How to Make Charitable Donations so as not to Invite an Audit Flag

Apparently, one of the best reasons to give a charitable donation is because when you give, you actually get something in return for your efforts. There's that general good feeling or natural high you might get from simply knowing that you helped someone out that day. However, since charitable contributions are in fact deductible, the IRS pays attention. The IRS also ensures that you almost have to literally jump through fire in order to receive your tax deduction on any donations you make. In fact, as of January 1, 2007, new IRS rules overseeing charitable donations actually require more documentation than ever before. But, even with the new requisites and a possible IRS problem, in the end it is still worth the effort to help other people out. 

Every dollar you donate translates to a certain saving, which is equal to your marginal tax bracket. For instance, you will be entitled to a savings worth $250 or 350% if you give a donation of $1,000 and you are in the 25% or 35% tax bracket, respectively. Therefore, in the 2nd option, the donation is just actually worth $650. Sadly, there are limits to the amount of savings that you can get. If your donations total to more than 20% of your adjusted gross income (AGI) in a particular year, you will be subjected to the relevant deduction limits set by the IRS. The restrictions that will be set on you will depend upon your specific situation. The rules will certainly get complicated and ambiguous as your contributions become larger, just be prepared for a possible audit or an IRS problem when that happens.

In some cases, you get to contribute a very large sum of money to a fully accredited charitable institution because you did not spend much of your $100,000 AGI. Here, you can only deduct $50,000, which is 50% of your AGI.

Only situations that apply to donations made to fully-accredited institutions are discussed above, but there are still more. You may also apply for deductions equivalent to the time and effort you have invested in volunteering to charitable works. However, in in cases when you make donations to specific individuals or to those who merely asked for your help, such contributions will not merit a tax deduction. 

Smart givers don't sell their stocks and just donate the cash. They don't hand over straight cash particularly when they can avoid paying taxes on stocks or securities that earned appreciation. The truth is, you're allowed 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. If you've donated the actual shares to a charitable institution, you can make a tax deduction equal to the entire $20,000 and not pay taxes on the appreciation worth $6,000.

If you donate old equipment, furniture, and clothes to charity, you can also get deductions equal to the fair market value of those items. As per the Pension Protection Act of 2006, however, deductions are only authorized when household items donated are in good or better condition. Even though there was no clear and established definition of the term "good", you may want to ensure that all items donated meet this qualification. Doing so will help you avoid getting an audit, or an IRS problem altogether.

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Originally posted 2008-10-30 21:07:45. Republished by Blog Post Promoter