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Why Good Record Keeping Is Critical When Claiming Charitable Tax Deductions

 

Good record keeping

Good record keeping

 

If your goal is to itemize on your tax returns and part of those deductions include charitable contributions, then you should be aware of a few things. There are many reasons for taxpayers to contribute to their favorite charity, but when it comes to deductions, the IRS has rules for acceptable inclusions. As a taxpayer, the most important guideline is to maintain proper records as this will provide you with confirmation if you are ever questioned.

Keeping Records

It should be noted that taxpayers who fail to keep the appropriate records will run the risk of being denied as to their claim. Statements must be provided by the recipient as to the value of the contribution being presented. This rule generally applies to items that have an agreed value of more than $250. It also applies to any vehicles being transferred.

 

Charitable contributions

Charitable contributions

 

Qualifications

Charitable contributions should be considered as noble gestures, however the recipient must be recognized by the IRS to qualify for a deduction. In order for an organization to qualify, they need to apply to the IRS for a tax-exempt status, which generally means that they are non-profit. If you are not concerned about a deduction, then this information won’t matter to you.

Making the List

Verifying that the organization you wish to offer that used car to will be acceptable by the IRS as a charitable one is easy enough. The IRS provides a list of recognized organizations through publication 78, otherwise referred to as a cumulative list of organizations. This list is updated every year and may end up with adjustments. Make sure to verify that your organization is on the list for the specific tax year.

 

Legitimate charitable Contributions

Legitimate charitable Contributions

 

Legitimate Contributions

Most everyday items can be considered as legitimate and acceptable contributions, but that does not mean that they aren’t exceptions to the rule. Guidelines will be somewhat different between material and monetary donations. For instance, household items and articles of clothing will need to be useable and in good condition if you intend to claim them as a deduction. Do not assume that you can discard an old sofa at a drop-off point and use it to reduce your tax liability.

Second Opinions

There are instances when a taxpayer makes a donation of an item that has a value greater than $500.00, and the value may be questionable. The IRS is willing to accept an outside appraisal from a reputable organization as to the value of the item. It should be noted that a record of this appraisal must be retained by the taxpayer.

Money Talks

Many taxpayers enjoy making donations, but would prefer to do so in a monetary form. This is perfectly acceptable, but will require a written record of the transaction. There is no stipulation other than all funds need to be accompanied by a statement that is either handwritten or typed on a letterhead. Documented transactions must display the name of the charity, the amount being donated and the date the funds were exchanged between both parties.

 

Bank Records

Bank Records

 

 

Alternative Forms of Verification

Bank records such as canceled checks or statements from your credit card company are acceptable forms of verification. Records that can confirm electronic transfers are acceptable. If the taxpayer has a recurring donation that is drawn on their payroll, a W-2 should be enough to satisfy any requirements that the IRS may have. In the case of the payroll deduction, it is a good idea to associate a pledge card with the deduction.

Drawing The Line

There is a common misconception that everything you donate to an IRS approved organization is deductible; this is not true. Allowable deductions may change based on IRS rules, but they generally revolve around the item you are donating. In many instances, the amount that you won’t be able to deduct can be transferred to the following year. This transfer policy is usually good for a period of five years.

Breaking It Down

There are three basic contribution guidelines which are based on your adjusted gross income. Contributions on capital gains assets are restricted to twenty percent. Property has a ceiling of thirty percent. Cash contributions are the largest that the IRS accepts within a tax year and that number is fifty percent of your adjusted gross income.

 

Timing

Timing

 

 

The Right Time

It is important to understand that unless you make a contribution during a specific tax year, you won’t be able to take it as a deduction. If you wrote a check to your favorite charity in January 2015, don’t try to add it to your tax returns in 2014. Contributions by way of credit cards made during the tax year and paid outside of that period are considered as deductible. The taxpayer is not expected to turn in their supporting documentation for their contributions with their returns; however, they must retain the records in the event a deduction is questioned.

Hopefully, this article got you thinking about how to advise clients properly on charitable deductions. As a quick side note, if you’re not already doing electronic tax filing, you should get crackin’. When you efile 1099 and W-2 tax forms, you’ll usually get results faster. Like most tax pros, your clients probably have a employees and outsourced staff assisting them. If so, I suggest you follow my lead and stop printing and mailing tax forms. I use eFile4Biz.com to file 1099 online, and focus on generating clients – not mailing tax forms. The video below will tell you more.

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