8 Tax Tips for Your Charitable Donations
Charitable donations are a great way to give back to the community and support important causes. However, it’s critical to be aware of the tax implications of your donations so you can get the most benefit from them. This blog post provides tips on making the most of your charity donations for tax purposes. Read on to learn more!
A great way to reduce taxes is through donations to charities. Not only can you help those in need, but some of the money donated can be deducted from your income tax return and won’t count towards your taxable income.
There are many rules when it comes to donating your money. Cash gifts have their own set apart from non-cash donations depending on how much you donate. There’s even more that can vary within those categories!
Check out these eight tips to ensure you’re getting the most out of your charitable donations.
Ensure that the organization is a qualified charitable organization.
A donation to a charity only qualifies if it is a 501(c)(3) organization, which means that the organization must be tax-exempt to qualify. You can search exempt organizations through the IRS website using the IRS Exempt Organization Database.
Do note that contributions made to political candidates or a specific person are non-deductible.
In the case of deductible charitable contributions, an organization goes through a process to acquire their status with the IRS and become “qualified.” Any organization you contribute to financially must provide information about their 501(c)(3) status regarding tax deductions.
If you’re donating anything other than cash, be sure to know the fair market value.
Tangible items such as clothes, furniture, or art can generally be deducted by using the total fair market value. However, certain goods may require an expert appraisal, such as artwork, where it can be hard to determine the actual worth. Without an expert appraisal, this could raise complications with claiming deductions.
Vehicles also have special rules when donating to a 501(c)(3) organization. Unlike clothes and furniture, you may not use the fair market value of your car as a charitable donation. However, there are exceptions to that rule so long one of these conditions applies:
- The charity keep and use the vehicle instead of selling it.
- The organization improves the donated vehicle before transferring/selling such as painting or adding new tires.
- The vehicle you donated is worth less than $500.
- The car was sold at a lower rate to a low-income individual.
The IRS takes a close look at these donations, and if you donated your car worth more than $500, then only the amount that the charity received from its sale can be claimed as a deduction.
Maintain Accurate Records
Be prepared to substantiate claims to a charity when you donate cash gifts. In other words, don’t deduct the spare change dropped in an organization’s collection bucket without proper documentation!
A receipt is an excellent way to keep track of your donations. In place of a receipt, banking records are also sufficient. If you contribute over $250, it’s best to have both a receipt and a banking record. A receipt from the organization must include the name of the charity, the value of the gift you donated, the date on which the donation was made, and a statement verifying that you did not receive any goods or services in return for the donated gift.
In the case of an IRS audit, you can only use the following documents to substantiate a monetary gift.
- A canceled check
- A written acknowledgment from the charity
- Bank statement
- Credit card statement
Always Use The Net Value of the Charitable Deduction
When donating to a charity, you should be aware of the benefits and taxes that come with it. For example, if you received benefits from your donation, like tickets to sporting events, you’re required to subtract that amount from your contribution when claiming a deduction on your taxes.
Let’s dig a little deeper, say you donated $450, but benefit by receiving “free” carpet cleaning worth $200, your tax deduction would be $250.
Know your Numbers and The Rules that Follow
Contributions above certain amounts have different laws. For example, a single donation of $250 must have a written receipt from the organization, and anything valuing $5000 or more must have an appraisal by an expert attached to your tax return. There are additional rules for non-cash donations totaling $500 or more. See www.irs.gov for a comprehensive list.
Consider Donating Appreciated Assets
If you contribute appreciated assets that have been owned for more than one year, the value of your deduction will typically equal its current market value.
For example, gifting stocks held for more than one year (one year and a day to be exact) can benefit you as the donor if the stock appreciated. You can deduct the total value of the current stock, and you won’t be taxed on any of the capital gains because you didn’t directly benefit from it.
The extra money from the appreciated stock is deducted from your taxes and the charity received a higher donation than what you invested. Everyone wins, except the IRS.
You can deduct indirect costs by volunteering your time.
You can deduct mileage and other out-of-pocket expenses related to any direct service you provide to a charity. This can include parking, tolls, travel expenses, lodging, and food.
Proceed with caution when you’re claiming these types of deductions. The IRS tends to scrutinize anyone who takes advantage of this opportunity. Honesty is the best policy and always remember to keep proper records. For example, keep a mileage log with up-to-date data to track mileage.
Consider rolling over IRA Contributions
The IRA Charitable Rollover is an incredible opportunity for people to give back and enjoy the flexibility of giving their donations to charity. Qualified individuals can contribute up to $100,000 from a traditional or Roth IRA without having to pay taxes when it’s withdrawn!
To qualify, you must be:
- 70 1/2 years old or older
- You must roll over your donations directly from your IRA account into a charitable organization.
- Obtain a receipt from each charitable organization you donated.
- A statement confirming you, as the donor, did not receive goods or services in receipt of the donation.
As an Enrolled Agent, I get asked, can you make charitable donations without itemizing them?
Yes, you can make charitable donations and still receive a deduction for your contribution. This is true even if you use the standard deduction. Single filers and Head of Household (HOH) can receive a deduction of up to $300, Married Filing separately (MFS) taxpayers can receive up to $150 deduction, and Married Filing Jointly (MFJ) can get up to $600 in deductions.
Tax season is a great time to reflect on charitable donations from the past year. By end of year, make sure you round up your receipts so you are ready to take all of the necessary deductions. We’ve provided eight tax tips to help you get the most out of your donations, so be sure to read through them carefully and consult with a qualified accountant if you have any questions. And don’t forget, if you need assistance filing your taxes or want advice about making charitable contributions, our team is here to help. Check out our service page and contact us today for more information.
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