Give and grow rich with charitable deductions

By Jeff Schnepper

Charitable contributions offer proof that the Golden Rule is a credo to live by. It not only allows you to feel good about giving, but lets you claim a tax deduction.

And we Americans like to usethe deduction. In 2005, more than 39 million tax payers claimed $139.1 billion in charitable deductions. That's the third biggest deduction after taxes paid and mortgage interest.

A charitable contribution is a gift to a qualified organization. The tax law allows charitable contributions as itemized deductions. Because these gifts are deductible, the actual cost of the donation is reduced by your savings.

If you are in the 25% tax bracket in 2007 and 2008, the actual cost of a $100 donation is only $75 ($100 less the $25 tax savings). As your income tax bracket increases, the real cost of your charitable gift decreases, making contributions more attractive for those in higher brackets.

The actual cost to a person in the lowest bracket, 10%, for a $100 contribution is $90. For a person in the highest bracket, 35%, the actual cost is only $65.

So, maybe you've noticed something: Thanks to the 2001 and 2003 tax cuts, the after-tax cost of a contribution is actually rising as lower tax rates reduce the value of the deduction.

Making giving a no-fuss proposition

A contribution is deductible in the year it is paid. Putting the check in the mail constitutes payment. A contribution made on a credit card is deductible immediately, even if payment to the credit card company is made in a later year.

You can deduct contributions only if they are made to or for the use of a qualified recipient. No charitable contribution deduction is allowed for gifts to other kinds of organizations, even if those organizations are exempt from U.S. income tax. Contributions to foreign governments, charities, and private foundations similarly are not allowed.

You can search an Internal Revenue Service database for organizations to which contributions are deductible, identifies each by type, and states their corresponding limit of deductibility. Moreover, no charity can take part in any political activity. Technically speaking, the information is contained in Publication 78.

• For more information on IRS rules on charitable contributions, see Publication 526 (.pdf download).

An organization could lose its charity status if it devotes a substantial part of its activities to formulating propaganda or otherwise trying to influence legislation. However, an organization, other than a church, may qualify as a charity and still perform some of these activities by keeping its political expenditures to an "insubstantial" part of its activities. Furthermore, donations to needy individuals are not deductible. (Don't bother getting receipts from panhandlers!)

Limits on donations

For most people, the limits on charitable contributions don't apply. Only if you contribute more than 20% of your adjusted gross income to charity is it necessary to be concerned about donation limits. If the contribution is made to a fully accredited charity, the deduction is limited to 50% of your adjusted gross income. For example, if you have an adjusted gross income of $100,000, your deduction limit for that year is $50,000.

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