Being charitable is a good way to get into the holiday spirit. But the Internal Revenue Service is concerned that a lot of taxpayers sidestep the spirit of the law by going overboard on how they deduct contributions.
"We are trying to stem the abuses that have been allowed to proliferate over the last several years," says Martha Sullivan, director of exempt organizations at the IRS. Sullivan says stronger enforcement among tax-exempt groups and contributors is a priority.
That includes crackdowns on charities that become vehicles for tax shelters as a way to attract contributions.
Individual taxpayers are being warned against overvaluing cars, artwork, and other donated property, in an enforcement effort that is getting support from the highest levels of the IRS. Karin Gross, of the IRS's Office of Chief Counsel, says excessive values on cars given to charities is an issue in which IRS Commissioner Mark Everson is "personally interested."
The tax law passed last month toughens the rules for cars donated to charity. More than 700,000 taxpayers claimed such deductions and some 4,300 charities had vehicle donation programs in 2000, according to a survey last November by the General Accounting Office (since renamed the Government Accountability Office).
The old rule, still in effect for gifts made this year, limits a tax deduction to a donated car's fair market value. Starting next year taxpayers can generally deduct only the proceeds that a charity actually receives from a sale.
Behind the change are government investigations that found clunkers being valued as cream puffs and charities often netting only a small part of a car's claimed value after it was sold at a wholesale auction and expenses were paid. In one case a truck valued at $2,400 yielded a charity $31.50.
Also under scrutiny are pledges by property owners to support conservation or historic preservation by limiting development. The IRS says some owners deduct an excessive amount for a resulting decline in a site's value.
Giving to charity is a legitimate way to save tax, though one must claim itemized deductions in order to benefit. People who take the standard deduction cannot deduct an extra amount for donations, though lawmakers have proposed partly removing that limitation.
People who normally take the standard deduction may be able to save more tax by accumulating a larger total of itemized deductions if they bunch two years' worth of donations into one. That can be done by advancing some of 2005's giving into late 2004.
There are limits. A raffle ticket is not deductible, says the IRS, and a donation may not be wholly deductible if you get a benefit in return, such as a ticket to a concert.
The value of volunteered time cannot be deducted. That help is provided entirely on your dime.
However, the cost of driving for charity work is deductible at 14 cents a mile. So, too, are items such as parking, uniforms, and office supplies.
Other points to keep in mind:
Give now, pay later. A pledge in 2004 is not deductible unless payment is made in 2004. But donations by credit card late this year are deductible for 2004 even if the charge isn't paid until next year.
Hand-me-downs. Used clothing and other goods are deductible at fair market value. While some people overvalue their items, surveys have shown that many understate the value. Paid tax preparers may estimate an overall donation rather than take time to determine higher specific values.
Thrift shops and online auctions may give you an idea of what used items sell for. Tax preparation software may include guidance on valuations.
Proving it. Receipts or other records are required to back up donations, though the IRS may not want to see them unless you are audited. You are supposed to have written acknowledgement, not just a canceled check, from a charity to which you give $250 or more a year. But small gifts that add up to more than $250, such as weekly church donations, do not require acknowledgement.
A gift of property requires special records depending on its value. A donation worth over $5,000, for example, requires a written appraisal-- though not for stocks and bonds with a readily determined market price.
Giving stock. If you give a charity shares that have grown in value, you get a deduction for the current market value and escape capital gains tax on the accumulated gain. For shares that have fallen in value, sell to get a tax loss, then donate the proceeds to the charity.
Trusts. Consider long-term plans that can use a charitable trust or similar arrangement to generate income during your retirement, give you a current tax deduction, and after your death funnel the plan's assets to a charity. Many charities and financial firms can help set up a program, even with modest assets.