Donating to charities not only benefits others but could also benefit you by reducing your tax bill. Charitable contributions to qualified charities may be deductible on your tax return if you itemize your deductions. Not all nonprofit organizations are qualified charitable organizations and not all donations are tax deductible. For example, political contributions or donations made directly to individuals in need are not tax deductible donations. Donations to foreign charities are also not tax deductible unless you donate to organizations that also have an American branch. Keep in mind if you receive goods and services such as merchandise or tickets to a game because of your contribution, then you can deduct only the amount that exceeds the fair market value of the benefit received.
Types of Donations
Cash – Cash donations are generally deductible in full, up to 50% of your Adjusted Gross Income (AGI); unless you donate to a private foundation, in which case the limit is 30% of your AGI. If you contribute more than the limit in a given year, the excess contribution may be carried over for five years.
Non-cash – Non-cash donations include, but are not limited to, clothing, furniture, household items, vehicles, collectibles, and appreciated assets. It is important to note if you have appreciated property, it is more advantageous for you to donate the property directly to a qualified charitable organization of your choice to avoid paying tax on the appreciation. For example, if you bought IBM shares for $500 more than a year ago and now the shares are worth $1,500, then you can deduct $1,500 if you donate the shares to a qualified charitable organization. If you were to first sell the shares and then donate cash, you would have pay capital gains tax on the appreciation. The contribution of appreciated assets is a win-win for both parties. Keep in mind the contribution of appreciated property has a 30% AGI limitation for donations to public charities and 20% AGI limitation for private foundations.
You must have a bank record or written communication from the charity for any charitable contribution to claim a deduction on your tax return. If you donate clothing, furniture, books, or any other household items, they must be in good condition or better to claim the deduction. You can estimate the FMV of the items donated that are less than $5,000, but anything greater than $5,000 requires an appraisal (except marketable securities because the information is readily available).
Donor-Advised Funds – You can create a donor-advised fund by making an irrevocable contribution to the fund. This enables you to claim an immediate tax deduction for the contribution but allows you to defer the actual disbursement of the funds to the charity of your choosing. This can be a useful strategy if your income is very high in one year and you want to make a significant charitable contribution to charity, but you do not know which charitable organization you would like to support. The money in the fund grows tax-free and you can recommend grants from the account to qualified charities at any time afterwards. No charitable deduction is allowed when the funds are disbursed from the donor-advised fund.
IRA Qualified Charitable Contributions – If you are over the age of 70 1/2, you can make a qualified charitable distribution (up to $100,000) from your Individual Retirement Plan (IRA) directly to a qualified charitable organization. A direct transfer will count towards your Required Minimum Distribution (RMD). By doing this, you do not include the distribution in your AGI. For example, if your RMD is $120,000 and you want to contribute $50,000 to a charity this year, you can have the money directly sent to the charity which will leave only $70,000 that will be taxed. Had you first received the distribution and then made a contribution to a charity, you would have been required to pay tax on the entire $120,000. Directing your distribution to charity gives the same amount of money you intend to give to a charity and it could potentially reduce your taxes by allowing more of your deductions that are subject to 2% AGI limit.
Travel Expenses – Though you cannot deduct the value of your time spent performing volunteer work for charity, you might be able to deduct expenses directly connected with those services. Examples include car expenses, lodging, transportation, cost of meals, etc. Note if the expenses are $250 or more, you must get an acknowledgment from the charity.
Donating to a charity is a great way to help society and it can also help you reduce your tax liability if you plan correctly. If you donate to a qualified organization and the donation is within the annual limit, you can deduct your contribution in full if you are itemizing deductions — just make sure you can support the amount you claim.
For more information on charitable contributions, please contact our tax team by calling 770.396.2200.