Deciphering New Tax Rules to Maximize Charitable Deductions
Charity Navigator
March 1, 2006
In the wake of Hurricane Katrina and the South Asian tsunami millions of Americans opened their wallets to support relief causes. The result --- relief charities received several billion dollars in donations. But the charities and the people they serve aren't the only ones to benefit. Thanks to special legislation passed by Congress, taxpayers are eligible for more than a pat on the back for all their generosity. But not all of the new tax rules are so rosy. Those who donated a vehicle in 2005 might be disappointed by how little they can deduct.
Charity Navigator offers the following tips to help you understand the new policies.
1. Special Exemption for Certain Tsunami Donations
Congress passed a law that enables donors to claim charitable donations for tsunami relief made during January 2005 on either their 2004 or 2005 tax return. This gave donors the opportunity to assess their personal tax liabilities for both years and take the deduction for the year in which it offers the maximum benefit. Donors even have the ability to claim some of these gifts on their 2004 return and others on their 2005 return. However, a single donation cannot be split or claimed in both years --- so if you already took the deduction last year you can not do so again on this year's returns. Keep in mind this special exemption only applies to gifts made by check, credit card or cash. Property (including stock) donated to charities responding to the tsunami disaster may still qualify for a deduction, but only on the return for the year in which the property was donated.
2. Special Exemptions for Hurricane Katrina Generosity
- Housing Victims: Up to a total of $2,000, taxpayers are entitled to a $500 deduction for each Katrina victim they housed for at least 60 consecutive days.
- Travel Deductions: For each mile driven in assisting in the Katrina relief efforts between 8/25 and 8/31/05, taxpayers can deduct 29 cents. That figure jumps to 34 cents from September through the end of the year.
- Increased Limits For Deductions: In a typical year, donors can deduct up to 50% of their adjusted gross income. For example, if your adjusted gross income is $100,000 then your deduction limit is $50,000. However, if you made a cash donation between August 28th and the end of the year, then you can deduct up to 100% of your AGI--- even if the charity didn't assist in the Hurricane relief and recovery efforts. Of course, this policy doesn't apply to the majority of taxpayers since very few Americans can afford to make such enormous contributions.
3. New Rules for Noncash Contributions
The IRS has became increasingly concerned about taxpayers overvaluing their noncash donations. As a result, it pushed for tighter regulations --- most notably with respect to car donations. Starting with 2005 tax returns, donors can no longer deduct the published fair market value of vehicles worth more than $500. Now, deductions are limited to the amount the car actually sold for at auction and the IRS requires a written receipt from the charity detailing the exact amount the car garnered. There are some exceptions to the new rule. Fair market value can be used when the car is worth less than $500, the charity keeps and uses the car, the charity improves the car before selling it, or if the car is sold at a discounted price to a person with a low income. But thanks to some folks who are already finding ways to take advantage of the exceptions, the IRS continues to scrutinize tax returns with these types of deductions. Donors should be cautious in how they value their vehicle donations.
4. Normal Tax Rules Apply for Donations to Other Causes
- Must Itemize: You must itemize in order to take a charitable deduction. Make sure that if you itemize, your total deductions are greater than the standard deduction. If they're not, stick with the standard deduction. For 2005, the standard deduction for a single filer under 65 is $5,000; for a married couple filing jointly it is $10,000.
- Must Give to a Qualified Charitable Organization: Just because an organization is exempt from income tax doesn't mean that contributions to the organization are tax deductible. For example, 501(c) (4) organizations, like the Disabled American Veterans or the National Rifle Association of America, are allowed to spend a substantial portion of their revenue on lobbying our government so not every donation to them is tax-deductible. However, all of the organizations featured on Charity Navigator's website are 501(c) (3) public charities and donations to them are tax deductible.
- Back Up Claims with Documentation: If you made a contribution for $250 or more, the IRS requires a written acknowledgment from the charity in order for you to take the deduction.
- Volunteering: There is no deduction for the time you volunteer but, out-of-pocket expenses incurred while volunteering are deductible.
More information on maximizing the tax benefits of your charitable pursuits is available in the Tips & Resources and FAQ portions of our site.
