Finding emergency money to pay taxes could be a charity away
Understanding the process of charitable contributions
For consumers looking to build emergency money funds, giving to charity can help. Taxpayers can either donate cash or goods, but each one comes along with some rules via the IRS. For example, if a consumer donates money, they have to have paperwork and documentation to prove it. On the other hand, donating household goods has even more legwork attached. It’s important to know the rules and then use them, but wise consumers who do can, find considerable savings by donating to charity.
Using an IRA direct rollover
For consumers who are 70 ½ or older, they can have money directly moved from an IRA to the charity of their choice. Both traditional IRAs and Roth IRAs allow the move, but it is more beneficial to do it via a traditional type. The reason is that the money in these accounts is taxable, and lowering the balance lowers the tax liability. Money that goes straight to the charity is not considered taxable income when it comes to the IRA owner. The only drawback is that when money is moved directly to a charity from an IRA, it is not deductible by the consumer. It’s a small drawback though, and the difference may be negligible. In order to take advantage of the charitable donations, taxpayers have to itemize their filing. If a taxpayer does a rollover to the charity, the standard deduction still applies.
Household goods donations and taxes
Many charities accept household goods donations and taxpayers are allowed to claim the market value of donations on their taxes. In 2006, a new law was set in motion that requires items to be in “good or better” condition. The reason for the new law was to dissuade consumers from donating their junk and then trying to claim it on their taxes. The other reason is that too many consumers were valuing their items at too high a value and filing for a higher tax break than rightfully they should have. Finding emergency money to pay taxes is possible with the donating goods option, but the goods have to be valuable or the IRS can deem them “minimal monetary value” items and deny the claim.
Another rule to remember when it comes to donating goods is that when the donated amount exceeds $500, taxpayers have to file Form 8283 with their tax return. It is the Noncash Charitable Contributions document that details the item. Sure taxpayers can still increase the value of the item, but the IRS is hoping the extra paperwork discourages people from doing it. There may be additional follow-up questions to get through to avoid bulking up values.
Calculating a tax deduction
Taking the standard deduction, as opposed to itemizing, is a personal call. The first thing to look at is what amount of a standard deduction applies. For example, the standard deductions for 2010 are:
- Single taxpayers or married filing separately — $5,700
- Heads of households — $8,350
- Married couples filing jointly — $11,400
If a consumer has enough deductions to exceed the standard amounts, then he or she should itemize to get the bigger deduction.
Using charity to help limit tax liability
Emergency money to pay taxes is difficult to find, but charitable donations are one way to lower tax liabilities. Remember that there are some rules, though. Consumers need to remember that contributions only count when they are given to qualified organizations. This is especially important to remember during times of disaster when “charities” crop up asking for donations. They may not be qualified and donations may not be tax deductible at all. Consumers should check with the organization to make sure it is considered a qualified charity and then use the donations to bring down taxes. It’s a great way to save money and in today’s difficult economy, that’s crucial to staying within a budget.