Tax-Deductible Charitable Giving

Donate today, pay less in April. Charitable giving is one of the surest ways to create a win-win with your wealth.

Not only does the charity benefit, but taxpayers enjoy savings on contributions that would otherwise be going to the government. 

Not all donations qualify for deductions, though. The federal tax law requires recipients to adhere to strict guidelines for contributions to qualify as deductions. Before assuming a gift will be tax deductible, remember the following:

  1. Donate to qualifying organizations

As mentioned above, charitable giving only qualifies for a tax deduction if it goes to a tax-exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. Remember, an organization can be a nonprofit without having 501(c)(3) status. Examples of qualifying institutions include the Red Cross, museums, religious organizations, among others.

Verifying an organization’s status is easy with the IRS Exempt Organizations Search tool.

Additionally, donations to a federal, state, or local government may be eligible if the gift will be allocated for public purposes. If you aren’t sure if an organization qualifies, ask them.

  1. Document contributions

Deducting charitable giving requires detailed records. To claim a deduction for cash, a written record, canceled check, or bank/payroll debit is needed. Each contribution of more than $250 in cash or property must be supported by a written acknowledgement from the donee confirming the amount of the contribution. Significant property contributions also require appraisals.

If not explicitly obvious, be sure to have a written record of the fair market value of all donations. IRS Publication 561 can be used to determine the value of noncash contributions.

  1. Don’t forget the small things

Though the IRS doesn’t allow deductions for time or service donated, expenses related to volunteering efforts for qualified organizations can be tax deductible. These expenses must be directly connected to the volunteer work and receipts must be kept. Don’t forget to record your mileage.

How Much is Deductible?

Up to 60% of your adjusted gross income can be deducted via charitable donations (100% if the gifts are in cash), but, depending on the type of contribution and organization, you may be limited to 20%, 30%, or 50%. For more details, use the IRS’ Publication 526. The donee will also be helpful in determining how their contributions are taxed.

Contributions that exceed the limit can be deducted on tax returns over the next five years, or until they’re gone. This process is called a carryover.

Beware of “quid pro quo” donations for which the donor receives an economic benefit in return for the gift. If a donor gives $50 and receives a T-shirt worth $15 in return, the deductible amount is $35 ($50 donation minus the shirt’s $15 value).

How to Claim Tax Deductible Charitable Giving on Your Tax Return

Depending on the amount of giving, taxpayers will need to itemize or take the standard deduction. 

Itemizing is time-consuming and requires a Schedule A to be submitted with the rest of your tax return. It may also be more expensive, either in terms of a higher bill from a professional tax preparer or additional filing software. However, if your itemized deductions sum to more than the amount of your standard deduction, itemizing is the clear winner.

The standard deduction levels can be seen in the table below. If your standard deduction is more than the sum of your itemized deductions, using the standard deduction is the obvious choice, saving you both time and money.

When it comes time to file your taxes, you’ll appreciate the detailed record-keeping you did throughout the year. Keep those records up-to-date as best you can.

Conclusion

Charitable giving can be an excellent tool to support one’s favorite charities and simultaneously reduce a tax burden. But, only if done properly. Knowing the above information can be a great first step towards deductible contributions. Also, depending on your situation, professional tax advice can be extremely beneficial.

Either the government is going to take your money or, with a small amount of effort and planning, you can entrust it to those working on problems near your heart.

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