rules that apply to property donations like cars, clothing as well as household goods. In case the charitable organization gives something in return like merchandise, any goods or services, free admission to a charity banquet or even a sports fun day, then only the value that exceeds the fair market value of the of received benefits are deductible.

Record Keeping: Keeping of tax records is significant but many taxpayers find it hectic. Any cash contribution, irrespective of the value, has to be documented for it to be deductible. Any cancelled check, bank or credit card statement or payroll deduction records or even a written and signed statement from the organization may be required.

Large Donations: Any contribution exceeding $250 must be supported by more documents for it to be deductible. The charity organization must acknowledge receipt of the donation in writing, with the cash amount donated or the fair market value of the donated items clearly specified for property donations. It must also be stated whether the charity provided any goods or services in return. Form 8283-Noncash Charitable Contributions must be completed for donations exceeding $500 while claims for non cash property contributions exceeding $5,000 must be appraised by a qualified appraiser and attached to Form 8283.

Timing: Donations made to charity are only deductible within the tax year they are made. Please note that pledges don’t apply, if you pledge to donate $1,000 but by the end of the year you only manage to contribute $500, it is the $500 that you can claim and not $1,000 pledged. However, end-of-year donations via credit card or checks can still be deducted for the very tax year even if the credit card bill is paid or bank account debited after December 31st.

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Evading Taxes by Turning Down Pay Doesn’t Work.

April 26, 2012 By

Many people think that tax law only follows cash, meaning with no income, you have no tax burden. People even go to the extent of turning down pay and bonuses just to evade taxes. Well, this could only make sense in the layman’s world but in the world of tax law, it is a different ball game. Even if a bonus is announced in December, and you choose to turn it down before it is paid, the taxman notes it as a constructive receipt taxable.

Executives have tried to navigate this tricky topic by repaying their bonuses. Some are motivated by pressure from shareholders or the public or even as a result of regulatory concerns. Sometimes they are even required by law to do so but there’s a tax effect.

There are certain options one can consider in trying to pay back bonuses in order to lower tax burden. However, there are a number of critical factors you must consider before making that step.

  1. Understand the reason for repayment

Before starting the repayment, inquire if it is a voluntary step or it is motivated by other underlying factors. A repayment fuelled by shame, altruism, or patriotism could seem admirable, but may only give you an uncertain tax outlook. Better an executive repaying a bonus as a consequent of a court order, or for any regulatory reasons though he or she is not guaranteed a “good” tax position.

With a tax professional by your side however, you ought to consider tough issues like whether or not the giveback occurs in the same year as the pay. Other questions you must answer include: Do you only repay your net check with the payroll deductions already made when you return a bonus?

  1. Amend Previous Year Tax Returns

This is only allowed if you are correcting a mistake, and often a pay back is no “mistake”.

  1. Business Expense Deduction

If your repay is motivated by regulatory concerns, you can claim a business expense deduction but only as a miscellaneous itemized deduction.

  1. Salary Reduction an Option?

The company could agree to lower the executive’s present salary to effect the repay.

  1. Section 1341 Provision

This section, though tricky, allows you to claim a deduction if you included the income in the previous year since you had an unrestricted right to it, but realized a year later you did not and you have to give it back.

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Using Charitable Donations as Channels for Tax Relief

January 30, 2012 By

2010 marked the first time, in two years, that charitable giving had increased. This happened despite the fact that the economy was just beginning its road to recovery. According to the annual philanthropy report of 2011 by Giving U.S.A foundation and Center on Philanthropy at Indiana University, individuals, corporations and foundations gave estimated amounts of $290.89 billion in charitable contributions in the year 2010, which was a 3.8% increase in current dollars, or 2.1% growth in inflation adjusted dollars from the previous year’s contribution.

The growth in contributions was a reversal on the trend in the previous two years and good news for non -profit making organizations. In 2008 and 2009, recession caused the largest drops in charitable giving in 40 years, but the drop in recession from 2010 marked a rise in charitable giving.

Religious organizations, in an expected trend, continued top the chart as the top beneficiaries of charitable donations in 2010, totaling to an estimated amount of $101 billion, which was a sizeable 35% of all donations made in the year.

Donations made to human services in the same year added up to an estimated amount of $26.49 billion. The contributions to the human services comprised he majority of funds donated to Haiti disaster relief, which was estimated to have cost $1.43 billion.

Individual donations, which include estimated amounts for itemized charitable deductions, grew by 2.7 percent in current dollars or 1.1 percent in inflation adjusted dollars in 2010 to an estimated $211.77 billion. Included in individual donations were estimates for “mega-gifts”, which Giving USA described as gifts large enough to affect the percentage change of total donation by 1 percent from one year to the other.

Corporate giving, on the other hand, grew by 10.6% in current dollars or 8.8% in dollars adjusted for inflation to an estimated $15.29 billion. Giving USA says that around $22.83 billion was donated by the corporate society, despite the fact that there was no estate tax in 2010, and as a result no tax excuse for bequests to charities.       

For taxpayers hoping to enjoy tax benefits through charitable donations, they must ensure they follow the donations rules of the IRS, one of which is to ensure that the donation that one is giving is received by the charitable organization by the 31st of December.

Donations made via credit card on the 31st of December can be filed as a donation in the current year, although the bill for the credit card gets paid in the following year.

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