Why is charity beneficial?

Charitable deductions provide financial incentives to taxpayers to donate generously to charities. Taxpayers can utilize such opportunities to benefit a charity and make the most of their tax savings by deducting some or all of their contributions on their tax returns. The current law allows taxpayers (with itemized deductions) to deduct their taxes as charitable donations to such qualified organizations. These organizations may be public or private.

Charitable tax deductions were first enacted in 1917 and have changed throughout the years from “a short statutory provision.” Over the course of the past 100 years, deductions for charitable donations have undergone major changes. In the beginning years, charitable deductions were not to be considered as income for taxation purposes, and it was only applied to the top income distribution. It is fair to say that in the early years, charitable deductions were enacted solely to provide protection in voluntary donations to public goods by rich industrialists. As of today, charitable deduction legislation is more focused on providing a financial incentive to taxpayers to make donations.

Charitable deductions or tax-deductible contributions can be given by taxpayers as cash, property, or even as securities. In the case of property and securities, the total amount of tax a taxpayer can deduct to donate to a charity depends upon the type of property being donated by the taxpayer and the charitable organization receiving the donation. There are specific limitations placed on these types of deductions that depend upon the percentage of the individual’s Adjusted Gross Income (AGI). For example, long-term capital gain property (property held for more than a year) involves 30% of AGI.

Charitable deductions work to promote the act of generously donating to charities by providing taxpayers with a financial incentive i.e., by reducing the tax bill. Taxpayers can utilize income tax deduction by donating to a qualified public charity. In this way, charitable deductions provide taxpayers with a great opportunity to donate for a good cause and ultimately make a significant change in the world.

Charitable deductions are applicable for taxpayers when they itemize their taxes. This is generally done when the expected amount of tax deduction (inclusive of charitable donations) amounts to more than the standard deduction. It is in the best interest of the taxpayers to keep a record of their annual donations to qualified charities. Then, at the time of filing taxes, they can use large deductions to reduce their tax bill.

To take a tax deduction, a taxpayer needs to sum up their annual charitable donations and ensure they exceed the limit of the standard deduction. State taxes, local taxes, mortgages, charitable donations, or medical expenses all qualify as charitable deductions. The maximum amount a taxpayer can claim as a charitable tax deduction on their taxes varies. For instance, if they pay cash to a public charity foundation, they can deduct approximately 60% of their AGI. In the case of long-term property or stocks (held for more than a year), charitable tax deductions amount up to 30% of AGI. A great way to increase the number of charitable tax deductions is to combine more than one asset.

Why is it beneficial to donate a car to charity?

If you have a car in decent working condition, by donating it you will:

1. Help a charity whose work you believe in: Maybe that seems obvious (most of us make donations to charities whose work we support), but it's true.

2. Provide a vehicle for the charity to use: As long as your car is usable, many charities can make good use of it: delivering meals to the elderly, taking people to doctors, or anything else that furthers the charitable mission. Some of your best choices for charities that actually use donated cars for their activities include the United Way, Goodwill, and the Salvation Army. On the local level, think about community colleges and vocational schools; their education programs use donated cars to train mechanics.

3. Get a healthy tax write-off: The rules are strict since the law changed in 2004, and the process more complicated, but a deduction approaching fair market value can still be had. If you donate a car valued over $500, and the charity sells it, you must get a written notice from the charity stating that it was "sold in an arm's length transaction between unrelated parties" and the gross proceeds of the sale. If the car is going to be used by the charity in its programs, then you will get written certification of its intended use and planned time of use. If the car is worth more than $5,000, you must also get an independent appraisal stating so. If the car is worth more than $500, you will need to file IRS Form 8283 and attach to your return. If the car is worth more than $5,000, in addition to Form 8283, it might be a good idea to include the independent appraisal and the charity's certification with your return as well.

Before 2004, donating a car to charity was a popular tax gambit. People would take thousands of dollars worth of tax deductions (no matter what the car ended up fetching for the charity at a sale or auction). Congress put a stop to this by passing the American Jobs Creation Act of 2004, limiting the deduction one could take for a donated car, truck, boat or plane worth more than $500. Instead of letting taxpayers simply deduct the published fair market value of the vehicle, as before, the Act decreed the deduction be determined by the exact amount the car actually garnered for the charity—and documented by a receipt from the charity to the donor.

So, after you make your generous contribution, make sure you carefully document the transaction and keep the documents in your IRS tax file for that year in case your accountant or tax preparer needs it. Also familiarize yourself with the IRS' publication "A Donor's Guide to Vehicle Donation."
That way you can be sure you are following all the rules.