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A brief overview of charitable tax deductions

Charitable contributions allow individuals and businesses to claim deductions to reduce the amount of taxable income. The eligible deductions are mandatory disclosures in Form 1040; this would be applicable for the tax year the claims are made.

Generally, donations and gifts are common contributions made voluntarily for charitable purposes. The Internal Revenue Sevice (IRS) allows deductions for charitable claims that are beneficial from the taxation point of view.

A brief overview of charitable tax deductions

The IRS allows claims for charitable tax deductions if the qualifying amount if either money, property, or gifts given in kind. Furthermore, the claim for this type of deduction can be made only for qualified organizations according to the classification done by the IRS. The following are considered as qualified organizations by the IRS.

  • An organization that is a community chest, corporation, trust fund, or any foundation created under the governing laws of the country
  • The organization must be for charitable, religious, educational, literary, or scientific purposes
  • US government organizations for war veterans including trusts, foundation, auxiliaries, or posts are also eligible
  • Different voluntary associations working under the lodge system that provide mutual aid, benefits, and insurance for sundry relief including domestic fraternal societies
  • Nonprofit cemetery companies owned and managed by the members with no intention of making any profit created for providing burial and cremations services
  • Churches, conventions, an association of temples, synagogues, mosques, or any other religious organization also qualify for deductions
  • The American Red Cross, United Way, and even educational organizations including the Boy Scouts of America and Girl Scouts of America are qualified organizations for claiming charitable tax deductions
  • Nonprofit hospitals, medical research centers, utility companies providing energy to such organizations, and volunteer fire companies are among others qualify as charitable organizations
  • Many companies that are responsible for developing and maintaining public parks and recreation facilities are also eligible for deduction purposes
  • Civil defense organizations also qualify for charitable tax deduction claims

The IRS also defines the amounts that qualify as a charitable contribution when claiming for a tax deduction. While contributions made in cash don’t have many restrictions, there are certain rules that govern donations made in property or kind.

Moreover, the timing of a contribution is crucial when it comes to claiming eligible charitable tax deductions. According to the IRS, all claims for contributions made in cash or property must be made before the close of the tax year.

Rules that govern contributions made in the form of property
The fair market value (FMV) of contributions made in the form of property for charitable purposes will be eligible for claiming tax deductions. The FMV is the hypothetical value of a property sold in the open market. There are four main factors that determine the FMV of any property, which include the cost or the selling price, sale value of comparable properties, replacement costs, and expert opinion of a property appraiser. Contributions that are made in kind other than property will have different criteria governing their valuation.

Contributions eligible for charitable tax deductions other than property
Household goods
Donating furniture, appliances, and linen that are in good condition will be considered eligible for charitable tax deductions. The deduction can be claimed for up to $500; however, a qualified appraisal is mandatory for higher amounts.

Used clothing
A charitable tax deduction claim of up to $500 can be made for used clothing, while a qualified appraisal is mandatory for higher amounts.

Jewelry and gems
Donations of special nature require a qualified appraisal to be eligible for deductions. Note that sentimental or any personal value will have no effect on the FMV.

Paintings, antiques, and art
A written appraisal is necessary if the value of the contribution made to IRS-qualified organizations exceeds $5000. In order to claim a valid charitable tax deduction, the appraisal should fall under various criteria for art valuation of $20,000 or more. Amounts in excess of $50,000 automatically qualify for an IRS statement of value.

Hobby collections
Charitable donations made may include hobby collections such as reference material, stamp collections, coin collections, rare and unique collections, manuscripts, autographs, diaries, and even complete sets of signatures of prominent personalities.

Cars, boats, and aircraft
These are high-value properties donated for charitable purposes to qualified organizations. The method of determining the FMV for high-value donations will be different to claim a charitable tax deduction for filing your yearly tax returns.

Other donations in kind include interest components in a business, life insurance, annuity contracts, types of inventory, patents, stocks, and bonds. Qualified appraisals will depend on the different types of donations. In order to claim the deductions, you must disclose the amounts on Form 8283 and attach the same to your income tax return.

Deductions will reduce the total taxable amount and there is a good chance that property values may be overstated to reduce taxable income. However, there is a penalty that can be imposed on the total claim. The IRS will impose 20% and 40% as applicable for underpayment of tax due to an overstated deduction claim made.

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