The holiday season is a time of gift-giving, and for many charitable organizations, December is the time when many of their most important donors make contributions. A big reason why so many people focus on the end of the year for their charitable giving is that they can often claim tax deductions for the amount of their gifts, and if you don't act before Dec. 31, then you miss out on the chance to save on taxes for the current year.
Giving to charity can produce big tax savings, but you have to follow the rules to avoid unforeseen surprises. Here, we'll look at five key facts about charitable gifts and taxes so that you'll know exactly where some of the common mistakes are that can cost you at tax time.
1. Don't itemize? Sorry -- you won't get a tax break
Charities tout the fact that donations are often tax deductible. But you need to realize that you can only actually deduct those donations if you itemize deductions as part of your tax return.
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Itemizing has becoming increasingly rare because of the tax law changes that took effect at the beginning of 2018. The size of the standard deduction almost doubled compared to 2017, and it increased slightly further in 2019. That's resulted in far more people taking the standard deduction, and in turn, it takes away the tax benefits of giving to charity for many taxpayers.
2. Make sure your charity really is a charity
There are many horror stories about con artists pretending to set up a charity and soliciting gifts. You can only get a tax deduction if you give money to a legitimate charity that has qualified for official status as what's known as a 501(c)(3) organization. Getting that treatment requires going through a process with the IRS, and it leaves out some entities that also make appeals for gifts this time of year, such as political campaigns.
If you want to know whether someone asking for money is with a legitimate charity, one step to follow is to check whether the organization is listed on the IRS website as qualifying for charitable status. If you don't, you could take the double-hit of having your money go to waste and failing to get a deduction for your gift.
3. Get basic documentation on any gift above $250
Even if you just make a simple cash gift, you'll need to have documentation from the charity in order to support your deduction. For small gifts, a check or bank statement is often enough, but charities are also required to give a written acknowledgment for gifts of $250 or more.
Also included on the acknowledgment is the value of anything you might have received in exchange. So if you gave $300 but got free concert tickets worth $100 as an incentive to give, then the acknowledgment should say so -- and you'll only be able to deduct $200 rather than $300.
4. Get more documentation if you give property
One commonly abused charitable gift involves the donation of property. As a result, there are special rules for donations of vehicles and other big-ticket items. In general, if you're looking to deduct $500 or more, then you'll need to complete an IRS form that asks for more information about your gift. Above $5,000, you'll typically need a formal appraisal unless the property is such that a value is readily available on a market. Stocks fit that last exemption. Usually, you'll just need to keep the extra documentation in case you get audited, but you should attach an appraisal if you're making gifts of half a million dollars or more.
5. Use your IRA to make gifts
If you're 70 1/2 or older, then you have a chance to make charitable gifts from an IRA and avoid the usual tax consequences. Donations of up to $100,000 per year are allowed. You won't get a deduction, but the tax benefit is similar, as you won't have to add the withdrawn amount to your taxable income. If you don't itemize, this can be the best way for older donors to get some tax benefits from making charitable donations.
Make your donations count
Giving to charity is an act of kindness, and getting a tax break is just an added bonus. By knowing these rules, you'll be able to avoid traps and make sure your gifts help the way you want.
