With the holiday season upon us and the end of the year rapidly approaching, you might be feeling a bit more charitable than usual. Not only is giving to charity a nice thing to do, but in some cases, it can be a smart tax move. Here are a few things you ought to know if you're planning to reap some tax benefits from your donations.
1. You can write off charitable donations on your tax return -- but only if you give to qualified charities
Though your primary goal in giving to charity might be to help the less fortunate, there's nothing wrong with lowering your taxes in the process. Any time you donate money to charity, you can take a deduction for that amount provided you retain a receipt, and your tax savings will be a function of the amount you give, coupled with your effective tax rate. In other words, if you donate $500 and your effective tax rate is 30%, you'll shave $150 off your tax bill.
This allowance, however, only applies to qualified charities, so let's talk about what that means. A qualified charity is one that's recognized by the IRS as tax-exempt. Common examples of qualified charities include:
- Educational non-profits
- Healthcare non-profits
- Religious institutions
- Volunteer emergency and fire squads
If you're not sure whether an organization you're looking to donate to counts as a qualified charity, ask. You should also be aware that certain donations, though generous in their own right, don't count as tax-deductible. These include gifts to:
- Sports teams
- School clubs
- Individuals in need
That last one is a little tricky. Say you hear about a local child who was injured in a car accident, and you donate to a neighborhood effort to aid in their recovery. Though giving that family money is an extremely kind gesture on your part, you can't take a deduction for it since that child/family doesn't count as a registered charity, .
2. You'll need to itemize to deduct charitable contributions
We just learned that the money you give to qualified charities can be deducted on your tax return -- but that's only if you itemize deductions, in general. The majority of people who file tax returns don't itemize, but claim the standard deduction, which, for the current tax year, is $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly.
Does it make sense to itemize if you give a lot of charity? It depends on the extent of your generosity and your other deductible expenses. If you pay a lot of mortgage interest and high property taxes, for example, then under the current system, you'll often do better itemizing over taking the standard deduction. But if your charitable donations are the only items you're able to deduct, then you'll probably be better off sticking to the standard deduction.
This isn't to say that you shouldn't continue being charitable. Just know that you may not get a tax break for it.
3. You can deduct contributions even if you get something in return
It's often the case that in exchange for the money you donate, you receive something back from the organization in question. For example, you might donate $1,000 and receive a ticket to a catered dinner or gala. If that's the case, you can still take a deduction for that donation -- but not the full amount. Rather, you'll need to determine the fair market value of what you received in exchange for your donation, and then subtract it from the total amount you gave.
Here's an easy example. Let's say that, in exchange for a $500 donation, you receive a pair of tickets to a local theater production worth $50. In that case, you'd simply subtract $50 from your total donation and write off the remaining $450.
4. You can deduct non-cash donations, as well
Just as you're allowed to deduct cash donations, you also can take a deduction when you donate goods to a qualified charity, whether it's clothing, toys, or furniture. To take that deduction, however, you'll need an itemized receipt documenting what exactly you gave away. Furthermore, you can only deduct the fair market value of those items, which is the amount they'd go for in their current condition.
Imagine you bought a table five years ago for $800 that you no longer need. If that table has since acquired its share of dings and scratches, it only may be worth $200 at this point, in which case you'd take a $200 deduction, not $800.
Figuring out fair market value can be tricky, but it's critical to get it right. If you're audited and the IRS determines that you took too high a deduction for the goods you gave away, you could wind up getting penalized. You can use this guide to get a basic sense of how common household items are valued, but if you're giving away something substantial, like a car, you may want to consult a tax professional.
If the holidays are inspiring you to give more, there could be a nice tax break waiting for you in return. No matter what sort of giving you do this season, be sure to keep accurate records so that if you are eligible for a tax deduction, you get that amount right.