When you make a donation to a charity, you can feel good about contributing to a need. As an additional benefit, you can also use your charitable donations to reduce your tax bill.
You can deduct charitable donations of both money and goods given to qualified organizations to lower your taxable income. Of course, some rules apply, with the main one being that the charity must be designated as a 501(c)(3) organization by the Internal Revenue Service (IRS).
Key Takeaways
- Charitable giving can help those in need or support a worthy cause; it can also lower your income tax expense.
- Eligible donations of cash, as well as items, are tax deductible, but be sure that the recipient is a 501(c)(3) charitable organization and keep your donation receipts.
- The amount you can deduct in a given year is subject to limits, but you can carry forward some of those unused deductions over a period of five years, again subject to eligibility.
A Look at the Rules
Deductions for charitable donations generally cannot exceed 60% of your adjusted gross income (AGI), though in some cases, limits of 20%, 30%, or 50% may apply. In order to claim the deductions, you need to itemize deductions on your taxes instead of claiming the standard deduction. If you choose to go this route, be sure you keep your donation receipts.
You can also carry forward some of your unused deductions over a period of five years, if they are the result of eligible donations.
Let’s dive deeper into the details for how to get the most out of your charitable giving when it comes to tax time.
1. Plan Your Giving
Strategizing your charitable giving can help you maximize your tax deductions. There are many tax-planning opportunities with charitable donations that you can take advantage of to give you the largest deduction possible. For example, if you know that you will be in a higher tax bracket next year than you were this year, you may want to wait and take the deduction next year, when it will be greater.
Large charitable gifts should also be planned carefully in order to maximize the deduction and minimize your out-of-pocket cost. For example, if you have $25,000 in taxable income this year and donate 60% of that, or $15,000, to charity, you will receive the deduction for the whole gift, and what you save on taxes lowers the cost of the gift to you. However, if you donate more than $15,000, you'll have to carry over the excess to the next taxation year, and you won’t have the benefit of that portion of the deduction for another 12 months.
Keep in mind that the organization you donate to must have 501(c)(3) status from the IRS. Just because an organization is tax-exempt, doesn’t mean it’s been granted this status.
2. Get a Receipt for Your Donations
You need proof of charitable contributions in order to claim them with the IRS. Any cash donation of $250 or more requires written acknowledgment of the gift from the organization, which must include whether you received goods or services in exchange for your contribution and, if you did, an estimate of that value. For smaller cash donations you only need a bank record or a simple receipt from the charity.
If a donation of less than $250 is made via a payroll deduction, you need a pay stub, a W-2 form, or some other record from your employer that shows the date and amount. Another option is to receive a pledge card from the organization that states that it did not provide goods or services for the amount deducted.
Getting a receipt every time you donate strengthens your tax records if you are audited. If you make a large donation and don't have (or can't find) the receipt, the donation will almost certainly be disallowed on audit. For this reason, it's best to set up a record-keeping system at the start of each year.
Set up your record-keeping system at the beginning of each year and file all donation receipts in the same place. Getting a receipt every time you donate strengthens your tax records in case you are audited.
3. Donate Household Goods
If you want to save money on taxes, be charitable, and clean out your basem*nt at the same time, you may want to consider donating household goods. There are many charities and church organizations that accept donations of clothing and household items to give away or resell to those in need.
The rules for non-cash donations are a little stricter than those for cash ones. You are allowed to donate goods at their estimated value at the time of donation, not at the value they had when first purchased. For donations worth less than $250, you must get a written receipt from the organization as well as prepare a list of items donated and their value.
For donations of $250 to $500, you need a “contemporaneous written acknowledgment” from the charity. For donations above $500 but below $5,000, in addition to having the acknowledgment, you must fill out IRS Form 8283. Donations of goods worth more than $5,000 require an official appraisal on top of the acknowledgment and Form 8283.
An IRA owner over age 70½ can donate up to $100,000 from their IRA directly to a charity, tax-free, and for those age 73 and over, the donation will count toward their required minimum distributions (RMDs) for the year. This is what's known as a qualified charitable distribution, or QCD.
4. Don’t Forget Vehicle Expenses
If you volunteer for a charitable organization and have unreimbursed car expenses, you can claim them as a charitable gift. For example, if you volunteer weekly at the same homeless shelter over the course of the year, the mileage and gas you spent taking part in that may make you eligible for a deduction. The miles that you drive in the year for the charity should be logged in a mileage log, including the date of each trip, the purpose of the trip, and the total miles driven.
You can claim either actual expenses or a mileage allowance of 14 cents per mile. The latter is much easier to track and report. Before filing, you must also get written confirmation from the charity for the volunteer driving.
5. Track Your Carryforwards Carefully
If you can't deduct all of your charitable donations in a year because you have hit the maximum percentage of taxable income, you can carry them forward for up to five years, after which time they expire and you can no longer use them. A tax loss carryforward, otherwise known as a carryover, is a provision that allows a taxpayer to move a tax loss to future years to offset a profit.
If you have tax carryforwards, track them carefully, so that you use them up before expiration. If it seems like you’re at risk of losing a balance carryforward, consider holding back on the current year’s donations and using up the older ones . Otherwise, you may lose a deduction once you hit the five-year limit.
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Can I Get a Tax Deduction for Donating to a Tax-Exempt Organization?
Not necessarily. In order for your donation to be tax deductible, it must go to a group that has had 501(c)(3) status conferred on it by the IRS. Not all tax-exempt organizations are granted this status.
Is There a Limit on the Amount of Donations That Can Be Deducted?
Yes. The limit is usually 60% of your adjusted gross income for the year; however, in some circ*mstances that limit can be reduced to 50%, 30%, or even 20%.
What Do I Do if I Have Donated More Than the Annual Limit?
The IRS allows you to carry forward deductions for up to five years after the year in which you made the donation. If you do have carryforwards, it’s important to use up the older ones first before claiming current ones, otherwise, you may lose a deduction once you hit the five-year limit.
The Bottom Line
Donating to charity is a great way to contribute to society and save money on your taxes at the same time. It’s a win-win situation. However, you must make sure you follow IRS rules and keep careful records to both substantiate your reported donations and to help you keep track of how much you have given, so you can get the best tax advantages.
