If the holiday season has inspired you to make contributions to those charities and causes near and dear to your heart, it’s important to know that one side benefit of your generosity is a potentially lower tax bill when you file your annual return. Here’s what you need to know to make the most of your contributions.
Is Your Preferred Charity Registered as a 501(c)3?
An organization must have this designation in order for donations to it to be tax deductible. The Internal Revenue Service (IRS) Exempt Organizations Select Check tool makes it easy to search for eligible groups by name or location.
The amount of a potential deduction for taxpayers who itemize and give to charity depends upon the type of charitable organization. For example, taxpayers may be eligible to deduct up to half of their adjusted gross income (AGI) for gifts made to public charities or private operating foundations, but deductions for contributions made to private foundations are limited to 30% of the donor’s AGI.
Have a Strategy
When it comes to reaping the potential tax benefits of charitable giving, how you contribute matters:
- Donating your time? There are plenty of organizations that value and appreciate your willingness to lend them your professional services or skills—but none of these contributions are tax deductible.
- Donating items or supplies to a charity? They may be eligible for a tax deduction based on the IRS’ fair market value, but in most cases, the items must meet the IRS’ criterion for “good used condition” or better.
- Gifting an item like jewelry, art or a historical artifact? Ask the organization how they will use the item. If a donated item is displayed by a charitable organization as part of a collection, for example, the full fair market value of the item may be tax deductible for the donor. If the same item is gifted to the charity and the group intends to sell it, however, it may not be tax deductible.
- Plan to attend a charity event this holiday season to offer your support? Know the tax rules that apply to items won at charitable events or auctions. Suppose you bid $5,000 on a trip at a silent auction that’s listed with a fair market value of $3,000. If you win it, you can only deduct $2,000—the amount that exceeds the fair market value of the item. Likewise, if you bid $3,500 on an auction item valued at $5,500 and win, there is no excess to deduct; none of the transaction is tax deductible.
Consider the Benefits of Gifting Cash Versus Stock
The type of gift you offer can impact the value of it for your own tax advantages as well as the charity. If you’ve owned stock that has appreciated in value for at least one year, for example, you may be able to deduct the stock’s fair market value on the day you make the gift. As a result, you’ll avoid capital gains tax on the appreciated stock. And the charity benefits from the appreciated value of the stock you gift to it.
If you own a losing stock, on the other hand, you may fare better by selling it and using the cash from the sale to gift to charity. You’ll be eligible to claim the capital loss when you file your taxes, and the charity will benefit from your cash gift, too.
Decide How Much You Want to Gift
The amount of your gift is a personal choice, but it can help to consider the average amounts people in your income bracket gift each year to determine an appropriate figure. According to IRS data reported by USA Today, taxpayers who earn between $25,000 to $50,000 each year gift slightly less than 7% of their income each year; those who earn between $100,000 and $200,000 each year gift about 3% of their annual income.
Charitable donations for the holidays is a great a way to make an impact and share your good fortune with others. If you take some time to think strategically about who you donate to, what you donate and how, it can end up being a gift that keeps on giving.