Charitable giving during the holiday season is a recognized tradition all over the world. From donating to your favorite charity to volunteering at a soup kitchen, charitable giving is every bit as important to the holiday season as spending time with friends and family.
From a financial planning standpoint, charitable giving should be on your mind at the close of the year. Around 26% of taxpayers itemize charitable deductions on their tax returns—with careful planning, you can make charitable giving an important part of your estate planning.
Some types of charitable giving have different tax breaks than others and some may receive different types of deductions. No matter what types of charitable giving you prefer, it’s important to know the tax implications of your choices—so that you can plan your donations and budget for them while knowing how your taxes will be affected.
The Tax Effects of Giving
Because charitable giving becomes a tax deduction, you might be able to lower your overall taxable income—possibly allowing you to enter a lower tax bracket. Deductions generally rely on three factors:
- The recipient (qualified charities are the only ones that can receive a donation that is tax-deductible, so gifting to your family will not give you a tax break)
- How you structure your donations
- The form in which you donate
Tax Implications on Various Gifts
Cash donations are generally fully deductible for the exact amount you gifted. If you donate more than $250, you’ll need a receipt. If you gift the charity in cash rather than a check or credit card, you’ll need to request some kind of bank statement or receipt from the recipient, no matter the amount.
Tangible assets can usually be deducted for the full amount of the items based on their current worth when gifting things that correlate to a charity—such as old clothes to the Salvation Army or art to a museum. If the assets have nothing to do with an organization’s aim or mission, you are allowed to deduct the amount you paid for it, or the item’s reasonable value, whichever is the lesser of the two.
Volunteering is a worthwhile donation. Although you cannot deduct the time you spend volunteering, you can deduct the transportation costs and other expenses related to your charitable work.
Generally, the full fair market value can be deducted from appreciated long-term assets. In most cases, you can deduct long-term securities that you have held for more than one year. However, the deduction is limited to 30% of your adjusted gross income (AGI) compared to the 50% limit for donating cash to charities. Donating your stocks directly to a charity can offer more tax benefits and can lower your income tax bracket.
Limitations for Deducting Contributions
The Internal Revenue Service (IRS) has many guidelines for charitable contributions that are tax-deductible. If tax deductions are a part of your financial charity-giving strategy, there are a few limitations to be aware of.
Anytime you donate and want to claim a deduction for donated cash or goods of $250 or more, you must have a written statement from the charity. The statement should display the amount of the donation, describe any property given, and indicate whether the organization provided any goods or services in exchange for the gift.
If you donated property instead of cash, the deduction amount is typically the fair market value for the items.
In cases where you get something in return for your donation, your deduction will be limited. You will be able to deduct the difference between the amount of your gift versus what you received in return.
The IRS has guidelines on qualified charities. For example, if you want to deduct your charitable contribution, you must donate to a qualified charity. Additionally, you cannot deduct gifts to political organizations or candidates.
Accurate record-keeping is important. As you make contributions throughout the year, you must keep records to prove the types of donations are you making. Regardless of the amount you donate, you will need a record if you choose to make any deductions.
The Bottom Line
Regardless of how you want to give your time and money to charities, it is always a good idea to sit down with a qualified financial planner. A financial planner can offer advice on the types of donations that would work best for you, your estate, and your future plans. They may also be able to help you find an organization that shares the same philanthropic goals and ideals as you.
Another resource that may be helpful when it comes to your charitable giving plans is Charity Navigator. This website will give you tons of options when looking for a charitable organization and makes it easy to find an organization that is not only legit but caters to the causes you want to support.