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Maximizing the Tax Benefits of Charitable Contributions

September 21, 2021

Giving money to charity is an incredible act of compassion and selflessness. It is a tangible way to support individuals and organizations in need. In the United States, charitable contributions have raised nearly $250 billion, a large proportion of which has come from individual contributions. While many people contribute money to charity, not all of those people know that there is another benefit that comes from their giving: tax benefits! There are in fact very meaningful tax benefits when you make charitable contributions that you should take advantage of when tax season rolls around. Continue reading for a comprehensive guide on how to maximize the tax benefits of your charitable contributions.

TAX IMPLICATIONS OF CHARITABLE CONTRIBUTIONS

When you make a charitable contribution, you may be eligible to realize meaningful tax savings. Of important note, not all charitable contributions are tax-deductible, so you should be sure to research the list of eligible charities as stipulated through the IRS. If you do indeed make a tax-deductible contribution, this basically means that you are benefitting from tax savings. Let us look at an example to get a better understanding of this.

If you make a tax-deductible donation of $200 and you normally have a 30% income tax rate, then you can use this $200 to “lower” your taxable income. This means that your taxable income decreases by $200, and you therefore pay $60 less in taxes that you would have otherwise had to pay. As such, your $200 donation only costs you $140 because you can realize these tax savings. You can probably imagine how the magnitude of this impact can increase drastically as your contributions increase!

CHOOSING WHERE TO DIRECT CHARITABLE CONTRIBUTIONS

Now here exactly should you direct your charitable contributions? This answer is completely up to you. Ultimately, people typically choose charities whose missions align most with their personal values. Before deciding which charity or charities you want to contribute to, consider researching how they use donations and where they direct the money toward. Sometimes charitable donations get lost in organizational costs rather than being directed toward the actual mission, which can defeat the whole purpose!

RECORDING AND REPORTING TAX DEDUCTIONS

When tax season rolls around, it is particularly important to have a detailed record of your charitable contributions. Keeping receipts, invoices, confirmations, and so on, are critical for recordkeeping purposes when you file for tax deductions with the IRS. You are better off having too many records than too few records in this case.

To report your deductions, you have to itemize your contributions. You may want to hire a tax professional to help you out with this, as it can be a bit complicated depending on the types and amounts of donations that you make.  Of important note, there are a few situations that require additional procedures when filing:

  • Single donations over $250 – need an official receipt from the organization to which you donated
  • Non-cash contributions over $500 – for things like used car or furniture donations, you must file a Form 8283 with your regular Form 1040
  • Non-cash contributions over $5,000 – need a written, independent appraisal

CONCLUSION

Overall, charitable contributions are a great, tangible way to do good and affect change. Be sure to remember that they have additional benefits to you, as there is a high likelihood that they are tax-deductible!

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