Charitable Giving: How Your Gift Gives Back in Tax DeductionsSubmitted by Collins & Guilford Wealth Advisors, LLC on October 23rd, 2020
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 reduce your taxable income and therefore your tax bill, but only if you itemize your taxes. People usually itemize when they anticipate that their deductions, including charitable contributions, will add up to more than the standard deduction. The standard deduction usually increases every year due to inflation, so be sure to check with a financial professional to see what the standard deduction is for the year that you’re filing for.
Itemizing deductions entails tracking and adding expenses that may reduce your tax bill. This usually includes state and local taxes, mortgage interest, medical and dental expenses 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, as most of the time you can only deduct the amount that the charity received from the sale of your car, not the fair market value. This doesn’t apply if the charity keeps the car and uses it, if they make improvements to it before selling, if it’s sold at a discount to a person with a low income or if it’s worth less than $500.
Pay Attention to IRS Guidelines
In order to avoid an audit, 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 501(c)(3) charities or private foundations. 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. You can generally deduct up to 50% of your adjusted gross income, but there are also limitations in place for 20 and 30% deductions depending on who you’re contributing to.
If you are audited, the IRS will need substantial evidence of your monetary donation. Your donation can be substantiated only 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.
If you’re still unsure about the tax implications of your charitable giving, be sure to consult with a tax professional.
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