Gift Donations and Tax Deductions
Although many people might find this surprising, the Internal Revenue Service encourages gift donations and the tax deductions that result from them.
It has long been the policy of the United States Government and the Internal Revenue Service to encourage activities that are deemed in the best interest of the country. This has led to many tax credits and allowable tax deductions that do not exist purely for the sake of reason and logic, but have a more policy orientated rationale. Such is the case with gift donations and the resulting tax deductions. The Internal Revenue, like a giant Government Santa Claus, actually encourages tax payers to make gifts to charitable organizations and take the generous tax deductions.
Of course, only the estimated 1/3 of tax payers who itemize deductions can take advantage of this. If you claim the Standard deduction, your contributions to charity must be motivated by pure goodness and not any thought of a tax break. The policy of the IRS to encourage donations seems to be working. In 2000, which is the last year that complete figures are available, a total of 37.5 million tax payers made gifts totaling $140.7 billion dollars. $98.2 billion of this total was in cash donations.
The savings to the tax payer can be substantial, but they also must understand that they are still going to be making most of the contribution. In other words, the IRS is actually sort of making a matching donation. A quick way to estimate how this works is to take the amount of the donation times your marginal tax rate. The marginal tax rate is the highest tax rate in your income bracket. If you, for example, earn $50,000 and make a cash donation of $2000, the tax savings would equal $500. This is $2000 times the marginal tax rate of 25%. One way to look at it would be to say that the Organization received $2000 and you gave $1500 and the IRS gave $500.
When you are donating property, it becomes a bit more complicated. This is why many people prefer to donate cash. The rules for donated property are a bit complex and tricky. You have to determine FMV, or Fair Market Value. The FMV is sometimes defined as the price that an item would be sold for between a buyer and seller within a certain area who were under no outside pressure to either buy or sell. If the item is valued at over $5000, a qualified written appraisal is needed to establish FMV.
Although the rules for non-cash gifts cause some problems and good records and record keeping is essential, the IRS is helpful. There are two publications that give aid in sorting out the rules. IRS Publication 526, Charitable Contributions, and Publication 561, Determining the Value of Donated Property, are useful in understanding the ways that you can do good and get a tax break at the same time.