In a previous column we covered the tax ramifications of making holiday gifts to clients or other business associates.
Of course, you’re not limited to making gifts to people you do business with. You can also give to family, friends and charity. Gifts to family, friends and other individuals are never tax deductible. Gifts to charity can be deductible — but only if you follow the rules.
Rule No. 1: You must itemize to deduct charitable deductions
First, you’ll benefit from a charitable deductions only if you itemize your personal deductions on your income taxes. Itemized deductions are deductions taxpayers are allowed to take each year for certain personal expenses, such as mortgage interest, property taxes, state income taxes, certain medical expenses, casualty and theft losses, and charitable contributions.
Individual taxpayers have the option to either itemize their deductions or take the standard deduction that is set by the IRS each year. In 2012, the standard deduction is $5,950 for single taxpayers and $11,900 for married taxpayers filing jointly.
Only taxpayers whose total itemized deductions are more than the standard deduction will itemize their deductions. Taxpayers who don’t itemize get no deduction for their charitable contributions (or any other itemized deductions). Thus, from a tax standpoint, charitable contributions are useless for people who don’t itemize.
This rule applies whether you make your contribution as an individual or through your business. Unless your business is a C corporation, charitable contributions typically "flow through" the business and are claimed as deductions on the individual tax returns of business owners. This is so whether your business is a sole proprietorship, partnership, limited liability corporation, or S corporation.
The fact that you don’t itemize doesn’t mean you shouldn’t make charitable contributions. You just won’t get tax deductions for them.
Rule No. 2: Only contributions to qualified charities are deductible
Only contributions to what the IRS calls "qualified organizations" are deductible. These consist mainly of public charities — organizations that come under Section 501(c)(3) of the Internal Revenue Code. These are the myriad nonprofits that engage in charitable, religious, scientific, literary, or educational work. If a nonprofit has obtained a determination letter from the IRS recognizing its status as a 501(c)(3) public charity, then it is a qualified organization and donations to it are deductible.
Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations Select Check tool to check if your favorite charity is a qualified charity.
Rule No. 3: You can deduct money or property
You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
Rule No. 4: You must keep records of all donations
You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a canceled check, bank or credit card statement, or payroll deduction record. You can also ask the charity for a written statement that shows the charity’s name, contribution date and amount.
Rule No. 5: You must contribute by year-end
If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012, as long as you mail it in December.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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