How Charitable Contributions Can Benefit You at Tax Time
How Charitable Contributions Can Benefit You at Tax Time
Charitable donations are an important way to give back, and they also can play a helpful role as deductions against your income taxes. To make the most of these tax deductions, you need to understand what the IRS does and does not allow, as well as how to keep good records.
What Is a Charity?
For your donation to count as a tax deduction, you must give it to an organization that is qualified as a charity by the IRS—the IRS keeps a list of exempt organizations you can search if you are unsure.
Charitable, religious, and educational institutions are commonly qualified charities—some of which may also be called 501(c)(3) organizations, referencing the Internal Revenue Code section that governs these tax-exempt organizations.
What Counts as a Charitable Contribution?
Charitable gifts are usually cash or personal property, but charitable deductions can also be things like stocks or bonds or real property.
Your time is not a charitable deduction, no matter what skill set you have or what expertise you bring to the table. You can, however, deduct your transportation costs—such as public transportation or a specified cents-per-mile when using your own car—and any costs you incur to do qualifying volunteer work, such as buying supplies or a uniform, or paying for parking.
Valuing Charity Donations
The valuing of charitable contributions can be tricky:
- If you give cash, however, that's easy.
- If you give stock or bonds, the donation equals the current value of the item.
- If you give used property, the rule is that you can deduct the fair market value of the item—what someone would actually pay for it.
- If you make a charitable contribution and receive something of value in return—like a tote bag or tickets to an event—then the value of the reward must be deducted from the value of your gift.
- If you give a gift to a college or university in return for the right to buy tickets to a sporting event at that institution, you can deduct only 80 percent of your contribution.
In the eyes of the IRS, it's not enough to give a charity gifts. You must also have proof that you made donations to charity, in order to be able to claim your tax deduction. This means you need to keep a receipt, cashed check, bank statement, or payroll deduction record.
When you get a receipt from the organization, it must list the organization's name, the date of the donation, and the amount of the charitable gift.
You must have a record for every donation, even a dollar bill you put in the Salvation Army bucket or in your church collection plate for it to be qualified as charitable giving by the IRS.
If a single donation is over $250, then you must have a receipt from the organization (even if you also have a cashed check or bank statement to prove it) in order to qualify for a charitable donations tax deduction. If your charitable donation is more than $250, then your receipt must also show whether the organization gave you anything in return.
Any donation you make within a calendar year counts for that tax year. If you make a donation using a credit card, the donation counts on the day it is made, not the day you pay your credit card bill. Similarly, the day you write a check counts as the date that contribution is made.
When you give away appreciated property—property that is worth more now than when you bought it, such as your house—giving it to a charity allows you to avoid being taxed on the appreciation. If you had sold the house and written a check for the same amount to the charity, you would have been taxed on that appreciation, but if you give away the appreciated property, you get the deduction for the full amount of its value without ever having been taxed on it.
When you donate a car that is worth more than $500—and the charity then sells the car—the amount you can deduct is limited to how much the charity sells the car for at auction. If the charity keeps the car to use, you can deduct its fair market value.
While it might be tempting to donate all the things you might otherwise throw out, the IRS only allows you to deduct items that are in good condition or better, so your stained T-shirt should go in the trash instead of the donation bag.
How Much Can You Deduct?
You are allowed to deduct up to 50 percent of your adjusted gross income (AGI) when you are giving to religious groups, public charities, and colleges.
If you are giving to other nonprofits—such as fraternal organizations—the cap may be lower, so check with your tax preparer.
If you are giving away appreciated property, then you can deduct up to 30 percent of your AGI.
If you had more charitable contributions than are allowed in one tax year, you can carry them over to the next tax year.
How to Take the Deduction
To take a charitable deduction on your taxes, you must file Form 1040 and itemize your deductions on Schedule A.
If you've given a total of more than $500 in noncash contributions, you must complete Form 8283.
If you've given a single item or group of similar items whose total value exceeds $5,000 (except publicly traded securities), then you must provide an appraisal.
The tax bracket you are in will determine how much you benefit from the charitable deduction. The higher your bracket, the more tax you are paying on your income, so a donation will save you more. For example, if you are in a 33% tax bracket, a gift of $100 effectively will save you $33 on your taxes because you will avoid the tax associated with that amount. If you are in a 25% bracket, donating $100 effectively saves you $25.
Charitable deductions can be a great way to do good, while reducing your income tax burden.
If you have questions about charitable contributions and want to speak to a tax professional, LegalZoom can help. Sign up for the personal legal plan for access to a tax professional who can give you tax advice regarding charitable contributions.