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Charitable deductions under scrutiny

Today has been designated as "Giving Tuesday." It's a new entry in the holiday gift-giving season, aimed at encouraging people to give generously to nonprofit organizations of their choice.

Many people make such gifts - not only on a certain day, but all year round. And of course the tax code encourages such giving through the charitable deduction.

By all means give generously, if that is what is in your heart. But also be aware of a couple of considerations regarding the tax impact of your gifts.

First of all, it's no secret that very high charitable deductions in proportion to a taxpayer's income can increase the chances of an IRS tax audit. IRS computers are programmed to compare the average amount given to charity by taxpayers of each income level. If your donations are far in excessive of that amount, it raises a red flag for the IRS.

Keep in mind also that it's important to make sure the formalities are observed in making charitable gifts. This means, at a minimum, getting a receipt from the nonprofit group and filing form 8283 with the IRS for donations of more than $500.

There is also the possibility that Congress and the president will target the charitable deduction as part of an overall plan to tackle the federal budget deficit. President Obama has already proposed capping the deduction at 28 percent for taxpayers making more than $250,000 a year.

If a reduction in the deduction comes to pass, it could significantly affect not only taxpayers, but charitable organizations themselves.

Source: "Charities depend on giving encouraged by tax breaks," HeraldNet, Michelle Singletary, 11-27-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our California tax litigation page.

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