Tax Deductible Donations: Rules of Giving to Charity
Donating to charity carries many benefits for taxpayers, such as allowing people to connect with a personal cause and preserve legacy–and it doesn’t hurt that donating to charity can lower your tax bill.
If donating to a charity is part of your tax plan, here are a couple of tips so you can maximize your tax-deductible donation before year-end.
What Qualifies as a Tax Deductible Donation?
Tax deductible donations are contributions of money or goods to a tax-exempt organization such as a charity. The IRS states “Contributions must be made to qualified organizations to be deductible.”
However, donations do not have to be money. In fact, the following donations are eligible for deductions:
- Cars
- Clothing
- Stocks or mutual funds, at the fair market value
- Collections of valuable items
- Artwork
- Jewelry
- Securities
- Real estate
If the value of what you donate exceeds $250, you need to obtain and file a written acknowledgement from the qualified organization you donated to.
If the value of your non-cash charitable contributions is $500 or more, you’ll need to include specific information about the charitable organization and what was donated when you file your tax return.
What Does Not Qualify as a Tax Deductible Donation?
Taxpayers can maximize potential tax savings by knowing what they can and cannot claim. Let’s take a look at some situations that do not qualify as a deductible donation.
Gifts to a Non-qualified Charity or Nonprofit
Many taxpayers assume that any charity or nonprofit organization is qualified. However, this is not always the case. Each group must register with the IRS for the section of the law that applies to it. According to TurboTax:
- Religious and charitable organizations typically fall under section 501(c)(3) and can receive tax-deductible donations.
- Not every section allows these deductions. For instance, social welfare and civic organizations registered under section 501(c)(4) don’t qualify.
- However, two types of 501(c)(4) organizations—veterans' organizations with 90% war vet membership and volunteer fire departments—do qualify for charitable deductions.
If you are unsure whether an organization qualifies, try this IRS search tool. We still recommend asking the organization about their qualifications before making a contribution.
A Promise or Pledge to Pay
Pledges can’t be dedicated until the money is actually paid.
For instance, if you agree to donate $50 a month for a year to a qualified charity, you can only claim the donations you made within the tax year, not the whole $600.
A Gift That's Not a Gift
Many organizations use different methods to earn money. However, fundraising tickets are not deductible. For example, bingo games, raffle tickets or lottery-based drawings are not deductible contributions.
Some Community Drives
Another common misconception relates to community drives aimed at helping an individual or family with issues such as: medical costs, loss of a house from fire or funeral expenses.
Make sure that the cause is sponsored by a 501(c)(3) organization such as the Salvation Army or Red Cross so your financial assistance is deductible.
Political Organizations
The IRS is very clear that money contributed to a politician or political party can't be deducted from your taxes.
How Much Do You Need to Donate to a Charity to Get a Tax Deduction?
There is no minimum donation amount necessary to earn a tax dedication. In fact, even if you do not itemize your deductions, qualified cash donations up to $300 can be deducted (or $600 if you are filing married jointly). Why? The IRS wants to encourage taxpayers to give money to charity.
However, the safe choice is to always itemize your donations. We recommend getting a receipt for any donations to avoid the danger of having them disallowed in case of an audit.
Is There a Limit on Charitable Donations? How Much does the IRS Allow for Charitable Donations?
Typically, the IRS limits donations to either 50 percent of adjusted gross income for public charities or 30 percent of adjusted gross income for private foundations. Let’s take a look at each of these in more detail.
Public Charities
Contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks.
According to the IRS, the 50 percent limitation applies to
- “All public charities (code PC)
- “All private operating foundations (code POF)
- “Certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2-1/2 months following the year of receipt, and
- “Certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.”
Private Foundations
The IRS states “Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however. Tax Exempt Organization Search uses deductibility status codes to indicate these limitations.”
We recommend that taxpayers enlist the assistance of a tax professional or financial advisor before making large contributions to ensure the donations are deductible.
*Contributions must actually be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.
What is a Charitable Lead Annuity Trust (CLAT)?
A charitable lead annuity trust (CLAT) is a charitable trust in which a charity, donor-advised fund, or a foundation that the grantor selects, receives annual payments. These payments may be set for a term of years or the grantor’s lifetime.
At the end of this period, the remaining CLAT assets are distributed amongst the trust’s non-charitable beneficiaries. These beneficiaries are typically the grantor’s descendants or trusts for the descendants’ benefit.
Charitable lead annuity trusts provide a tax efficient way for individuals to transfer wealth to heirs while benefiting charities.
However, CLATs are not exempt from income tax. If the grantor wants to claim the immediate income tax charitable deduction, the CLAT must be set up as a grantor trust, or G-CLAT.
How to Make the Most of Your Charitable Donations
At Centura Wealth Advisory, we know how to optimize charitable giving strategies to best benefit your long-term financial goals.
Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.
Read on to learn more about sophisticated gifting strategies for affluent individuals.
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