Charitable contributions are an excellent way to give back and make a real difference in the world. Donating to a qualified nonprofit benefits those in need while also reducing your taxes. But maximizing your deductions is no easy task. In this blog post, we’ll look at ten steps you can take to ensure that your charitable contributions are properly documented and maximize your tax benefits.
What is a tax-deductible donation?
A tax-deductible donation is a charitable contribution of cash or property to a qualified organization, such as a nonprofit religious, charity or educational group, that is eligible to receive a tax deduction. To qualify for a deduction, the donation must serve a charitable purpose and the recipient organization must qualify for tax-exempt status as determined by the Internal Revenue Service (IRS).
The amount you can deduct on your taxes is generally the fair market value of the property donated, or the cash value. However, the IRS may limit the amount you can claim on your taxes if the donation is part of a quid pro quo transaction or for certain types of donations. To maximize the amount of your tax deduction, be sure to save records of all payments, get a statement from the charity for donations of $250 or more, and make sure that the donation is eligible for a tax deduction.
10 Steps to Maximize Your Tax-Deduction Donation
Step 1: Figure out how much you need to give to charity to make a difference on your taxes
Figuring out how much you need to give to charity to make a difference on your taxes is a matter of analyzing your financial situation and understanding the tax laws that apply to charitable giving. Here are the steps to follow:
- Calculate your standard deduction amount. For 2022, the standard deduction is $12,950 for single taxpayers and married couples filing separately, $19,400 for heads of households, and $25,900 for joint filers. In 2023, the limits increase to $13,850, $20,800, and $27,700, respectively.
- Determine if your itemized deductions will be greater than the standard deduction. Add up all the deductions you plan to take and compare the total to your standard deduction. If your itemized deductions are greater than the standard deduction for your filing status, you should elect to itemize to reduce your taxes.
- Decide which non-profit organization you wish to contribute to. Make sure the charity is a 501(c)(3) public charity or private foundation.
- Donate and keep a record. When you make a donation, be sure to request a receipt from the charity and keep a canceled check or credit card receipt for your records.
- Determine the value of any benefits you received for your contribution. Subtract the value of any benefits you received for your charitable donation (for example books, tapes, meals, entertainment, and so on) before you deduct it.
- Be aware of the annual deduction limits for donations to public charities, including donor-advised funds. For contributions of non-cash assets held more than one year, the limit is 30% of your adjusted gross income (AGI). Your deduction limit will be 60% of your AGI for cash gifts.
- File your tax return. With your paperwork ready, itemize your deductions and file your tax return.
Following these steps can help you maximize your tax-deductible donation to charity and may help you reduce your overall tax bill. However, it’s always best to consult a tax professional to ensure your donation is in compliance with the tax laws that apply to charitable giving.
Step 2: Document your contributions
Documenting your contributions is essential if you want to claim a charitable deduction on your taxes. To document your contributions, follow these steps:
- Keep track of all donations, regardless of amount. This includes bank statements, credit card statements, receipts from the charity, and canceled checks.
- For cash or property donations over $250, you must get a written letter of acknowledgment from the charity. This must include the amount of the contribution, whether you received any goods or services in exchange, and a good faith estimate of the value of those services.
- If you are deducting at least $500 worth of non-cash donations, you must fill out Form 8283 and attach an appraisal of the items if they are worth more than $5,000.
- For donations made by payroll deduction, you must have documents from your employer showing the amount withheld and a pledge card from the charity stating that they do not provide goods or services for donations made by payroll deduction.
- For all donations, you must have documents showing the organization’s name, amount donated, and date of the donation. Bank records or receipts from the charity are acceptable forms of documentation.
By following these steps, you can successfully document your contributions to qualify for tax deductions.
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Step 3: Choose a qualifying organization to receive your donation
Step-by-Step Instructions on How to Choose a Qualifying Organization to Receive Your Donation:
- Ensure that the organization is a 501(c)(3) public charity or private foundation. You can use the IRS Tax Exempt Organization Search tool to verify an organization’s tax-exempt status and determine if it qualifies for deductible contributions.
- If you plan to take a charitable deduction for your donation, make sure that the organization serves a charitable purpose, as outlined by the IRS tax code. Eligible entities include organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports.
- Donations to nonprofit veterans’ organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations qualify, but only if the donations are designated for eligible purposes.
- For donations to federal, state, or local governments, the gift must be earmarked for public purposes (such as maintaining a public park).
- Once you’ve chosen an eligible organization, make sure to keep records of your contribution, such as a tax receipt from the charity or a bank record (such as a canceled check or statement).
- For non-cash donations, you may need to obtain a qualified appraisal to substantiate the value of the deduction you’re claiming.
- With your paperwork ready, itemize your deductions and file your tax return.
Step 4: Calculate the standard tax deductions available to you
To calculate the standard tax deduction available to you when making a tax-deductible donation, you’ll need to evaluate your filing status and compare it to the corresponding standard deduction amount for your filing status. For the 2021 tax year, the standard deduction amounts are: $12,000 for single-filer, $18,000 for head of household, and $24,000 for married couples filing a joint return.
Once you’ve determined your standard deduction amount, you’ll need to calculate the total itemized deductions you’re eligible to claim. Itemized deductions can include tax payments, medical expenses, and charitable donations. Bunching your charitable contributions with other types of itemized deductions is a strategy that can maximize the tax benefits of your generosity.
If your total itemized deductions are greater than the standard deduction, you should elect to itemize to reduce your taxes. You can claim a charitable donation on your taxes only if you itemize your deductions.
Finally, when filing your return, you’ll reduce your taxable income by subtracting the greater of either the standard deduction or your total itemized deductions.
We suggest you consult your tax advisor on ways to maximize the tax benefit of your charitable contributions.
Step 5: Consider making non-cash donations under $250 in order to take advantage of the reduced deduction amounts available in 2022 and 2023
In the 2022 and 2023 tax years, taxpayers may only deduct charitable contributions if they itemize deductions on Schedule A and may only claim charitable contribution deductions for cash contributions up to 60% of their adjusted gross income (AGI). For non-cash donations under $250, the deduction amount is reduced. Under the Tax Cuts and Jobs Act of 2017, the deduction limit for non-cash donations was reduced from 50% of AGI to 30% of AGI. This means that taxpayers can claim a deduction of up to 30% of their adjusted gross income for non-cash donations under $250, compared to the 60% limit for cash donations. Therefore, taxpayers may find that the deduction for non-cash contributions is less beneficial than for cash contributions, as the deduction amount is reduced.
Step 6: Review the form 8283 guidelines for non-cash contributions
The IRS requires that you fill out Form 8283 to claim a deduction for non-cash charitable contributions if the property has a total aggregate value of more than $500 for the year. To prove a charitable gift, you need to provide information such as what you gave, when, and to whom. For donations valued at over $500 each, you must also provide details such as when and how you acquired the item, its cost or adjusted basis, and more. Depending on the value of the donation, different substantiation requirements must be met.
Donations less than $250 require a receipt from the organization, between $250 and $500 require a “contemporaneous written acknowledgment” from the organization, donations over $500 to $5,000 require a contemporaneous written acknowledgment and filing Form 8283, and donations over $5,000 require a contemporaneous written acknowledgment, a written appraisal of the property, and filing Form 8283. For all donations, keep track of the information you need to prove a charitable gift.
Additionally, for donations worth more than $250, you must get a written letter of acknowledgment from the charity that includes the amount of cash you donated, whether you received anything from the charity in exchange for your donation, and an estimate of the value of any goods or services provided to the donor. For donations worth at least $500, you must also fill out Form 8283 and attach an appraisal of the property if it is worth more than $5,000.
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Step 7: Review the rules for taking a fair market value deduction for donating private corporation or C-corp shares to charity
If you are considering donating private corporation or C-corp shares to charity, you are eligible to deduct the full fair market value of the contribution if the recipient is a public charity. While most charitable organizations cannot efficiently accept and liquidate such assets, Fidelity Charitable has a team of in-house specialists who can help you make this donation. Generally, you will not pay capital gains taxes on the stock’s subsequent sale and you can deduct the full FMV, as determined by an appraisal. Here are the steps you should take:
- Ensure the non-profit organization is a 501(c)(3) public charity or private foundation.
- Keep a record of the contribution, such as the tax receipt from the charity.
- In some instances, obtain a qualified appraisal to substantiate the value of the deduction you’re claiming.
- Itemize deductions and file your tax return.
- If the donor receives an economic benefit in return for the gift, calculate the deductible amount by subtracting the fair market value of the benefit from the contribution.
Step 8: If you pay $500 or more for a ticket to a dinner fundraiser, can you deduct the full amount?
No. You cannot deduct the full amount of a donation made to a dinner fundraiser. Your deduction is limited to the amount that you paid for the ticket minus the value of the dinner. For example, if the dinner ticket is valued at $500 but the dinner itself is valued at $200, you can only deduct $300 from your taxes. Generally, the deductible amount will be indicated on the ticket, but the charity must also provide you with a written acknowledgement of your contribution that states you paid $500 but received goods or services worth $200. Furthermore, any other merchandise or services purchased for the fundraiser, such as wrapping paper or magazines, can only be deducted in an amount equal to the difference between their purchase price and fair market value. Money donations made directly to the charity are fully deductible, though donations that include goods or services received in return are not fully deductible.
Step 9: Keep an eye out for changes in charitable deduction limits
The potential changes in charitable deduction limits for 2021 offer an opportunity for charitably inclined individuals and families to maximize their tax benefits. The Coronavirus Aid, Relief and Economic Security (CARES) Act gave taxpayers who took the standard deduction in the 2020 tax year the ability to take an above-the-line $300 federal income tax deduction for qualified charitable contributions. This deduction was increased to $600 for 2021 for those who file jointly. In addition, the annual standard deduction amount has more than doubled since passage of the Tax Cuts and Jobs Act in December of 2017, which means that some taxpayers who historically itemized deductions may find that their total amount of itemized deductions does not exceed the standard deduction.
Furthermore, annual income tax deduction limits for gifts to public charities, including donor-advised funds, remain at 30% of adjusted gross income (AGI) for contributions of non-cash assets, if held more than one year, and 60% of AGI for contributions of cash. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years. As such, it is beneficial for taxpayers to take advantage of these deduction limits through utilizing both itemized and standard deductions, as well as through key charitable giving incentives in existing tax laws.
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Step 10: Utilize tax planning strategies to maximize your deductions
Tax planning strategies can be used to maximize deductions for a tax deductible donation. Here is a step-by-step guide:
- Contribute appreciated non-cash assets instead of cash: Donate appreciated non-cash assets held over a year instead of cash. This can eliminate capital gains tax, increasing the amount available for charities by up to 20%.
- Use a part gift, part sale strategy to offset capital gains tax from investment portfolio rebalancing: Over time, some assets that have gained in value will account for more of a portfolio, while other assets that have declined will account for less. To help offset capital gains tax, try a part gift, part sale strategy to help manage the portfolio.
- Group charitable contributions with other itemized deductions: Charitable deductions often work best combined with other deductions, such as tax payments and medical expenses. Grouping charitable contributions with these other types of itemized deductions is sometimes called “bunching” and can help maximize the tax benefits of your generosity.
- Time donations to take advantage of the standard deduction: If possible, time your charitable contributions to take the standard deduction one year, and then itemize deductions the next. This allows you to use the standard deduction one year and then itemize deductions the next.
- Establish a donor-advised fund: Establishing your own donor-advised fund is another way to maximize your charitable deductions. It’s essentially a savings account for charity. Donations are immediately deductible, and you can distribute from the account at your own pace.
No Charitable ContributionDocumentation, No Tax Deductible Donation
Just how picky is the IRS regarding the documentation it needs to substantiate charitable gifts? It turns out pretty picky, indeed.
Consider the case of Mr and Mrs Durden. In 2007, the Texas couple made $25,171 in contributions to their church. They had written checks documenting their donations, and the church sent them a written acknowledgment of receipt. But because the gift acknowledgment did not mention whether the Durdens had received any goods or services in exchange for their contributions as required by the IRS, the deduction was not allowed.
The couple then obtained a second receipt dated June 21, 2009, from their church which stated that they had not in fact received any goods or services in exchange for their donations. But, this second attempt was rejected as well. The IRS responded that it failed to meet their “contemporaneous” requirement which states that the letter or receipt must be received by the donor at the time of the donation. (This generally means before the tax return for that year is filed)Ultimately, the Tax Court upheld the IRS’s decision to refuse the deduction.
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By following these steps and consulting with a tax and financial professional, you can maximize the tax benefits of your charitable donation and make a significant impact on the lives of those in need.
Your donors and their gifts are the lifeblood of your organization. Return your appreciation of their support by ensuring that you are in full compliance with the IRS. Let us know other ways your organization substantiates donor gifts?
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