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Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Generous and tax-savvy — Following IRS rules on charitable gifts

Generous & Tax


Donating to charity makes it possible to do good and do well. But to claim an income tax deduction or reduce the size of your taxable estate with charitable gifts, you must follow IRS rules carefully.

Vetting charities

First, ensure that you’re donating to a qualified charity. There are thousands of organizations soliciting contributions, many with similar missions and names, so it can be easy to confuse a legitimate charity with an unqualified or even a fraudulent one.

Watchdog groups — for example, Charity Navigator and CharityWatch — provide information on many nonprofit organizations. They rate them based on such qualities as transparency and fiscal responsibility. Keep in mind that nonprofits that were once qualified could lose their tax-exempt status due to noncompliance. A current database of qualified charities is found on the IRS website.

Deducting donations

Many donations to qualified charities, such as cash gifts, are fully deductible if you have proper records. Others are only partially deductible. If, for example, you do volunteer work, you may deduct only your out-of-pocket expenses, not the fair market value of your services. And if you donate tangible personal property that isn’t related to the charity’s primary function, your deduction is limited to your “basis” in the property — generally what you paid for it. Also know that, if you receive an in-kind benefit for your donation, such as merchandise or a meal, you can deduct only the amount that exceeds the fair market value of that benefit.

Good record-keeping is critical. For any contribution of $250 or more, keep on file a bank or payroll deduction record documenting the contribution, as well as a contemporaneous written communication from the charity stating its name, the amount and date of your contribution, and the value of any goods or services you received in conjunction with your contribution.

For substantial donations — such as an item valued at more than $5,000 — you must submit an additional tax form and obtain a professional appraisal of the property. To ensure your gift qualifies and that you’re receiving the full allowable deduction, work with your tax advisor when making major gifts.

Planning your estate

Charitable gifts also can help you reduce gift and estate taxes. But before you make a charity part of your estate plan, consider your own lifetime income needs and what you want to leave your heirs.

Two types of trusts are designed to help people make tax-advantaged charitable gifts. With a charitable lead trust, you can make charitable gifts during your lifetime and preserve assets for your heirs to be paid out after your death. With a charitable remainder trust, you can elect to receive regular income payments during your lifetime and leave the trust’s remaining assets to charity when you die.

Setting up and maintaining a charitable trust is complicated. So be sure to work with experienced estate and tax planning experts.

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