What to Know About Tax-Deductible Donations to Take Advantage of the Benefits
There are many good reasons to donate to charity. You can support a cause you’re passionate about, make a difference in your community, and feel good about yourself — all while lowering your tax burden.
If you’re planning to donate to a charitable organization this year, you can deduct the amount of your donation when you file your taxes. However, there are some important things to keep in mind. For instance, you’ll need to make sure that the organization you’re donating to qualifies as tax-exempt. If you’re donating property instead of cash, you’ll need to know its fair market value, or how much it’s worth in cash.
Though the IRS rules may seem daunting, familiarizing yourself with them can help you save major money at tax time. Here, Heather Townsend, a CPA at Townsend Financial, answers our questions below and explains what you need to know to maximize your tax-deductible donation.
How much can I deduct on my tax return?
You can deduct up to 60% of your AGI (adjusted gross income on your tax return) for charitable donations of money.
Do I have to itemize?
You must itemize (file Schedule A) in order to deduct charitable contributions. That means your deductions must exceed the standard deduction ($13,850 for single people or $27,700 for married people for 2023) for it to make sense to itemize.
If you itemize, you can deduct a whole range of expenses, including mortgage interest, property and state taxes, medical expenses, and charitable donations, to name a few. Keep in mind that property and state taxes are capped at $10,000.
Can I deduct nonmonetary donations?
Yes, you can donate items such as clothes, cars, boats, real estate, stock, etc., and the amount to deduct is based on the fair market value of the item on the date of the contribution. Generally, if the fair market value is $5,000 or more, you will need to get an appraisal. Fair market value is defined as the price at which the property would change hands between a willing buyer and willing seller — if neither were under any obligation to buy or sell and both had reasonable knowledge of relevant facts.
When it comes to donating items other than cash, you can deduct up to 50% of your AGI if your donation is to what’s known as a 50% limit organization. These organizations include churches, educational organizations, hospitals, research groups, private foundations, and others.
Can I deduct donations to any charitable organization?
An organization must be considered a “qualified” organization in order to be tax-exempt. You can ask the organization directly, or check here, where the IRS keeps a list of all qualified organizations.
How can I maximize my tax-deductible donations?
If your donations add up to less than the standard deduction, you can lump your donations together at opposite ends of a single year in order to exceed the standard deduction threshold to itemize.
For example, say you’re planning to give $10,000 annually to your favorite charity, and you aren’t planning to have any other deductions to itemize. That’s less than the standard deduction, so you wouldn’t be able to deduct your donation. However, if you donate $10,000 on January 1, and another $10,000 on December 31, you could claim the full donation for the tax year in question instead of the standard deduction. That way, you can use the donations to reduce your tax burden.
You could also consider investing in a donor-advised fund, which is an investment account for supporting charitable organizations. With these funds, you can generally take an immediate tax deduction. The funds can be invested for tax-free growth, and you can request donations to be disbursed to any IRS-qualified charity.
Should I consider donating stock instead of cash?
Donating stock, especially appreciated stock, allows two tax benefits, which can increase the value of your gift and decrease taxes — a win-win! You avoid capital gains taxes on your appreciated stock and get a charitable deduction. When you donate stock held for more than one year, your deduction is generally limited to 30% of your AGI.
What if I receive something in exchange for my donation?
Donations can be reduced by the value of goods and services you receive. For example, let's say you went to a charity gala and bid on a trip. You won and paid $6,000 for a trip that’s valued at $4,000. The difference between your donation and the value of the trip is $2,000, which is the amount you can claim as a deduction.
Do I need to obtain any documentation in order to claim tax-deductible donations?
For cash donations, if you donated less than $250, you’ll simply need a receipt for your donation or a bank record. If over $250, you must have a written acknowledgment of your donation from the organization, and the letter has to state whether any goods or services were provided in exchange for the gift.
For donations of goods or property valued at over $500, you will need the name and address of the organization, the date of the contribution, a description of the property, the fair market value of the property on the date of the contribution, plus a description of the item’s condition. For items valued at more than $5,000, you will need to obtain an appraisal.
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