Americans lead the world in charitable giving – twice as much as the next most charitable country, according to a 2006 Charities Aid Foundation report. In 2006, Americans set a new record in philanthropic contributions, with an estimated $295 billion. A large percentage of that comes from individual donors.

Experts say the practice of voluntary giving has positive effects on the giver’s health, happiness and even personal wealth.

A direct effect on wealth is, of course, the tax deduction. But only certain donations qualify.

The tax benefits are applicable only to contributions made to qualified organizations and are not set aside for use by a specific person. Legitimate public charities are mostly federally approved 501(c)(3) organizations. Generally, they include religious, educational, scientific, literary and charitable organizations. Certain organizations that foster national or international amateur sports competition may also qualify. The IRS has on its Web site a list of organizations eligible to receive tax-deductible charitable contributions.

Generally, deductions for monetary contributions are limited to 50 percent of adjusted gross income (AGI). For example, the deduction limit for an AGI of $100,000 is $50,000 for that year. In some cases, 20 percent and 30 percent limits may apply to gifts of property that have appreciated in value and are held for more than one year. Any amount in excess of the applicable limitation to charity in one year can be carried over for the next five years.

Charitable donations made by credit card are deductible in the year they are charged to the credit card, even if the giver pays the credit card company in a later year. Donations made through a pay-by-phone bank account are not deductible until the payment date is shown on the bank statement.

Different tax rules apply for cash contributions where the donor receives a financial or economic benefit in return, such as purchasing a ticket for a dinner dance at a church or for a fundraising auction conducted by a charity.

There are many ways to contribute to a qualified cause. These may include charitable gift annuities, gifts in kind, volunteer work and endowments. While some of these ways may not provide direct tax benefits, the IRS may allow indirect write-offs. Consult with a tax advisor about the many ways Uncle Sam repays good deeds.

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This entry was posted on Monday, December 28th, 2009 at 2:16 pm and is filed under Tax Advice. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.