In the United States, charitable donations will be deducted from your income tax. Cash and property are also eligible for deductions. Land donations, on the other hand, are subject to special laws. Contributions to various types of property are subject to different laws. The laws are summarised in this article. Visit Metropolitan Income Tax and Book Keeping.
A donation to an agency that qualifies as a charity under IRS rules is tax deductible. If you’re not sure if you qualify, ask a charity. To apply, it must have an employer identification number and have filed an application with the IRS. This information should be provided by the charity. They may not be a registered charity if they don’t have it.
In certain cases, the deductible is equal to the property’s fair market value. However, as discussed below, the deduction for donations to certain types of property is reduced.
Deductions for property donations are based on the property’s fair market value at the time of the donation. The value of property is determined by the existence of a regular market and the ease by which prices can be determined. The prices quoted on such markets include stocks, bonds, mutual funds, traded commodities, traded futures contracts, and foreign currency values. And when there is an assessment, the IRS often contests the value of other property. For donations of property worth more than $5,000, an appraisal by a certified appraiser is needed.
Vehicles present unique challenges since it is often difficult to document the exact state of the vehicle. The “blue book” value can differ significantly from the actual value. For instance, Bill donates his 2002 Toyota to Cars for Kangaroos, despite the fact that the full retail price for one in excellent condition is $4,500. Bill’s car, on the other hand, has body damage, the engine won’t start, and the transmission is broken. Despite what the tow truck driver tells Bill, the car is obviously not worth $4,500. To prove his deduction, Bill requires a credible receipt from the charity.
More details can be found in the 2013 version of Income Tax in the United States.
Contributions from personal property
The amount of capital gain (but not ordinary income) that the taxpayer would consider if the property were sold is usually limited to the taxpayer’s basis in the property plus the amount of capital gain (but not ordinary income) that the taxpayer would recognise if the property were sold. As a result, the deduction for business products (inventory, equipment, etc.) could be limited to basis. There are a few notable exceptions that will be addressed further down.
The fair market value of publicly traded shares or securities contributed by someone who isn’t a securities dealer is usually deducted. Stock or shares sold by the taxpayer are not deductible. Consider the following scenario: Phil started Phillow, a software business, with a $50,000 investment. Phil now holds 100 million shares, each worth $100, after going public and undergoing several stock splits. Phil gives a 501(c)(3) entity that is not a private foundation 10,000 shares of Phillow stock. Phil is entitled to a $1 million tax deduction for his donation.
Only after all intervening interests have expired is a contribution of a potential interest in tangible personal property deemed made.
1.170A-5 of the 26th Code of Federal Regulations Other restrictions apply to contributions of less than a complete interest in personal property. 1.170A-7 of the 26th Code of Federal Regulations
Contributed household goods (clothing, furniture, etc.) must be in good or better condition and of more than nominal value to be tax deductible. Food, artworks, jewellery, and collectibles are not considered household objects for this reason, nor are donated items worth more than $500 if a qualified valuation is added to the taxpayer’s return. Sam, for example, paid $10,000 for an antique chair. The chair was in bad shape, but it had already been used by the town’s founder. Sam returned the chair to the local museum with sufficient appraisals attached. Sam is entitled to a deduction for the chair’s appraised value.