Strategies to Maximize the Tax Advantages of Your Charitable Donations
Strategies to Maximize the Tax Advantages of Your Charitable Donations
Likely, your inbox is filled with prompts to contribute to your year-end generous acts. It's that period, isn't it? The charitable giving season started on #GivingTuesday and organizations aim to maintain the momentum until the year ends. The timing is beneficial for tax reasons too.
Based on Giving USA's annual analysis, contributions from individuals, inherited wealth, foundations, and businesses to U.S. charities reached $557.16 billion in 2023, escalating by 1.9% in actual dollars but decreasing by 2.1% when factoring inflation. Peer donations, the largest source of funds by total amount, grew by 1.6% to $374.4 billion, yet declined by 2.4% when considering inflation. Shockingly, the total count of individual contributors decreased by 3.4%.
This decrease in giving is not typical, especially in turbulent economies. Generally, giving rises with the economy and stock gains. In 2023, the S&P 500 posted a 24% increase.
Various factors might be responsible for the declining contributions, most emphasizing the 2017 tax reform. The Tax Cuts and Jobs Act (TJCA) nearly doubled the standard deduction for individuals, which continually escalates to match inflation. By 2025, the standard deduction will be $15,000 for single filers and $30,000 for married filers. The new tax legislation also imposed constraints on certain itemized deductions. This has resulted in fewer taxpayers itemizing, necessitating itemizing to claim a charitable deduction.
Some Americans donate regardless of tax incentives. Many helpful standards relating to charitable donations—such as verifying the charity's records—are still beneficial even without tax benefits.
No matter your motivation—tax break or benevolence—take these suggestions to heart as you donate this year:
If you seek a deduction, group your gifts. If regular annual donations do not exceed the threshold to make itemizing advantageous, consider grouping gifts by making a substantial donation in one year to acquire the deduction and providing fewer donations in subsequent years. For example, instead of your consistent $5,000 contribution to your alma mater, contribute $15,000 in 2024 and delay the next two years.
Consider contributing appreciated assets. Donating assets that have escalated in value, such as stock, may lead to a dual tax benefit. Routinely, appreciated assets are subject to capital gains tax upon sale. However, when donating appreciated assets to charity, exemption from capital gains tax and the possibility to claim a full deduction value (for tax-deductible items) of the asset (if you itemize) for items held for at least a year occur. With the S&P yielding more than 25% in 2023 and top performers faring even better, donating increasing stock could be profit-conducive for the charity and advantageous for your taxes.
Invest in a donor-advised fund. A donor-advised fund (DAF) can be a smart charitable giving solution, particularly if you are grouping contributions or donating a considerable amount of appreciated stock. A DAF is an account managed by a public charity. Contributing to a DAF typically qualifies you for an immediate tax deduction, even though the funds are not immediately distributed to the charity. DAF funds usually generate investment returns, and you can make choices for which qualified public charities receive the funds over time. DAFs are an ideal option if you desire a deduction for the current year but aim to support individual organizations sporadically over several years.
Carefully choose your recipients. Bear in mind, for federal income tax purposes, only donations to recognized charitable organizations are deductible. Even if you don't expect a tax deduction, it's prudent to research the charity's credibility before donating. You can confirm a charity's qualification for tax benefits via the IRS website using their Search Tool. You can also examine their charitable status by calling the IRS's toll-free phone number. Consider trusted sources like Charity Navigator for additional information about proposed charities, such as access to tax returns and financial reports. You can also browse our site's list of America's Top 100 Charities and utilize the financial ratios provided for organizations not on the list.
Get a receipt—for money too. As a best practice, always request a receipt. Nearly every charitable organization will provide one willingly. Although this documentation does not need to be submitted with serious tax returns, it is crucial to preserve it for potential audits. Cash donations, regardless of quantity, must be documented by bank records like cancelled checks or credit card receipts, clearly specifying the charity's name, date, donation amount, and the charity that received the contribution. The written statement must include this information.
Don't overlook paycheck deductions for charity. Your workplace might participate in a philanthropic program, enabling you to make donations straight from your paycheck. Many organizations even boost your impact by matching your contribution. If you decide to contribute via payroll deduction, keep records such as a pay stub, form W-2, or other documentation issued by your employer, displaying the total amount deducted as a charitable donation, along with your pledge card, indicating the charity's name. For federal employees, a pledge card mentioning a Combined Federal Campaign will suffice as records.
Consider donation advantages. A charitable donation is only tax-deductible if the donation surpasses the value of any gifts or services received in return. If you receive something in exchange for a donation—regardless of whether it's a coffee mug or a luxurious dinner—you can only deduct the cost of your donation, subtracting the value of the obtained item. If you're unsure of an item or service's value after a donation, simply ask. Most charities will perform the calculations and state the donation's value in their thank-you letter or receipt.
Remember retirement fund donations. Typically, donating from an IRA requires withdrawing funds, paying taxes, and subsequently donating the sum. However, an exception exists for individuals aged 70 1/2 or more, who can contribute directly from their IRA to a qualified charity via a qualified charitable distribution (QCD). These funds can satisfy your required minimum distributions (RMDs) for the year, and the donated amount is exempted from taxable income—there's no need to itemize for this deduction. The total QCD amount that can be exempted from income tax is increasing to $108,000 in 2025, up from $105,000 in 2024. In addition, starting in 2025, individuals can make a one-time election for a QCD to a split-interest entity, with the initial amount being $54,000, adjusted for inflation.
Time donations aren't deductible. The IRS does not permit a charitable deduction for donating your services, even if it's simple to assign a monetary value to your time. So, if you, as an architect, contribute your time (worth $350 per hour) to a qualified charitable organization, you're entitled to a deduction of $0—no errors here. The same rule applies for lawyers, doctors, artists, nurses, accountants, and writers affiliated with Our Website.
Related volunteering expenses may be deductible. Although time isn't deductible, most out-of-pocket expenses related to volunteering are, so long as they aren't reimbursed or regarded as personal expenses. Examples of potentially deductible out-of-pocket charitable expenses include parking fees, tolls, and other travel expenses. For 2024, the rate for mileage driven during charitable activities is only 14 cents per mile. The rate is set by Congress and hasn't been adjusted for inflation since its inception, owing to the fact that it hasn't escalated in value despite higher gas prices. (Interestingly, the 2024 standard mileage rate for business is 67 cents per mile—some organizations may reimburse you for mileage related to volunteering at rates they set themselves and may reference the business mileage rate as a benchmark for what's reasonable.) As with other donations, maintain accurate records for out-of-pocket expenses—detailed documentation is vital.
Maintain punctilious records. Meticulous records are critical when it comes to charitable donations, but especially important when donating noncash items. Generally, you can deduct the item's fair market value—the price a willing buyer would pay to a willing seller. If you're self-documenting a donation under $500, be specific, providing a description and condition of the items. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property's fair market value. If you make noncash contributions (over $500), you may be required to complete one or more parts of Form 8283, Noncash Charitable Contributions.
Limitations may apply. The amount you can deduct for charitable contributions is usually capped at no more than 60% of your adjusted gross income. Your deduction may be further restricted to 50%, 30%, or 20% of your AGI, depending on the type of property you donate and the charity you donate to.
Consider the timeframe. To ensure your gifts are tax-deductible in the year they're made, you must donate them by December 31. Some rules apply. For instance, text message contributions are tax-deductible in the year sent if the contribution is charged to your mobile account. Credit card charges—even if not paid off prior to year-end—are tax-deductible, provided the amount is reported by the year-end. Likewise, checks mailed by December 31 will be tax-deductible for that year, even if not cashed in 2024. However, good intentions alone aren't sufficient—making announcements of your intent to donate assets will not qualify for a tax deduction during the current tax year unless the pledge is fulfilled during the year.
New Year's Eve is an excellent time to explore philanthropy! It's straightforward to give cash presents, for instance. But if you're contemplating larger donations, such as long-term initiatives like trusts, pledges, or establishing a charitable foundation, it's wise to consult an expert. They can assist you in pinpointing and pursuing your altruistic intentions.
- If you want to maximize your charitable gift and receive tax deductions, consider grouping your gifts by making a substantial donation in one year.
- To get a tax deduction for a charitable donation, ensure your donation surpasses the value of any gifts or services received in return.
- If you're aged 70 1/2 or more, you can contribute directly from your IRA to a qualified charity via a qualified charitable distribution (QCD), and the donated amount is exempted from taxable income.
- To ensure your charitable donations are tax-deductible, maintain accurate records, including receipts for cash donations, bank records, and Form 8283 for noncash contributions worth more than $500.
- Consider donating appreciated assets, such as stock, to charity as it can lead to a dual tax benefit, exempting you from capital gains tax and allowing a full deduction value for the asset (if you itemize).