From donating money or goods to your favorite charity to volunteering at a soup kitchen, charitable giving is a great way to help others year-round.
From a financial planning standpoint, charitable giving should be on your mind at the close of the year. That's because charitable contributions can impact your federal taxes. Many taxpayers itemize charitable deductions on their federal tax returns which may help them pay a lower tax bill (or even get a refund) in the spring.
Some types of charitable giving have different tax breaks than others and some may receive different types of deductions. No matter what type of charitable giving you prefer, it’s important to know the tax implications so that you can plan and budget for donations while knowing how your taxes will be affected.
- You can deduct charitable contributions and donations on your annual federal tax return.
- You may need a receipt from the qualified organization or charity in order to claim the tax deduction.
- Tax deductions vary based on the amount of your donation, the type of donation, and who the recipient is.
- Throughout the year, keep track of how much money you donate and what the fair market value of donated items are in order to be prepared for the next tax season.
Charitable Giving and Tax Deductions
Charitable giving can be deducted from your taxes. Because of this, 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
When it comes. to charitable contributions, you are generally limited to deducting no more than 60% of your adjusted gross income (AGI), though there may be lower thresholds depending on the type of donation. For example, if your AGI was $100,000, you couldn't donate and then deduct more than $60,000 in one tax year.
If you want to claim charitable contributions on your tax return, you usually need to itemize your deductions. However, for the 2021 tax year—the return you'll file in 2022—the IRS has a special provision that allows you to take the standard deduction and deduct up to $300 ($600 for married couples filing jointly) in charitable contributions to qualifying organizations.
Tax Implications on Various Donations
Cash donations are generally fully deductible for the exact amount you donated. If you donate more than $250, you’ll need a receipt. If you donate cash to a charity, rather than write a check or charge your 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 donating 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). Donating your stocks directly to a charity may 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 donate 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 donation and 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 donations made 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.
Frequently Asked Questions (FAQs)
How much charitable giving is tax deductible?
You can donate as much money as you want every year to charities, but you can only deduct up to 60% of your adjusted gross income (AGI) on your taxes. Qualified contributions are not limited to this amount; taxpayers can deduct qualified contributions of up to 100% of their AGI.
What is charitable giving?
Charitable giving is when you donate your money or property to an organization. You may not receive anything in return for your donation. The organization will count as a qualifying charity if it has a 501(c)3 status. That means you can deduct your donation on your federal taxes.