Lottery winnings, charitable donations and the tax collector

By now I'm sure you've heard about the Nova Scotia couple who hit the lottery and then gave away most of their $10.9 million (Canadian) winnings to charities.

Allen and Violet Large are generous, but they're no fools. They kept nearly a million for themselves. The septuagenarians say they'll use the money for emergencies and to buy more lottery tickets.

Good for them! And doubly good for them that Canadian tax law allows them to give away so much of their windfall.

"Fortunately for this commendably generous Canadian couple, they do not live in the United States, which would apply a 'No good deed goes unpunished' tax policy to a case like this one," notes Mary O'Keeffe, who blogs at Bed Buffaloes in Your Tax Code.

In comments posted at TaxProf Blog, Mary continues:

"Canada does not include lottery winnings in taxable income. Canada also has a very different sort of tax preference for charitable donations. Donors apparently do not get to deduct the amounts donated, but they do get (nonrefundable) tax credits for the amounts they donate — and they can get credits for donating up to 75% of their income. The credit is computed at 15% for the first $200 of giving and 29% for subsequent amounts.

Since the top marginal rate is 29%, this means that taxpayers in the top tax bracket (over $127k in taxable income) get a benefit approximately equivalent to deducting it, but taxpayers in lower brackets get a tax benefit that is better than deducting it would have yielded. The bottom line — in general, Canada's policy towards generous donors with modest incomes is far more progressive than the United States tax policy."

More limits on U.S. donations: OK. So it's clear that we U.S. taxpayers don't get such good treatment from our federal tax collector when we're lucky and/or feeling generous.

Just what are the IRS rules for Americans who want to donate and deduct their contributions to charities?

Timing: First, the gift, either cash (which includes checks and donations charged to credit cards) or goods, must be made in the tax year for which you want to claim the deduction. That's why you get so many pleas from nonprofits in December.

Putting the check, written on Dec. 31, in the mail by that date to the charity constitutes payment. So does a contribution made on a credit card and charged to your account in the tax year it's made, even if you don't pay the credit card bill on which the gift appears until the next year.

Itemizing: Second, you must itemize. Although most taxpayers don't file Schedule A, that form is the only way you can get any tax benefit for giving to your favorite charity.

There's been talk on Capitol Hill for years about allowing at least some charitable gifts to be claimed by nonitemizers. But given the focus nowadays on deficit reduction, getting new tax breaks into the Internal Revenue Code will take some work.

Checking out the charity: Third, your gift must go to a qualified charity. This is one that meets IRS requirements to operate as a tax-exempt organization.

Reputable groups will be happy to provide you with information on how they meet the tax code rules. Or you can check them out yourself using IRS Publication 78's online search feature.

Private groups, such as GuideStar and Charity Navigator, also track and verify nonprofit status for philanthropic purposes.

Now about those giving limits: One of the great things for itemizers is that there technically is no limit on the amount of a charitable deduction.

You did see the word "technically," didn't you?

There are 20 percent and 30 percent donation deduction limits for specific gifts and the groups (typically private charities) to which they are given. They are complicated, so if you find yourself considering a donation to which these rules apply, hire a tax pro to help you.

But for a public charity — those you see touting their IRS 501(c)(3) status in their donation requests — the deduction is limited to 50 percent of your adjusted gross income, or AGI.

Fifty percent groups include churches, religious organizations, hospitals, educational organizations, private operating foundations or other organizations that receive a substantial portion of their support from the public or the government.

This means if you give $10,000 to your university's foundation to endow a scholarship, then you can claim that amount as tax deduction as long as the other rules already discussed are met and your AGI is more than $19,999.

And realistically, as good-hearted as we are, few of us will hand over more than half of our income in a year to any qualifying group. So in practical application, limits on the deductibility of charitable donations don't apply to most people.

Carrying forward excess donations: But what if you did go donation crazy like the Canadian couple and busted the deduction limit? That's OK. You can still get your tax break.

You'll just have to roll the excess donation amount into the next year's tax return.

And if your gift is really, really big, you have up to five years of rollovers to claim the full charitable gift.

Remember the donated goods rules: We've been talking primarily about cash donations, but as I mentioned earlier, you can give away goods, too. You just figure the fair-market value (what a willing buyer would pay a willing seller) of the items and count that as your donation amount.

Remember, though, that there now is a law that says you can't claim any donated piece of personal property unless it's in good or better shape.

I know the ol' blog readers wouldn't be so tacky to try to use a charity as a dumping ground and then claim an illegal deduction, but I had to mention it.

Don't be surprised to see charities mention this requirement, too. I've heard of some drop-off centers rejecting really crappy stuff.

Don't forget receipts: Finally, regardless of the type of gift, its amount and to what type of qualified charity it's given, get a receipt.

The IRS has specific rules about just when a formal acknowledgement from the donation recipient is required. But even if the nonprofit doesn't have to, by law, give you a receipt, ask for one anyway. A legitimate tax-exempt organization will be happy to do so, either right there on the spot or by mailing (or e-mailing) it to you later.

OK. Got a handle on all these charitable giving and tax deducting rules? Good.

Now you've got plenty of time to decide which groups you want to support by the end of the year and do so properly so you can claim the deduction on your 2010 taxes.

Related posts:

• Keep the giving going
• Midyear tax tip #8: Get charitable
• Donate and deduct credit card rebates
• Deductions demand documentation
• Heat wave calls for cool charitable gifts
• Torched home not allowable deduction
• Bet on it, gambling winnings are taxable

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