Many people focus on giving near the turn of the year. In addition to the holiday spending onslaught that starts with Black Friday sales events at shopping malls and online, the end of the year is also a popular time to make donations to charitable organizations. Not only do charities ramp up their fundraising efforts late in the year, but it's also the last chance to get potential tax benefits from charitable giving.
The laws governing charitable donations and taxes are somewhat complicated, and tax reform made some changes that will have an impact on those seeking to write off their charitable gifts. Below, we'll look at five things you really need to know in order to make your donations go as far as they possibly can -- both for the charity and for your own personal finances.
1. Only gifts to qualified charities are eligible for a tax deduction
Perhaps the most important thing for donors to know is that in order to claim a tax deduction for a charitable gift, you have to make the gift to an organization that qualifies as a true charity. Not all nonprofit organizations qualify for charitable status under Section 501(c)(3) of the Internal Revenue Code. For instance, gifts to political organizations, business leagues, social clubs, fraternal societies, and a host of other entities that qualify for nonprofit status aren't deductible.
To verify whether your gift will be tax-deductible, you can do a search at this IRS website to see if the entity to which you want to make a gift is on the list of qualified charities. That way, you'll be absolutely sure that writing off your donation won't trigger an audit.
2. You have to itemize deductions to get a tax benefit for a donation
Most people know that donations to charities are deductible, but not everyone appreciates that the deduction is only available to those who itemize on their tax returns. Those who take the standard deduction don't get any tax benefit from their donations.
That's a bigger deal this year than in the past, because tax reform boosted the amount of the standard deduction substantially in 2018 compared to 2017 levels. That will almost certainly result in fewer people choosing to itemize, and that in turn will give fewer people a tax benefit from their charitable giving.
3. You need acknowledgment of gifts of $250 or more
Most people give cash or checks as their charitable donations because it's simple. However, there are some requirements for gifts of $250 or more. In addition to the records you need to keep for any donation that prove that you made the donation, a $250 gift must get a written acknowledgment from the charity that indicates how much you gave and says whether you got anything in return from the charity. That in turn will help you figure out the net amount you can deduct, as you generally have to offset your donation by the value of what you receive from the charity in exchange for the gift unless it qualifies for an exemption.
4. Many gifts of property need more documentation
You can also donate property to charity, and in general, you can deduct its fair market value. Deductions of $500 or more require completion of IRS Form 8283, which requires some basic information about the donated goods. If you claim a deduction of more than $5,000, then you'll need a qualified appraisal of the property, unless it's a publicly traded security like a stock. Gifts above the $500,000 mark require you to attach the appraisal to your tax return.
Keep in mind that because of fraud concerns, gifts in special categories such as automobiles and other vehicles require special treatment. Your charity should be able to give you details on what you'll need to substantiate your donation.
5. Older individuals can make donations directly from an IRA
Finally, one choice that older Americans have it to donate money from an IRA. Those who are 70 1/2 or older can donate up to $100,000 to charity directly from their IRA. Although you won't get a tax deduction for doing so, you also won't have to include the withdrawn amount from your IRA as taxable income, as you would if you had kept the money yourself. This charitable rollover can be a great way to use excess retirement money that you don't need yourself to go toward a great cause.
Donating to charity is a time-honored tradition for many, and it's worth the effort to make it work both for the charity and for yourself. By knowing the rules governing charitable donations and your taxes, you'll be able to take maximum advantage of the Internal Revenue Service's generosity and do more good for the world.