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Charitable Donations

Posted on Wednesday, November 2nd, 2011 by

Charitable Donations – Give for Good Measure

As the end of the year quickly approaches, remember that you may be able to use your gifts to qualified tax-exempt organizations to reduce your taxes.

Keep these things in mind to make sure you get the appropriate benefit from your generous donations. In particular, note the important guidelines for donating used cars and other property, such as stocks and bonds.

The tax benefit from charitable contributions is only available for taxpayers who itemize deductions — about one-third of all filers. Those who take a standard deduction receive no additional tax benefit for their contributions. For 2001, nearly 39.4 million taxpayers deducted charitable contributions totaling over $139.2 billion.

Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your 2003 deduction would be $200. You include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

Those itemizing deductions reduce their taxable income by the total contributed to qualified tax-exempt organizations, with some limits. The tax saving usually equals the deduction times the marginal tax rate — the top rate for the person’s income level.

For example, an individual with a taxable income of $60,000 donates $2,000 to his or her church. The tax savings from this generosity will be $500 — $2,000 times the taxpayer’s marginal tax rate of 25 percent.

The deduction for a donation of property is usually the property’s fair market value. For ordinary income property and for property held one year or less, the deduction is generally the lesser of the fair market value or the taxpayer’s basis in the property.

For stocks and bonds with an active market, the fair market value is the average of the highest and lowest selling prices on the contribution date.

Figuring the value of personal property can be more complicated. For example, determining the value of a donated used car requires weighing several factors. Some car donation program operators have mistakenly suggested that donors can take as a deduction the full value listed in an established used car pricing guide.

The tax law, however, allows a deduction for only the fair market value of the car . Fair market value takes into account not only the year, the model and the mileage of the car , but also the local market and the vehicle ’s condition. As a result, the fair market value of the taxpayer’s car may be substantially different than the average price listed in an established used car guide.

You should keep appropriate records to substantiate the value of your gifts. For any single gift of $250 or more, you must have a written acknowledgement from the charity by the earlier of the date you file your tax return or the filing deadline, including extensions. If you donated an item or group of similar items valued at more than $5,000 (other than money or publicly traded securities), you must get a qualified written appraisal from a qualified appraiser.

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