How Do Donation Tax Deductions Work?

The Internal Revenue Service (IRS) allows donation tax deductions on donations made to organizations identified under the Internal Revenue Code. There are four tax deductible donation categories identified under the code, namely (1), those made to nonprofit organizations, as described in section 501(c) (3); (2) donations made to civic groups or unions provided that such donations are used solely for charitable purposes, education or recreational activities; (3) donations made to nonprofit organizations that are working to develop positive business conditions in specific trade areas; and (4) donations made to veterans' groups, provided that 97.5 percent of the members of such groups are retired or active members of the US Armed Forces and their families. Donations made to individuals, groups and organizations not mentioned in the Internal Revenue Code are non-deductible, so be sure to check the status of the organizations to whom you want to give donations.

Amount of Deductions Allowed

The amount of donation tax deductions may vary depending on the income status of the donor and the receiver. As a general rule, as of 2011, you can deduct a value of up to 50 percent of your adjusted income for donations made to charitable organizations listed under the IRS publication. However, if you give donations to private foundations, you are allowed to deduct a maximum of only 30 percent's worth of your adjusted income.

The maximum deduction allowed for corporations is different from that for individual donors. Corporate charitable donation deductions are limited to 10 percent of the company’s taxable income, so even if the company donated almost half of its income to charity, it could enjoy a tax deduction of only 10 percent for its donations.

Types of Donations You Can Make

The IRS recognizes both cash and non-cash donations; therefore, if you provide professional services to charitable institutions, you can claim the cost of your billable hours as donations. For instance, if you are a lawyer charging $400 an hour to your regular clients, you can claim $400 an hour's worth of donation tax deductions if you provided free service to a charitable organization or any organizations falling under the four donation tax categories set by the IRS. Aside from services, you can deduct the value of goods that you donated to charity, such as clothes, shoes and books. When valuing these goods, do not use the original price you paid for them but use the estimated current price or the fair market value of these goods.

How to File for Charitable Tax Deductions

To claim charitable tax deductions, you need to use IRS Form 1040 and fill out Schedule A. If the amount of your donations is more than $500, you will need to fill out Form 8283. Non-cash donations valued at more than $5,000 are subject to appraisal, and you may need to engage the services of an independent appraiser before you can claim this amount as tax deductible. To claim charitable tax deductions, you will also need to attach to your returns the necessary donation documents, including the receipts and the appraisal report. Do not be complacent when it comes to documenting your charitable donations. Note that deductions for charitable donations are always closely scrutinized by the IRS, so you need to attach the pertinent documents to your returns in an effort to avoid a tax audit.