Feeling Generous?  Follow the Tax Deduction Rules

Americans donated more than $303 billion to charitable causes last year, according to the Giving USA Foundation. And while that represents a slight decline from the year before, Americans continued to give generously despite the economy.

The holidays are a popular time to make gifts. If you're getting ready to donate, be aware of the charitable tax deduction rules and some important

High-Income Taxpayers Get a Bigger Tax Break this Year For years, high-income taxpayers have had their itemized deductions and personal exemption write-offs "phased out." This means that they didn't get the full benefit of the popular itemized deductions such as charitable contributions, mortgage interest, state and local taxes, and miscellaneous deductions. Good news: For 2010 only, the phase-out rules are gone. The complex rules are scheduled to reappear in 2011 as the Bush tax cuts expire. Tax Planning Implications this Year What could this mean for you? For 2010, if your income is high enough, you can actually write off all of your itemized deductions and personal exemptions. One significant planning opportunity involves donations to IRS-approved charities, where contributing this year could produce a much bigger tax-saving benefit than if you donate the same amount next year. Other Limitations: Despite the bigger deductions, be aware of other limitations on charitable donations. Many taxpayers don't know that all charities aren't created equal. You may donate to "50 percent charities," which include religious groups, schools, hospitals, and public charities. There are also "30 percent charities," such as veterans' organizations, domestic fraternal societies and some private foundations. Donations of cash are generally limited to 50 percent of AGI, but there are several exceptions (both favorable and unfavorable) to this general rule. Although the IRS calls them 50 percent charities, you can deduct only as much as 30 percent of your AGI in the year of the gift when you contribute appreciated securities. If your AGI is $100,000 and you give $40,000 in stock to your alma mater, you can only deduct $30,000. The remaining $10,000 must be carried forward to another year. With a 30 percent charity, you can give as much as 30 percent of your AGI in cash, but only 20 percent in appreciated assets. Consult with your tax adviser if you want more information about planning for tax-smart charitable donations.

changes that have been made in recent years.

Monetary Donation Guidelines

To deduct a charitable donation of money, regardless of the amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the organization, as well as the date and amount of the contribution.

Here are some details about substantiation:

• Bank records include canceled checks, bank or credit union statements, and credit card statements.
• If you have a bank or credit union statement, it should show the name of the charity, the date, and the amount paid. Credit card statements should show the charity name, the date, and the transaction posting date.
• Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction.
• For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible gift (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

Rules for Donating Clothing and Household Items

To be deductible, clothing and household items donated to charity must be in good used condition or better. An item for which a taxpayer claims a deduction of more than $500 does not have to be in good used condition or better if a qualified appraisal of the item is filed with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Deductions for Donating Vehicles

Tax law limits the amount that individuals are able to deduct when they donate vehicles to charity. (The same basic rules apply to boat and aircraft donations.) This provision has understandably discouraged charitable gifts of used cars.

However, there are exceptions that can result in a better tax deduction.

Years ago, you could deduct the full fair market value of a donated vehicle based on the "Blue Book" value or some other reasonable indicator. But tax officials felt some taxpayers overstated deductions for their run-down clunkers. Now, a charitable deduction for a vehicle valued above $500 is generally limited to the amount the charity receives from the vehicle's resale. Typically, a charity sells the vehicles it receives from donors. Many organizations promote programs specifically designed for this purpose.

There are exceptions that can provide higher deductions:

Exception #1: If the charity certifies that it intends to make a "significant intervening use" of the vehicle, which furthers the charity's stated purpose, you can deduct the full fair market value.

Exception #2: If an organization certifies that it intends to make a "material improvement" to the vehicle, you can also deduct the full fair market value. But simply cleaning, painting, or removing minor dents and scratches isn't enough. The improvement must increase the overall value of the car.

Exception #3: In addition, you can deduct the fair market value if the charity certifies that it intends to give or sell the vehicle to a needy individual at a price significantly below the fair market value. This exception applies only if the gift or sale is in direct furtherance of the charity's purpose of relieving poor, distressed or underprivileged people who are in need of a means of transportation.

Finally, note that a deduction of a fair market value is allowed for a gift of a vehicle valued at $500 or less.

If you qualify under one of the exceptions, the value can be determined through an established used vehicle pricing guide like the Blue Book. The guide must list the sales price for a vehicle based on the same make, model and year in the same condition, with the same or similar options, features, warranties and guarantees.

To help with your holiday-season and year-end giving, here are some additional reminders and rules:

• Contributions are deductible in the year made. So if you make a donation by charging it to a credit card before year end, it counts for 2010. This is true even if the credit card bill isn't paid until next year. Also, checks count for 2010 as long as they are mailed this year.
• It may be better from a tax standpoint to contribute certain appreciated assets to charity that have been held more than 12 months. That way, you avoid paying capital gains tax but can still deduct the full fair market value as a charitable deduction.
• Make sure the organization is "qualified." Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most eligible organizations. The searchable online version can be found at IRS.gov under " Search for Charities." In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
• Only taxpayers who itemize their deductions can claim charitable contribution write-offs.
• If possible for property donations, including clothing and household items, get a receipt that includes the name of the charity, date of the contribution, and a reasonably detailed description of the donated property. If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500.
• If the amount of a taxpayer's deduction for all noncash contributions is more than $500, an additional form must be submitted with the tax return.