It’s that time of year again—the season of giving. The holidays are a perfect time to make donations to charity and create valuable tax savings in the process. But it’s not always as simple as making a donation and taking a deduction. Here’s what you need to know about charitable contributions and how to take advantage of valuable tax savings.
First, what is a deductible donation?
When donating to charity, it’s possible to reduce your taxable income. But, to do so, you have to donate to a qualified charitable organization and itemize your deductions on your federal tax return. Alternatively, if you take the standard deduction or donate to a non-qualified organization, you cannot deduct your charitable contributions on your federal tax return.
In addition, the IRS has certain limitations on how much you can deduct based on your adjusted gross income for that year. Generally, you can deduct between 30% to 60% of your adjusted gross income, depending on the type of donation and the receiving organization. Be sure to check the IRS website or consult with your tax professional for specific details.
How do I claim tax-deductible donations on my tax return?
The first step to claiming your tax-deductible donations is determining whether you are eligible to itemize deductions.
When you file your taxes, you can either take the standard deduction, which is available for everyone, or you can choose to itemize. When you itemize, you add up a percentage of your medical expenses, state and local taxes, home mortgage interest, and charitable donations. The result is the total of your itemized deductions for the year. Then, compare it to your standard deduction and choose the greater of the two.
For 2022, the standard deduction amount is $25,900 for joint filers, $19,400 for heads of households, and $12,950 for single filers. So, depending on your filing status (married, single, head of household), as long as your total itemized deductions surpass your standard deduction, then you will be able to claim your donations for the year. But, if your total itemized deductions do not surpass your standard deduction, then you will get a bigger benefit from taking the standard deduction and not claiming your charitable donations.
Talk to your financial planner about other options if you cannot itemize. For example, you can consider a bunching strategy. Bunching means that you make multiple years’ worth of donations in one year to increase your total itemized deductions, then take the standard deduction the following year. This way, you are able to maximize your total deductions across multiple years.
In addition, a Donor-Advised Fund (DAF) can be a valuable tool for your bunching strategy if you know you want to make a donation but aren’t sure which charities to support yet. DAFs are charitable accounts that you can contribute to and take a deduction now, but you have some additional time to choose which charities to support. Then, you can contribute from your DAF to your preferred charities over time.
In addition, if you are age 70.5 or older, you may consider a Qualified Charitable Distribution (QCD). This is a strategy where you donate directly to a charity from your IRA. QCDs have significant advantages because they can reduce above-the-line income and may help reduce or eliminate Medicare IRMA surcharges for high-income people. In addition, because they are an “above-the-line” deduction, you do not need to itemize your deductions to take advantage of the savings.
Some things to watch out for
Before making a charitable donation, ensure that your chosen organization is a qualified charitable organization. You can find the list of qualified organizations under section 501(c)(3) of the Internal Revenue Code or use the IRS online search tool. Most religious organizations, the Red Cross, nonprofit educational opportunities, and museums are qualified charitable organizations.
After making any donation, you’ll also need to document the contribution. Documentation comes in the form of bank statements, credit card statements, or a receipt from an organization. You will need to provide your tax preparer with a copy of these documents.
Some donations require additional documentation. For example, if you made a cash or property donation of more than $250, the IRS requires you to get a copy of a written letter of acknowledgment from the organization. The letter should include details like the amount of cash or property you donated, whether or not you received any gifts from the charity in exchange for the donation, and an estimate of the value of the services or goods you received. Be sure the date is included in the letter, and the date must be before December 31st of the tax year you are claiming the donation.
If you deduct at least $500 worth of noncash donations, you must fill out Form 8283. If the items are worth more than $5,000, you need to fill out Form 8283 and attach an appraisal of your items to the form.
Ask your financial planner for help.
Charitable donations can be highly rewarding. Donating to an organization you are passionate about feels fulfilling and meaningful, and it also comes with tax benefits. However, making sure you receive those benefits can be complicated. Working with your tax preparer or a trusted financial planner can ensure you make the best moves for your money during tax season. Talk to your financial planner today about how you can get started with your charitable contributions.