Your Charitable Donation Gives Back in Tax Deductions
There’s no doubt that it feels great to help someone in need through charitable giving. There are more than 1.5 million nonprofit organizations in the United States that range from food banks and disaster relief centers to churches and cultural centers. And in 2018, Americans contributed over 4 billion dollars to charitable organizations.
While you may have altruistic reasons for donating to a charity that you support, there can also be tax benefits that come along with donations. Here are some important things to consider when thinking about donating a significant gift to an organization, whether monetary or otherwise.
Itemize Your Deductions
Charitable tax deductions can lower your tax bill and are generally available only if you itemize instead of taking a standard tax deduction. People usually itemize when they anticipate that their deductions, including charitable contributions, will add up to more than their allowed standard deduction. Note that for 2021, however, tax law permits taxpayers who don’t itemize to claim a limited deduction on their 2021 federal income tax returns. This limited deduction is for cash contributions they made to certain qualifying charitable organizations (up to $300 for singles and $600 for married individuals filing joint returns).
Itemizing deductions entails tracking and adding expenses that may reduce your tax bill. This usually includes state and local taxes (limited to $10,000 but currently being debated for higher limits by Congress), mortgage interest, medical and dental expenses greater than 7.5% of adjusted gross income, and charitable contributions. You should make sure to keep track of all charitable donations throughout the year, so you have an accurate record of what to include in your itemized deductions.
Keep Accurate Records
In order to report accurate information on your taxes, keep a careful record of your charitable contributions every year. If you make a monetary donation, the organization will provide you with a tax receipt. In instances where you make non-monetary donations, you may want to get a qualified appraisal to submit when filing your taxes to substantiate the deduction that you’re claiming.
There are some specific guidelines to how much you can claim for certain types of donations. If you’re donating a large amount of clothes, furniture or other items to a charitable organization, they are only tax deductible if they are in “good used condition” or if they have a qualified appraisal. If you’d like to include donations like this on your taxes, you should steer clear of dumping them in a donation box, because you won’t have any record of the value of the items that you donated.
If you donate property that you’ve owned for more than a year, the value will be equal to the full fair market value of the property. Be careful if you decide to donate a car or boat, as rules surrounding these types of donations can be complex and should be reviewed with your tax advisor and/or the charity in advance.
Pay Attention to IRS Guidelines
In order to accurately file your return, be sure to keep yourself informed and up to date with IRS guidelines for charitable giving. The charities that you contribute to should be qualified organizations. You can ask any organization whether it is a qualified organization, and most will be able to tell you. If you contribute to a political campaign or a neighbor in need, you cannot consider those donations tax deductible.
There are also some limitations to how much you can deduct for charitable donations. The deduction is typically limited to 20% to 60% of your adjusted gross income and varies depending on the type of contribution and the type of charity. The law now allows taxpayers to apply up to 100% of their AGI for calendar-year 2021 qualified contributions (qualified contributions are cash contributions to qualifying charitable organizations). The 100% limit is not automatic; the taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies.
If you are audited, the IRS will need substantial evidence of your monetary donation. Your donation can be substantiated with a canceled check, credit card statement, bank statement or a written acknowledgment from the charity. Additionally, if you contribute $250 or more to an organization, you must prove that you made the donation and didn't receive anything in return. In this case, you should keep a receipt from the charity that lists the charity's name, the value of your gift, the date you made your donation and a statement verifying that you did not receive any goods or services in exchange for your gift.
Portfolio Solutions® helps our clients develop charitable giving strategies for the entire year, including the use of Donor Advised Funds, which facilitate the charitable donation of appreciated stocks and can help avoid paying capital gains tax on them. If you are interested in learning more about how you can maximize the impact of your charitable giving while minimizing taxes, contact us at 800-448-3550.
* Liberty Wealth Advisors® does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties.