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

The fact that you actually get something back is one of the attractive reasons for giving to charitable organizations. There’s that general good feeling or natural high you might get from merely knowing that you helped someone out that day. However, since charitable deductions are in fact deductible, the IRS akes notice. 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. As of January 1, 2007, more documentation is required for deductions related charitable contributions. In the end, people still continue to donate despite the added requirements concerning this endeavor. 

Every dollar you donate translates to a certain saving, which is equivalent to your marginal tax bracket. For instance, you’ll be entitled to a savings worth $250 or 350% if you make a donation of $1,000 and you are in the 25% or 35% tax bracket, respectively. Hence, in the 2nd option, the donation is just actually equal to $650. Sadly, there are restrictions to the amount of savings that you can get. If your contributions add up to more than 20% of your adjusted gross income (AGI) in a given year, you’ll be subjected to the relevant deduction limits set by the IRS. Once again, the extent of the restrictions will be dependent on your specific circumstance. More often than not, the policies concerning contributions of this nature could get complicated and ambiguous that it will lead to audit flags or even an IRS problem.

What if a person doesn’t spend much of his $100,000 AGI? As a result, the person will have substantial cash to make him/her qualified in giving out large contributions to accredited non-profit organizations. As a result, only 50%, or $50,000, will be subtracted from his/her AGI.

The examples above are only relevant to contributions made to fully-accredited institutions. You may also apply for deductions equal to the time and effort you’ve invested in volunteering to charitable works. However, in in cases when you make donations to specific persons or to those who merely asked for your help, such contributions won’t merit a tax deduction. 

Smart givers never sell their stocks and simply donate the cash equivalent. Smart taxpayers do not hand over straight money, particularly when they can give stock or securities that have appreciated because doing so helps them avoid paying any tax on the income generated from the appreciation. The truth is, you can actually deduct the full market price of your stocks and not pay taxes on the appreciation if you had these for over a single year. For example, if you bought 1,000 shares of common stock in a corporation two years ago at $14 for each share, and on today’s market it is actually worth $20 per share, if you donated the actual shares of stock to a charitable institution, then you could deduct the full $20,000 and not pay taxes on the gained $6,000.

If you donate old equipment, furniture, and clothes to charitable institutions, you can also get deductions equivalent to the fair market value of those items. The Pension Protection Act of 2006 stipulates that these items should be in good condition, otherwise you won’t qualify for the deduction. 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. Otherwise, you’ll be up for an audit, or worse, an IRS problem.