From donating money or goods to your favorite charity to volunteering at a soup kitchen, charitable giving is a wonderful way to help others throughout the year. However, from a financial planning perspective, charitable giving should be on your mind as the end of the year approaches. This is because charitable contributions can impact your federal taxes. Some taxpayers itemize charitable deductions on their federal tax returns, which can potentially lower their tax bill or even result in a refund come spring.
Charitable Donations and Tax Deductions
You can deduct charitable donations from your taxable income, which may lower your tax bracket. Deductions generally depend on three factors:
- The beneficiary (only qualified charities can receive a tax-deductible contribution, so donating to family members will not grant you a tax break)
- How you organize your donations
- The form of the donation
Generally, you have a maximum deduction limit of no more than 60% of your adjusted gross income (AGI), although lower limits may apply depending on the type of donation. You cannot donate and deduct more than $60,000 in a single tax year if your adjusted gross income is $100,000, but that’s still quite generous.
Note: You typically must itemize your deductions to claim charitable contributions on your tax return, although an exception was made for the tax year 2021, which has since ended.
Tax Implications of Different Donations
Cash donations can usually be deducted in full for the exact amount you donated. You will need a receipt if you donated more than $250. You will also need to obtain some form of bank statement or receipt from the recipient, regardless of the amount, if you donated cash to a charity instead of writing a check or using your credit card.
Tangible assets can typically be deducted at the full value of the items based on their current value when you donate items that conform to the charity, such as old clothes to the Salvation Army or artwork to a museum. You can deduct the amount you paid for the item or its fair market value, whichever is less, if the assets have no relationship to the organization’s purpose or mission.
Note: Volunteering is a worthy donation. You cannot deduct the value of the time you spend volunteering, but you can deduct transportation costs and other expenses related to your charitable work.
Generally, the fair market value can be fully deducted from appreciated long-term assets. You can deduct long-term securities held for over a year in most cases, but the deduction is capped at 30% of your adjusted gross income (AGI). Donating your stocks directly to a charity may provide additional tax benefits and can lower your tax bracket.
Limitations on Contribution Deductions
The Internal Revenue Service (IRS) has several guidelines regarding charitable deductions that can be tax-deductible. There are a few limitations you should be aware of if claiming deductions is part of your overall financial charitable giving strategy.
- You must have a written statement from the charity if you donated and wish to claim a deduction for cash or goods donated that total $250 or more. The statement must show the donation amount and describe any property given, and indicate whether the organization provided any goods or services in exchange for the gift.
- Note: The deduction value is typically the fair market value of the items if you donated property instead of cash.
- Your deduction will be limited in cases where you received something in return for your donation. You can only deduct the difference between your donation amount and what you received in return.
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The IRS also provides guidance on qualified charitable organizations. You should donate to a qualified charitable organization if you wish to claim a deduction for your charitable contribution. Donating $500 directly to a homeless person or a friend or relative is not eligible for a deduction. Additionally, you cannot deduct donations made to political organizations or candidates.
Conclusion
Regardless of how you wish to give your time and money to charities, it can be good to sit down with a qualified financial planner first. An expert can provide advice on the types of donations that will work best for you and your estate and future plans. They may also be able to help you find an organization that shares the same charitable goals and values you have.
Another resource that may be helpful is the “Charity Navigator” search engine. This site will provide you with many options if you are looking for a charitable organization, making it easier for you to find an organization that is not only legitimate but also serves the causes you wish to support.
Frequently Asked Questions (FAQs)
How much can charitable donations be deducted for tax purposes?
You can donate any amount you wish to charities, but you can only deduct up to 60% of your adjusted gross income (AGI) on your tax return.
What is a charitable donation?
A charitable donation involves giving money or property to an organization. You may not receive anything in return for your donation. The organization will be considered qualified as a charitable organization if it has 501 (c) 3 status, allowing you to deduct your donation on your federal tax return.
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Sources:
- IRS. “Publication 526 (2021), Charitable Contributions.”
- IRS. “Year-End Giving Reminder: Special Tax Deduction Helps Most People Give Up to $600 to Charity, Even if They Don’t Itemize.”
- IRS. “Topic No. 506 Charitable Contributions.”
- IRS. “Substantiating Charitable Contributions.”
- USA.gov. “Donating To Charity.”
Source: https://www.thebalancemoney.com/how-charitable-giving-can-impact-your-taxes-1289751
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