Sharing your good fortune with others by donating to charities can generate a host of benefits. Not only can it spark that warm feeling inside of knowing that you’re making a difference; giving has also been shown to have the power to convey important health advantages like lower blood pressure, reduced stress, increased self-esteem, and relief from depression and anxiety. These are invaluable benefits that money simply can’t buy.
Claiming Tax Deductions for Charitable Contributions
When planned and documented correctly, charitable donations can also provide significant tax advantages. If you’re considering making large donations to support your community, the environment, or other causes you care about, it’s important to first take the time to understand how to claim the greatest possible tax benefit from your gifts. Making the most of available tax deductions can enable you to give more by leaving more in your pocket after paying your tax bill.
When claiming tax deductions for your charitable gifts, it’s important to stay abreast of current IRS guidelines, since tax rules can change significantly from one year to the next. Follow these tips for ensuring your donations qualify for the charitable contribution deduction.
Donate to qualified charities.
For your donation to be tax deductible, the receiving organization must qualify for tax-exempt status under the Internal Revenue Code. Most qualified organizations advertise this tax-exempt status; however, you can also use this IRS lookup tool to determine whether a specific organization is qualified. Contributions to individuals, non-qualified organizations, and some donor-advised funds are not deductible.
Document your tax-deductible contributions.
In general, money or property given to qualified organizations are tax deductible. If you receive something in exchange for the contribution, however, then the fair market value of what is received must be excluded from the deduction. For example, if you paid $500 for tickets to a charity gala that included dinner and events with a combined fair market value of $200, then $300 of the ticket price would be tax deductible.
Deductible Portion of Quid-Pro-Quo Donations
If you’ve received anything in exchange for any of your donations, be sure to subtract the fair market value of what you got in exchange from the total donation. If the deductible portion of such a quid-pro-quo contribution exceeds $75, then the charity must send you a disclosure statement providing a good faith estimate of this fair market value. Keep the disclosure statement for documentation during tax filing.
Value of Donated Items
If you donate property other than cash to a charity, then the fair market value of that property at the time it was given (which may be different from its purchase price) can be claimed as a charitable deduction. For this reason, donating appreciated assets like shares of stock can be an effective way to claim a large tax deduction while diversifying out of a concentrated holding. The IRS publishes guidelines for determining the fair market value of donated goods. Be sure to document the items you donate along with good faith estimates of their value.
Costs Related to Volunteer Activities
U.S. taxpayers may not deduct any amount for time spent volunteering for charitable organizations. However, out-of-pocket expenses associated with volunteer work for qualified charities do qualify for the deduction. For example, a volunteer could claim a mileage deduction for trips made to volunteer work sites or the cost of a uniform that must be worn while performing volunteer work. However, the IRS specifically stipulates that childcare expenses do not qualify, even if you’re unable to volunteer without incurring them. If you perform volunteer work, document any deductible out-of-pocket expenses you incur in the process.
Itemize your deductions and supply supporting documentation.
To claim a charitable donation deduction for 2023, you must itemize your tax deductions using Schedule A of Form 1040. For this to provide a net tax benefit, the total of your itemized deduction generally needs to exceed the standard deduction. In 2023, this is $13,850 for single filers and $27,700 for joint filers. Other costs that can be itemized as tax deductions include medical expenses that exceed 7.5% of AGI, state and local taxes, home mortgage interest, and losses from federally declared disasters.
To claim donations of cash or other property worth more than $250, you must obtain a letter of acknowledgement of the gift from the receiving charities before you file. Additionally, you will need to file Form 8283 for non-cash donations of more than $500. Some high value donated items also require qualified appraisals to be tax deductible.
Making the Most of Tax Benefits
There are limits to how much you can deduct as a result of charitable donations. In general, the deduction is limited to 60% of the taxpayer’s AGI. However, depending on the type of contribution made and the organization that receives it, deductions may be limited to 50%, 30%, or even 20% of AGI. Additionally, how you give large gifts to charity can often make a tremendous difference. For example, various charitable trust structures are often used by high net worth taxpayers to meet specific financial goals. For advice on structuring your donations for the largest tax benefit, work with a trusted tax professional.
WRP Wealth management specializes in working with employees before, during, and after their companies’ IPOs to make the most of their financial opportunities. We can work with you to create a giving strategy that supports the causes that are near to your heart as well as your and your family’s financial wellbeing. For more insights, browse our blog or our free resource library.