The Walton Family gave the largest charitable donation this year. It was for $800 million for the Crystal Bridges Museum of American Art. The rich in general gave twice as much this year than last year according to the Chronicle of Philanthropy. For 2011, the ten largest donations topped $2.6 billion in total.
Although philanthropy was definitely a motivation for the Waltons, the fact that making charitable donations can be deducted from tax liability is probably a strong factor. The good news is you don’t have to be rich to take advantage of this itemized deduction. Charitable donations are deductible for any family that itemizes.
If your family is new to the idea of itemizing your tax deductions, here are some rules for 2011 that you need to keep in mind when filling out your tax forms.
Must Be a Qualified Organization
Giving to an individual simply isn’t charitable as far as tax rules go. There are very good reasons for this. When your broke brother-in-law hit you up for $20 in gas money, did you just give a charitable donation? If you wouldn’t, how many people do you think would try to claim it?
The IRS controls charitable donations by regulating the entities that can legally be deducted as charitable. Ultimately, it simplifies things for charitable givers and the IRS. If you know someone that is a charitable cause, get them affiliated with an appropriate organization. Until then, only gifts to approved organizations are deductible.
Proper Donation Records
Regardless of the sum, you will need to keep track of your donations and the IRS has standards for what records should be kept for donations. According to the IRS, bank records, payroll records (if deducted from your paycheck) or a written letter from the organization with the name, date and amount of the contribution, are all acceptable as proper documentation. Without the correct records, you risk paying fines in an audit.
It’s possible to donate any number of valuable items aside from cash. Stock, clothing and cars are examples of some commonly donated non-cash items. While common, non-cash donations require additional documentation for proof. The organization receiving the donation needs to provide you with:
- Description of non-cash contribution
- Statement that no goods or services were provided by the organization in return or a record of what was exchanged and for what value
- Description and good faith estimate of the value of goods
- The estimate must be fair market value
You May Still Deduct If You Receive Goods or Services in Exchange
Golf in a charity tournament? A portion of your charitable entry fee may be tax deductible. The IRS does allow you to deduct when you are receiving goods or services in exchange for your donation. However, you can only deduct the portion of your donation that exceeds the value of the goods or services you are receiving.
That means if you are paying $100 to golf somewhere that only costs $35. You may be able to deduct the difference.
You’ll probably never get a chance to donate $800 million like the Walton’s. However, if you understand the tax rules, you can lower your tax liability just like any billionaire.