Charitable Donations and Your Taxes: Seven Reasons Cash Is King
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We're only two weeks into December and I've already been approached by more than a dozen charities asking for donations
. In a tough economy, those organizations have gotten pretty creative. I'm rarely asked to make a gift of straight cash -- or cash equivalent, such as checks or credit cards. Instead, I've been asked to donate items for silent auctions, buy baked goods and candles at a premium and, of course, take a chance with raffles.
While all these fundraising ideas certainly have their place (and I, by no means would want to discourage you from participation), as a tax attorney, I still believe that cash is king when it comes to charitable donations.
Here are seven reasons to consider why making a donation of cash (or cash equivalent) makes better financial sense:Valuing cash (or cash equivalent) is easier than valuing goods. There's no ambiguity when it comes to the value of cash. However, it can be a little tricky to value goods for purposes of a charitable deduction. When it comes to used clothes or furniture in "good" or better condition, a good rule of thumb is to opt for the thrift store value (what you'd pay for the same item in a thrift store or on consignment), but keep in mind that value can be subjective. If the item is valued over $500 but not in "good" condition, you may still take the deduction if you have an appraisal; appraisals, however, cost money and cannot be added to the cost of your donation, though they may be deducted as a miscellaneous deduction on Schedule A. If your contribution is worth more than $5,000, you'll absolutely need a qualified appraisal no matter the condition. Special rules apply to particularly hard-to-value items such as art, jewelry and collectibles; you'll always want an appraisal for those items.You can't deduct the cost of donating your services. Unfortunately, the donation of personal services is never deductible as a charitable donation -- even if you can value those services. Fortunately, your out-of-pocket expenses associated with donating your services or time for charitable organizations are deductible. To qualify, those expenses must be: (1) unreimbursed; (2) directly connected with the donation of your personal services; (3) expenses incurred only because of the personal services you donated; and (4) not personal, living or family expenses. Transportation is the most common of these out-of-pocket expenses: You can either deduct the actual costs of gas, maintenance, etc., related to the donation of services or you can claim the standard mileage rate for charitable deductions (it remains 14 cents per mile for 2010 and 2011).Your donation for things you make or create is generally limited. In most cases, when your charitable donation consists of something other than cash, you can claim the fair market value of the item as the value of your donation. However, special rules apply for what's called "ordinary income property," which includes inventory, works of art you create, manuscripts you prepare and capital assets. Your deduction for those items tends to be limited to your basis or the cost of producing the items excluding your services. In other words, you can only claim a donation for the actual cost of your materials -- at least, in most cases. For example, if you create a statue that would otherwise retail for $500, your deduction is not $500; it's limited to the cost of the marble (and any other items used in the piece).You have to adjust the amount of your donation when you receive something in return. If you make a charitable donation for which you get something in return, you can deduct only the amount that exceeds the fair market value of the benefit received. So, for example, if you pay $100 for a benefit dinner that costs $30, you can only take a deduction for the amount you pay that exceeds the cost of the dinner (in this case, $70). This applies to memberships, special events, "silent auction" payments and other donations where you receive something in return. Be sure to substantiate the value of what you receive in return with your charitable organization; the organization will usually happily give you a valuation letter.You can't deduct the cost of raffles, bingo or other games of chance for purposes of charitable donations. Play if you want (admit it, it's fun), but the cost of doing so is on you: There's no corresponding charitable deduction.Not everyone is a great record keeper. As I mentioned, you can generally deduct the fair market value of any property you donate, including cash, to qualified charitable organizations. All charitable donations of cash (or cash equivalent), no matter what the amount, must be supported by written documentation. The good news is that this not only includes receipts but also canceled checks, as well as debit and credit card records so long as you can clearly identify the donation portion. For donations by text message, a telephone bill will suffice if it shows the name of the charitable organization, the date of the gift and the amount. If you're not great at holding onto a number of loose receipts, this keeps life simple: You can simply refer to these records. Of course, for any contribution of $250 or more, you must also keep in your records a contemporaneous written record from the charity with the amount, type of charitable contribution and whether the organization provided any goods or services in exchange for the gift (see number 4 above).Charities can always use cash. From an efficiency standpoint, a charitable organization can almost always use cash. They can't always use your old Uggs, the Yugo that's been sitting in your front yard for years or your self portrait. Similarly, the benefit to the charity from the sale of goods or services can be limited. With a cash donation, there's no cost to the charity to store, administer or liquidate your gift.
At the end of the day, making charitable donations is a highly personal issue. Whether you choose to donate cash or non-cash items, remember that charitable contributions are only deductible if you itemize deductions on Schedule A of your federal form 1040. You should also confirm that the charity is a qualified organization (you can search the IRS Publication 78 online
). Finally, if you have questions about valuing or reporting donations, check with a tax professional.