Charity, The Gift That Keeps Giving.
A Comprehensive Tax Analysis
Donating to charity is an extremely noble deed. While it may not be easy to part with your hard-earned money, giving to others in need can have a tremendous impact. Aside from the altruistic reasons to donate, there may be potential tax benefits the donor can take advantage of. The purpose of this post is to do a deep dive into the who, the how and the when of tax-beneficial charitable contributions.
Who Receives Tax Benefits from Donating to Charity?
Let's first get something out of the way: Not everyone will receive a tax benefit from donating to charity. Generally, the only people that receive a federal tax deduction are those that "itemize" their tax deductions, not those that take the "standard" deduction. If you're unsure whether you itemize, you can either ask your accountant or review your tax return. If you see an amount on "Schedule A" that is used on your 1040, you likely itemized. Usually, people that itemize are those that have a fair amount of mortgage interest, property/local taxes and charity paid during the year. Valuable tip: Even if you don't usually itemize, it is possible for you to "bunch" your donations in a particular year. For example, if you know you won't have enough charity to itemize in 2023 and 2024, you can instead choose to not give any charity in 2023 and give double in 2024 (or vice-versa), thereby increasing the chance you will benefit from your donations.
What Can I Donate?
Aside from cash (i.e., cash, check or credit card), you can usually deduct non-cash items (property) that are donated to charity, such as land, vehicles, stock or art. You generally cannot deduct time spent volunteering, although some expenses related to volunteering (e.g., travel expenses) may possibly be claimed.
What Kind of Proof Do I Need?
You don't need to submit any receipts with your tax returns. If you are audited, however, you can be required to prove the charity amount you claimed on your tax return was accurate. For cash donations under $250, a bank statement showing the transaction will usually be sufficient. For cash donations of $250 or more, a bank statement will not be sufficient, as you will need a receipt from the charity showing the amount and date of your donation. The documentation needed for non-cash items can be a bit more tedious, as you may need the receipt to show item details and a record of the "basis" of the property. You may even need a written appraisal of the item from a qualified appraiser if the item's value exceeds $5,000.
What Kind of Organizations?
Often, people will have a friend or relative that doesn't have enough money for their basic needs that they wish to help. Alternatively, they'll receive a request to Zelle money to someone that is collecting funds for someone in need. Can you deduct these as charity? To be eligible to claim a donation as charity on your tax return, it needs to be to an IRS qualified charity. Unfortunately, giving money to your family/friend may not fit into this category. My point is not to dissuade you from giving to these people; whether the IRS agrees or not, these acts show you are a kind-hearted person. These donations may be even MORE virtuous, since you are solely focused on the good deed and not your side benefit. I am only looking to raise awareness as to what you can and cannot claim as charity on your tax return.
When Do I Need to Donate By?
Typically, you will need to donate in the current year to get a tax benefit on your current year's tax return. But what happens if you are short on cash, and you still want to get a deduction for the current year? Here's a tip that will buy you some additional time: If you charge a donation to your credit card before December 31st, even if you don't actually pay the credit card bill until next year, you will still get a deduction for the current year. A similar tactic can be used for donations via check; the donation is considered delivered the date you mailed the check, not when they cash it. What about if you have money you want to donate, but you are unsure of which charity to give the money to? A donor-advised fund may be a good option for you, as it allows you to receive a tax-deductible receipt in the current year, while you can choose which charity to send the money to at a future date.
A Final Word
Charity can potentially offer the donor a significant amount of tax benefits. Aside from everything we discussed above, there are many potential charity-giving strategies that can be employed to further benefit the giver, such as donating appreciated securities directly to charity, donating the cash proceeds from the sale of depreciated securities, setting up charitable trusts, etc. I hope this post opened your eyes to the many potential tax benefits of charitable giving.
>Accounting insights by Aaron Shleifstein from A. Shleifstein & Co. CPA's.
A. Shleifstein & Co. CPAs is a full-service accounting firm, offering white-glove service. You've worked hard building your business. You continue doing your thing, while we handle all of your tax filings and help limit your tax liabilities.
