The best tax breaks are ones that you would do even if you didn't get any financial benefit. For tens of millions of Americans, charitable giving is an essential element of their financial lives. When you add up gifts made to local causes and to charities with global scope, gifts through weekly checks and one-time text messages, and in-kind gifts or legacy bequests, estimates of U.S. charitable giving put annual totals in a range between $350 billion and $450 billion . Much of those gifts made their way onto federal tax returns and earned donors extensive tax breaks.
The benefits of giving to charity
Those who itemize their deductions are allowed to claim gifts to charity as one of their tax write-offs. To qualify, the charity must be a qualified organization under the Internal Revenue Code, which generally includes those organizations with religious, educational, scientific, or literary purposes that apply for tax-exempt status as an officially recognized charity. Gifts must be completed by the end of the year, and the maximum you can claim as a charitable deduction is up to 50% of your adjusted gross income for most organizations.
Charitable contributions are one of the most popular itemized deductions that taxpayers take. Almost 34 million Americans itemized charitable deductions during the most recent year for which IRS data were available, and the total claimed amounted to close to $195 billion. As a result, the average amount that taxpayers were able to deduct on their taxes because of charitable contributions was $5,343.
What people gave
By far, gifts by cash and check were the most prevalent. About 33.4 million Americans made such gifts, and they added up to $148.4 billion, or more than three-quarters of the total amounts claimed on tax returns.
The biggest reason is that gifts by cash or check are simple. They don't involve any extra hassle, and figuring out their value takes no effort at all. Even for gifts of more than $250, the documentation requirements for cash gifts are easier to follow than the corresponding guidelines for non-cash gifts.
Nevertheless, a substantial portion of gifts made to charity weren't by cash or check. More than 22 million Americans made such gifts in the most recent available year, and the IRS numbers make it clear that many donors gave both money and other gifts.
These other gifts came in several forms. Many people donate used clothes, vehicles, and other tangible items to charity with the intent that they go to people in need or end up being resold at thrift stores and other charitable retail outlets. For such items, coming up with an appropriate valuation is generally the driving issue, because you're only allowed to deduct the fair value of used clothing or other goods, not what you initially paid for it. Gifts over $500 require an additional form, and gifts above $5,000 require appraisals, with one exception.
That exception is for publicly traded securities for which a defined market value is available, and that is the other main category of noncash gifts. For securities you've held for longer than a year, you're allowed to deduct full market value even if your tax basis in the securities is lower. In other words, you get to avoid capital gains tax on your profits by giving appreciated investments to charity, and you get a full deduction for the higher value.
Get what you need
The key to taking a charitable deduction is making sure that the charity to which you make the gift provides appropriate documentation to substantiate the gift. Written acknowledgements from the charity itself are necessary for gifts of $250 or more, and some other form of verification, such as a bank statement or copy of your check, is needed for smaller gifts.
In addition, if you get something of value back in exchange for your gift, you can only deduct the net amount. So if you give $100 to charity and get an item worth $60 back, then your deduction will be only the difference of $40.
Giving to charity is an American tradition, and at tax time, it can pay off. By being smart about deducting charitable contributions, you can make your gifts go further.
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