If you have the financial resources to do so, making donations to charity is a fantastic way to spread the wealth and help others in your local community and beyond. In addition, giving to charity can also get you a few benefits on your annual tax bill. However, the rules around donation eligibility, charity qualifications and yearly limits can be a little confusing. To help, here’s a quick guide to charitable donations and taxes.
Eligibility of Donations
Charitable donations to an eligible organization can be deducted from your taxable income, potentially lowering your tax bill. In order to qualify, the charity must be designated by the IRS as a 501(c)(3) organization. Most charities will specify their designation, so that donors understand the potential tax implications of their gift. Donations of both cash and items such as books, clothing and household goods are eligible for tax deductions. It’s also possible to donate works or art or other investment assets, although for tax purposes you may need to undergo an appraisal to confirm their worth. In addition, the cost of transportation to make a donation, as well as expenses incurred while volunteering for a designated charity, are typically also counted under eligible donations.
Itemized vs. Standard Deduction
Keep in mind that in order for your charitable donations to make an impact on your tax bill, you’ll need to elect to itemize your deductions rather than taking the standard deduction. The standard deduction for 2023 is $13,850 for individuals and $27,700 for married couples filing jointly – so be sure to crunch the numbers to see whether your donations for the year, along with other deductions, put you above or below that figure. If your donations are on the smaller side, it may make more financial sense to take the standard deduction. While you won’t get a specific tax benefit from your donations, you’ll still get the benefit of knowing you’ve made a difference for someone in need!
Keep Your Receipts
If you do plan to itemize your donations and deduct them from your taxable income, it’s important to keep a record of each and every charitable gift. A 503(c)(3) charitable organization should be well versed in giving donors the necessary documentation. Do be aware that cash gifts of $250 and up require a specific letter of acknowledgement from the charity, whereas a normal receipt or bank statement is fine for smaller gifts. This rule also applies to donated items, with a few additional rules for goods worth over $5,000 which may require an appraisal. You can find more information from the IRS online.
Annual Limits
In general, the IRS allows taxpayers to deduct charitable cash contributions of up to 60% of their adjusted gross income (AGI). There are more specific rules about AGI percentage which apply to donations to certain types of organizations, including private foundations. The IRS lays out the specifics online, but it’s a smart idea to consult a financial expert if you’ve recently made a sizeable donation and are unsure how your charitable gift may affect your tax bill. Another option may be to carry forward some of your deductions to the next year, which is usually possible within a five-year period – but again, a tax consultant will be able to advise on your best move.
Where to Start?
If you’re new to the world of charitable donations, here are a few tax-qualifying charitable organizations to look into:
- The American Red Cross – This humanitarian non-profit brings lifesaving medical care to people in the US and around the world.
- Oxfam America – From natural disaster recovery efforts to confronting famine, Oxfam is a global organization fighting inequality and poverty.
- Habitat for Humanity – This non-profit helps families to build and improve the places where they live, to create stronger communities for all.
- Dana-Farber Cancer Institute – An organization dedicated to cancer research and patient care. Specific guidance on donations and taxes is outlined on their website.
Visit irs.gov to learn more about tax considerations when investing. You may also contact a tax professional who can provide information on your specific situation. The information in this article is intended for general educational purpose, so it is important to contact a professional for specific tax advice.
