Every year, charitable individuals and households make one saying a reality when they make a donation to nonprofits: It’s better to give than to receive. However, when you give, the IRS also allows you to receive something in return: Charitable tax deductions. When you donate money to a qualifying public charity, you can deduct up to 60% of your income, alleviating your tax burden. Here’s what you need to know.
If you’re planning on making a charitable contribution, a financial advisor can help you identify and claim any eligible tax deductions.
What Are Charitable Tax Deductions?
Charitable tax deductions are the tax benefits individuals and businesses may receive for donating to qualifying charitable organizations. Specifically, donations to registered nonprofits recognized by the IRS can be deductible. When you donate money or property to a qualified nonprofit organization, you can deduct the value of your donation up to IRS limits from your taxable income when filing your income tax return as long as you itemize deductions.
The IRS provides guidelines on which organizations qualify for tax-deductible contributions. Generally, contributions to 501(c)(3) organizations, which include most charitable and religious organizations, educational institutions, foundations, fraternal societies, and certain other nonprofits, are eligible for tax deductions.
Deducting your charitable donations is only possible when you itemize your deductions. As a result, taking the standard deduction means your charitable donations for the year don’t impact your taxes.
Charitable Tax Deductions Limits
If you decide to itemize your deductions, the IRS limits how much charitable deductions can lower your taxes. Specifically, you can deduct charitable contributions of 20% to 60% of your adjusted gross income (AGI). The percentage of your deduction depends on the charitable activity. For example, you can deduct contributions to Israeli charities up to 25% of your AGI if you have income from Israeli sources.
Your AGI is your annual income minus specific deductions such as student loan interest, certain retirement account contributions, and a portion of self-employment taxes.
Here’s an example of how the limit works: If your AGI is $60,000, the maximum amount you can deduct for charitable contributions is $36,000 ($60,000 * 0.60). So, if you donate that much, you can deduct that $36,000 by itemizing your deductions.
Fortunately, if your contributions exceed the 60% limit, you can deduct the excess amount for up to five years. Doing so is called a carryover deduction because you bring a previous year’s deductions into the current year.
Using the previous example, say your charitable contributions are $45,000. You deduct $36,000 from this year’s taxes, with $9,000 left over. As a result, you may be able to deduct this remaining $9,000 when you file next year.
How Tax-Deductible Donations Work
Taking a charitable deduction means more than giving a friend or family member a couple of dollars. Here’s the process for receiving a deduction for charitable activity.
Make a Qualifying Donation
To benefit from tax-deductible donations, it’s essential to contribute to a qualifying organization. The IRS defines eligible organizations as registered 501(c)(3) nonprofits. These include charitable, religious, educational and certain other nonprofits. Before making a donation, verify the organization’s status to ensure your contribution qualifies for a tax deduction.
Record Your Contributions
Keeping detailed records allows you to accurately report your donations and deduct the correct amount from your taxes. Otherwise, you won’t be able to back up your claim for a deduction if the IRS audits your tax return.
Receipts, bank statements, credit card statements and canceled checks can be adequate proof for smaller donations. However, cash donations of $250 or more require a written letter of acknowledgment from the nonprofit that received the donation. Non-cash donations of between $250-$500 (in total) also require written confirmation, such as receipts. Additionally, you must fill out Form 8283 to claim total noncash donations worth more than $500.
Include Volunteer Activity
While you can’t deduct the value of your time when volunteering, certain expenses related to volunteer work may be tax-deductible. These include out-of-pocket expenses for transportation and supplies directly related to your volunteer activities. Keep track of these expenses (such as a detailed mileage log) to ensure a maximum deduction.
Remember the Tax Deadline
Claiming deductions depends on when you made them. Specifically, December 31 marks the end of the year and the last day charitable donations count for that tax year. So, donating from January 1, 2023, to December 31, 2023, means you can claim deductions when you file your 2023 taxes in April 2024. However, a donation made on January 1, 2024, isn’t deductible until April 2025.
Additionally, how you give affects the date of your donation. Here’s a breakdown of when each donation counts:
- Check: The day you mailed the check is the date of the donation. So, if you mail it in 2023 and the nonprofit receives or cashes it in 2024, it still counts for 2023.
- Credit card: The day your credit card company registers the charge (usually, this is the same day you make the donation). When you pay the credit card bill doesn’t affect the date of the donation.
- Stock: The day the trader or broker transfers the gift to the nonprofit.
Remembering these boundaries can help you plan strategically when considering how giving affects your deductions. If you’re considering donating appreciated assets, such as stocks, consulting with a tax professional is recommended.
Claiming Charitable Tax Deductions on Your Tax Return
Claiming charitable tax deductions means itemizing your deductions when you file. Remember, doing so means giving up the standard deduction. As a result, itemizing only makes sense if it provides a higher total deduction. Because the standard deduction is sizable, the average taxpayer usually benefits from taking it instead of itemizing.
The following standard deductions by filing status for the 2024 tax year can help you see if itemizing is better for your situation:
|2024 Standard Deduction
|Single & married filing separately
|Married filing jointly/qualified widow(er)
|Head of Household
If you calculate your deductions and see that itemizing is better, you’ll need to complete Schedule A when you file. This form allows you to list your deductions and ensure you receive the most tax benefits from your return.
How to Maximize Tax Breaks Through Giving in 2024
Charitable donations let you support a cause close to your heart and help others when they need it most – and doing so should always be the basis for giving. However, when you give, a secondary benefit is how your tax return improves for that year. These three strategies can help you maximize the tax breaks from your charitable giving.
Open a Donor-Advised Fund
A donor-advised fund is a philanthropic vehicle that allows you claim a sizable charitable contribution for the year you set it up. You’ll transfer a lump sum to the donor-advised fund account, which then holds the money until you decide how you want to give the money. Even if you don’t donate from the fund that year, you still reap the tax benefit of a charitable gift, but not again in the years when the funds are distributed.
Donor-advised funds can provide a rate of return, allowing the lump sum to grow until you donate it. However, the money in the account can’t be returned to your possession; it must be given to a qualified charity.
For example, say you have $5,000 you’d like to donate. You aren’t sure which causes you want to support, but you don’t want to lose the tax benefit of donating during the current tax year. So, you set up a donor-advised fund and transfer the $5,000 into it. This way, you can claim a $5,000 donation on your tax return and can take your time researching nonprofits.
Remember, you can arrange the donor-advised fund to transfer funds to multiple charities. You can also deposit stocks into the fund. Additionally, you can set the fund to continue making distributions from your estate after your death.
Donate Appreciated Stock
Stock appreciation can cause unwanted tax consequences because of the capital gains taxes incurred when you sell the asset. As a result, donating appreciated stock is a way to put the gains to good use and eliminate tax implications. When you donate stock that has increased in value, you can benefit in the following ways.
- Avoid Capital Gains Tax: By donating appreciated stock directly to a qualified charity, you can avoid paying capital gains tax on the appreciation. Instead, the charity takes ownership of the stock and receives its monetary value upon selling it.
- Receive a Deduction: If you’ve held the stock for at least a year, you can receive a tax deduction for its fair market value at the time of the donation. This way, you reduce your tax burden while supporting your favorite nonprofit. Remember, depositing the stock into a donor-advised fund also counts as a donation.
Make a Qualified Charitable Distribution
Taxpayers who are age 73 or older and have traditional IRAs or 401(k)s must take required minimum distributions (RMDs) from these accounts even if they don’t need the money. Not taking your RMD for the year incurs heavy financial penalties. Fortunately, you can direct your RMD to a charity, transforming the money into a qualified charitable distribution (QCD).
The benefit of this strategy is twofold. First, a QCD means the money that would have hit your account is a charitable donation, so it doesn’t count towards your taxable income for the year. Second, it satisfies some or all of your RMD threshold, depending on the amount.
Strategically utilizing charitable tax deductions can significantly impact your philanthropic efforts and your tax breaks. By contributing to qualified organizations, keeping meticulous records and aligning your giving with tax-smart strategies, you can maximize the benefits of your charitable donations. Ultimately, while the primary motivation for charitable donations should be the desire to support meaningful causes, leveraging the deductions the tax code offers means you can make more informed and impactful decisions in your philanthropic journey.
Tips for Charitable Tax Deductions
- A financial advisor specializing in taxes can help maximize your return. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While giving cash is a straightforward way of making a donation, other assets are donatable as well. Consider donating real estate if you’re strapped but still want to make a difference.
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