Charitable contributions are one of the best ways to save money on taxes. Not only does the charity benefit, but taxpayers also benefit because they can deduct a portion or all of their contributions on their tax returns.
A tax-deductible donation is one in which you can deduct money or property that you give to a qualified organization, such as clothing or household items. Nonprofit religious, charitable, or educational organizations are examples of qualified organizations.
Donations of money or goods to a tax-exempt organization, such as a charity, are tax deductible. Donations that are tax deductible can help to reduce taxable income. You must itemize on Schedule A of IRS Form 1040 or 1040-SR in order to deduct donations from your taxes.
You can use the IRS Tax Exempt Organization Search Tool to see if the organization is tax-exempt. You’ll need the entity’s full name or employer identification number (EIN).
Generally, the amount you can deduct from your taxes is the fair market value or cash value of the property you donate. However, the IRS may sometimes limit the amount you can claim on your taxes.
If you anticipate a high-income year as a result of a large bonus or equity compensation, or as a result of long-term investment gains, you may face a larger tax bill than you anticipated. However, as you consider charitable giving this year, you may discover additional opportunities to reduce your taxes while supporting your favorite nonprofits during this time of need.
Special Considerations to Know
To be deductible, a charitable contribution must be made to a qualified organization under tax law. The total amount of charitable contribution deductions are limited by annual AGI caps. Special rules limit certain deductions based on the type of property donated and the type of tax-exempt organization receiving the donation.
In general, charitable donations can be deducted up to 60% of your adjusted gross income. Still, you may be limited to 20%, 30%, or 50% depending on the type of contribution and the organization. If you want to make the most of your charitable donations and typically give more than $10,000, consider the bunching strategy, which allows you to “stack” your gift-giving in a tax year.
Steps to Make a Charitable Donation
1.Donate to a charitable organization.
Only charitable contributions to tax-exempt organizations, as defined by Internal Revenue Code section 501(c)(3), are tax-deductible. Religious organizations, the Red Cross, nonprofit educational organizations, museums, volunteer fire companies, and organizations that maintain public parks are examples of qualified institutions.
2.Donate something other than cash
It might be more advantageous to give these non-cash assets directly to the charity rather than selling them and donating the after-tax proceeds. Non-cash assets include stock and mutual fund shares. You will receive two significant benefits if you have owned the assets for more than a year. In most cases, you’ll be able to claim a tax deduction for the full fair market value, and neither you nor the charity will have to pay any taxes on the gain.
3.Maintain accurate documentation.
If you want to claim a charitable deduction for a cash gift, you must be prepared to provide documentation to support your claim. In other words, with proper documentation, you can deduct spare change dropped in a charity’s collection bucket. If you are audited, the IRS will only accept a canceled check, credit card statement, bank statement, or a written acknowledgment from the charity to substantiate a monetary gift.
Tax Giving Strategies
1.Using a part-sale strategy to offset capital gains tax from rebalancing an investment portfolio.
Some assets that have appreciated will account for more of a portfolio over time, while those that have declined will account for less. This can expose an investor to unintended risk if the market environment changes abruptly.
Rebalancing entails selling positions that have outperformed the target allocation and allocating the proceeds to underrepresented portfolio investments. A taxable event occurs whenever an appreciated part is sold in a taxable () account.
Donors who itemize their deductions can reduce the tax impact of rebalancing by making a partial gift and a partial sale.
The way to do this is to sell some appreciated assets within the same tax year in order to offset the gains from those sales by claiming an income tax deduction for some appreciated assets donated to charity.
2.Make a stock or bond donation.
If you sell appreciated security, you may be required to pay capital gains tax on the increase. Instead, if you give appreciated security to a charity, you and the charity will avoid capital gains tax. You would also be eligible for a charitable income tax deduction equal to the fair market value of the security donated, up to 30% of your AGI.
3.Consider using a donor-advised fund to make charitable contributions.
Whether you donate cash equivalents, stock, or other appreciated assets, a donor-advised fund is a quick and easy way to make a tax-deductible donation this year. Rather than scrambling to write checks or transfer stock to multiple charities, you can set up a donor-advised fund with a single donation.
Charitable giving can quickly become complicated. Before deciding on a giving strategy, consult with a professional advisor.