When you extend a helping hand to your favorite charity by donating cash or property, you not only benefit the organization but also yourself through potential tax deductions. However, to ensure your donations qualify for these deductions, you must adhere to specific guidelines set by the IRS.
Choose a Qualified Charitable Organization
Before anything else, confirm that the charity you're contributing to is a qualified charitable organization with tax-exempt status. The IRS offers a useful tool called "Exempt Organizations Select Check" on their website. This tool enables you to search for a specific tax-exempt organization, verify its federal tax status, and access information returns that the charity may have filed for public review.
Ensure Actual Payments
For your contributions to be deductible in a given tax year, they must be actual payments, not just promises. In other words, if you pledged to donate $5,000 but only paid $1,500 by the end of the year, you can only deduct the $1,500 on that year's tax return.
Understand the Fair Market Value (FVM)
When donating property and receiving something in return, it's essential to determine the fair market value (FMV) of both the item donated and the item received. For example, let's say you donate a flat-screen TV to your child's school and, in return, receive event tickets. To calculate your tax deduction accurately, subtract the FMV of the tickets from the FMV of the TV.
Follow Substantiation Rules
The IRS has specific substantiation rules that apply when you give cash or property to a charitable organization. These rules can vary based on the type and amount of your donation. Some donated property may require you to obtain a professional appraisal to determine its value. Before proceeding with any donation, it's advisable to consult your tax advisor. They can provide expert guidance on the specific requirements for your charitable contributions.
In summary, while charitable giving is a noble endeavor, it's crucial to navigate the IRS rules to maximize your charitable tax deduction. By ensuring that your chosen organization is qualified, making actual payments, understanding fair market value, and following substantiation rules, you can confidently support your favorite causes while benefiting from valuable tax deductions. HoganTaylor Wealth can give you personalized advice and ensure compliance with the latest tax regulations. Contact us today for more information.
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