For the most part, donations of cash or property to charity are deductible on your personal tax return (subject to certain limitations). If you receive an item or service in return for your donation, you must reduce your deduction by the value of that item or service. For example, if you donate $150 to a charity and receive a book worth $30, your total deduction would be limited to $120. The charity must inform you of the item's value.

The Pension Protection Act of 2006 closed some loopholes for charitable deductions, and taxpayers are now required to substantiate any cash or monetary gift with a bank record or written acknowledgement from the charity. It must specify the amount and date of contribution, as well as the name of the charity.

The Pension Protection Act also strengthened the rules governing noncash donations and stipulated that donations of clothing and household items must be in "good condition." For noncash donations worth more than $500, you must provide additional information with your Federal tax return. Be sure to obtain a certified appraisal for donations worth over $5,000 (other than publicly traded securities) and nonpublic stock worth over $10,000.

Although you cannot deduct the value of your time or services contributed to a charity, you may deduct out-of-pocket expenses, including a 14 cents per mile deduction for charitable travel.

Even if you donate every penny of what you make in any given year, your charitable contribution deduction is limited to 50% of your AGI. You can, however, carry forward the excess contributions for five years.

Charitable Vehicle Donations

When claiming a deduction for a vehicle worth more than $500, you may deduct only the amount the charity receives for the sale of the car. Many charities typically wholesale donated cars and receive less than market value. Prior 2004 reform, taxpayers could write off the car's full blue book value, regardless of the amount the charity received for the car. In the event the charity retains the vehicle for its own use, the taxpayer is responsible for substantiating how the vehicle will be used and for how long. These new rules only apply when the deduction exceeds $500.

Donating Appreciated Property

Donating appreciated capital gain property to charity has many tax advantages. For most appreciated property, the amount of your deduction is the value of the property rather than its cost, and you are never taxed on the amount of appreciation. In the case of most property contributions, an annual deduction limit of 30% of AGI applies. Inventory, items donated for a charity auction, and certain other property are subject to different rules.

Sell property that has declined in value and donate the proceeds to charity, since you may be able to deduct both your capital loss and your contribution. If you give devalued property directly, you may deduct the fair market value of the property as a charitable contribution, but you won't be able to deduct the loss.