Dangling the possibility of a tax deduction is a key tool that nonprofits use to entice potential donors. You should never donate simply for the write-off, but you might as well be strategic about the donations you would make and the causes you would support anyway.
Deductions against individual income tax for charitable contributions are allowed under section 170 of the Internal Revenue Code (“I.R.C.”). Organizations eligible to receive tax-deductible contributions are described in I.R.C. § 170(c), which tracks the definition of tax-exempt organizations found in I.R.C. § 501(c)(3). Read on for some tips to maximize your charitable contributions deductions, and check out IRS Publication 526 for more details.
The keys to personal deductions for charitable contributions are verification, documentation, and timing. First, verify that a potential donation recipient is eligible to receive tax-deductible contributions. The Internal Revenue Service maintains a search tool for this purpose. Qualified organizations will also usually be happy to provide verification of their tax-exempt status upon request. Donations to ineligible organizations, or to individuals directly or indirectly, do not qualify for a deduction.
Next, you must document your contributions. It probably goes without saying that an expense you cannot prove can be disallowed. Never be afraid to take a deduction to which you are entitled—just make sure you can back it up! Any contributions of $250 or more must also be supported by written documentation from the recipient. Each contribution is separate; if you donate $100 per month to a local charity, you have made twelve $100 contributions rather than one $1,200 contribution. Of course, a written acknowledgment for lesser amounts is always helpful, too. Many organizations will automatically send written acknowledgements of donations either immediately, at the end of the year (listing all your contributions for the year), or both. As long as you have the written acknowledgment by the time you file your tax return you are set.
Documenting your contributions is particularly important when you make non-cash donations, such as used furniture or clothing to the local Goodwill. Most folks decline the offer of a receipt. Unless you are absolutely certain that you will not be itemizing deductions for the year (more on that below!), get the receipt. Note that the value of your non-cash donation is its then fair market value—i.e., what it would sell for at Goodwill—not the amount you originally paid for the item(s).
A few additional notes regarding documentation:
Written acknowledgement must include a statement that no goods or services were received in exchange for the contribution. For instance, if you pay $100 for a ticket to a concert benefiting a local charity, and the value of the performance was $30, you are only eligible to deduct $70.
It is impossible to document cash donations unless you get a receipt as you are making the deduction. If you put cash in a collection plate that is passed around at church or in a Salvation Army bucket outside a store, there is no way to track that. Instead, write a check to your church and drop that in the collection plate instead of cash—I promise you that the contribution will be just as well received! As long as the individual checks are under $250 each, your canceled check is sufficient written documentation.
Finally, pay attention to timing. Most individuals and married couples filing jointly claim the standard deduction rather than itemizing their deductions. The standard deduction for 2023 tax returns (which will be filed in 2024) is based on filing status:
single or married filing separately ⇒ $13,850,
head of household ⇒ $20,800, and
married filing jointly or qualifying widow(er) ⇒ $27,700.
(Additional increases are available if one or both taxpayers are over age 65 or blind at the end of the year.)
Why does the standard deduction amount matter? Deductions for charitable contributions are only available if you itemize deductions, which means listing out your medical expenses (above a threshold of 7.5% of your income), state income and property taxes (subject to a $10,000 annual maximum), mortgage interest, charitable contributions, casualty and theft losses, and other qualifying expenses. If your total itemized deductions are less than your standard deduction, you are better off simply taking the standard deduction, and your would-be itemized deductions are irrelevant. (The good news regarding the standard deduction is that there is no substantiation involved!)
I have worked with many folks over the years for whom their total itemized deductions fall just short of the standard deduction amount. If this happens to you consistently year-over-year, you may be able to time your donations so two years’ worth falls into one calendar year. Consider, for instance, someone who typically makes a slew of holiday donations each December. If they make their “December 2023” holiday donations in January 2024 instead, and then make their “December 2024” holiday donations on schedule, they will accumulate two years’ worth of donations in calendar year 2024. This may be enough to push them into itemizing territory for 2024, thus getting a bigger bang for their buck tax-wise. (For 2023, they would be taking the standard deduction anyway.)
The flip side can also be true. If you are planning a tranche of donations near the beginning of next year, issuing them before December 31 of this year may help you tax-wise. In short, timing your expenses so more of them end up in the same year might make itemizing your deductions more advantageous than the standard deduction.
Once you have mastered the three keys of charitable contributions, you are well on your way to maximizing the tax benefits of your charitable contributions. But for those wanting extra credit, there are two more points to consider: donor-advised funds and contributions of securities.
If you feel philanthropic but are not sure where you want to donate, consider a donor-advised fund. A donor-advised fund allows you to irrevocably set aside money for charitable purposes now, and decide which charities will receive those funds later. Because contributions are irrevocable, you get the tax deduction when you deposit the money, not when the fund later issues a grant to a charity you designate. The money you deposit is invested in the meantime.
Finally, consider contributions of securities (i.e., stocks, bonds, and mutual funds)—either directly to your charity of choice or to your donor-advised fund. Most charitable organizations will be glad to receive contributions of securities. Just contact your chosen recipient to ask them how to facilitate the transfer. Yes, you could sell the security and then donate the cash, but selling the security results in a taxable capital gain. Transferring the security directly allows you to unload appreciated holdings without the resulting capital gain. Additionally, you can typically deduct the full fair market value of your security when you transfer it directly.
Assume, for example, you own stock that you purchased several years ago for $5,000 that is now worth $15,000. If you sold the stock, you would have a capital gain of $10,000 ($15,000 sales price minus $5,000 purchase price). Assuming your applicable long-term capital gains rate is 15%, you will incur $1,500 of federal income tax. After setting aside a portion of the sales proceeds in a high-yield savings account to pay the taxes, there is only $13,500 left for your charitable contribution. If you instead donate the stock directly, you incur no tax and get a $15,000 charitable contribution deduction. (As a tax-exempt organization, the charity can then simply sell the stock without incurring tax and receive the full $15,000 benefit.)
Being strategic about your charitable contributions allows you to have a greater impact. Plan ahead to get the most out of your philanthropic efforts.
Commentaires