One of the ways the government is encouraging people to donate to charity, is by making their donations tax deductible. However, it is not as easy as you being able to deduct whatever you donated, regardless of whether that was property, cash, or services. There are some traps to be aware of, as the Welfont Group has explained.
If you donate your services, then you cannot deduct any compensation for your time from your taxes. You can, however, deduct expenses if they have not been reimbursed from the charity. This includes things like driving costs, accommodation if needed, and so on. You cannot, however, deduct the cost of childcare. That is classed as a “non-deductible personal expense”, which means you simply have to pay for it yourself.
Now let’s say that you make a cash donation. This is generally the easiest type of donation in terms of tax deductions, although there are always some caveats. Specifically with cash donations, it is that you can never deduct more than 50% of your gross annual income (adjusted). However, to encourage greater donations, the IRS does allow you to carry forward any money that exceeded 50% of your gross income, for a period of five years. This means, for example, that if you donated 60% of your gross annual income, you will be able to deduct 50% the first year, and 10% the next year, rather than losing out on that 10%.
Last but not least, there is the idea of property donation. Property can be anything from a house to a child’s toy, or from an airplane to an old vehicle. If you do donate appreciated property, then you will be able to deduct the actual value of said property. You will not pay tax on it, in other words, nor will the charitable organization that received your donation. However, there are many rules and regulations in terms of how you can determine the value of the property, what you can deduct, and what proof you have to submit. Because these donations tend to be quite sizeable, it will come as no surprise that there are some significant limitations and special rules to be aware of as well.
Perhaps the most important special rule is for short term capital gain property and ordinary income producing property. This means that if you decide to contribute a property that would have given you only a short term capital gain, or an ordinary gain, if you had decided to sell it again, then what you can deduct is the adjusted basis of the property. And, again, you can never deduct more than 50% of your annual gross adjusted income (30% if you are donating to a private foundation), although you can, again, carry it forward for five years.
It should be clear to see why you need the help of a professional broker if you are considering making a sizeable donation and want to make a tax deduction!