How to Make Charitable Contributions so as not to Attract an Audit Flag
People give donations to charitable institutions simply because of the good feeling that naturally comes with the thought of helping someone. In addition, these types of donations are tax deductible. The IRS will always pay a closer look at entries in your tax return related to charitable donations. In fact, as of January 1, 2007, the guidelines concerning this type of effort are stricter, requiring individuals to submit more documentation. This limitation, however, didn’t keep people from making more contributions because in the end, helping others is worth anything else.
Every dollar you donate translates to a certain saving, which is equivalent to your marginal tax bracket. For example, if you donated $1,000 and you’re in the 25% or 35% tax level bracket, you will be entitled to a savings of $250 or $350, respectively. Your donation will just be equal to $650, as in the case of the 35% tax bracket. There are limits to the amount of savings that you can get though. If your contributions total to more than 20% of your adjusted gross income (AGI) in a given year, you will be subjected to the applicable deduction limits set by the IRS. To reiterate, the extent of the restrictions will be dependent on your specific case. Often, the rules concerning donations could get complicated and ambiguous that it will lead to audit flags or even an IRS problem.
Consider a case of a person who has an AGI of $100,000 and he/she does not spend that amount. In effect, the person will have a great deal of actual cash to make him/her qualified in giving out large donations to accredited non-profit organizations. As a result, only 50%, or $50,000, will be deducted from his/her AGI.
Only cases that apply to contributions made to fully-accredited institutions are discussed above, but there are still more. You may also take advantage of deductions equal to the time and effort you have invested in volunteering to charitable works. But deductions can’t be claimed for contributions given to specific individuals or to those who simply asked for your help.
Smart givers don’t sell their stocks and just donate the cash. They do not hand over straight cash particularly when they can avoid paying taxes on stocks or securities that earned appreciation. The truth is, you’re authorized not to pay taxes on the value of the appreciation of stocks or security owned in a full year. Consider a case when you brought 1,000 shares of stocks at $14 for each share two years ago, and today, each is worth $20. Donating these stocks to charity will entitle the person to a $20,000 tax deduction and a tax exemption of s$6,000, equal to the appreciation of the stocks.
As far as deducting the value of items that you donate to a charity is concerned, you are allowed to deduct the wholesale and fair-market value or worth of old equipment, furniture, clothes, etc. Unfortunately, there is also a substantial catch. The Pension Protection Act of 2006 stipulates that to be able to claim deductions on contributions of household items, these should at least be in good condition, or better. The meaning of ‘good’ was never made clear but you want to ensure that if it was ever brought up during an audit, you could rightfully claim that you donated items that were in good condition so that you can avoid a future IRS problem.
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