Donating to charity is not just a compassionate act; it can also provide significant tax benefits, reducing your taxable income while supporting causes you care about. Understanding these tax advantages can help you make informed decisions about your giving strategy, and help your wealth do good in the world. This article will explore the various tax benefits associated with charitable donations, providing practical tips on how to maximize your tax savings through philanthropy.
Federal Income Tax Deductions
The most common tax benefit for charitable donations is the ability to deduct contributions from your federal income tax. This means that the amount you donate to a qualified charity can reduce your taxable income, resulting in a lower tax bill. However, there are specific rules and limitations that you must be aware of.
- Qualified Charitable Organizations: To be eligible for a tax deduction, donations must be made to a qualified 501(c)(3) organization. These organizations are deemed to be charitable, and therefore are eligible for tax deductions.
- Itemizing Deductions: You can only deduct charitable donations if you itemize your deductions. If you take the standard deduction, you cannot claim a charitable deduction.
- Percentage Limitations: The amount you can deduct is limited to a percentage of your adjusted gross income (AGI). For cash contributions, you can generally deduct up to 60% of your AGI, while donations of property are limited to 20%, 30%, or 50% of your AGI depending on the type of property and the type of organization you donated to.
Deductions for Non-Cash Donations
Donating property, or other goods or assets, also qualify as charitable donations and may be eligible for deductions.
- Fair Market Value: Non-cash donations are generally deductible at their fair market value. For certain types of property, you may need to have the property appraised to determine its value.
- Ordinary Income Property: Donations of items like inventory or stock held for less than a year are generally deducted at their cost basis, not the fair market value. It is important to consult with a tax advisor to understand the proper process.
- Capital Gain Property: When you donate a long term asset, like a stock held for over a year, you might be able to deduct the full value of that asset, and also avoid capital gains tax.
Donating Appreciated Assets
Donating appreciated assets is a valuable way to both donate to a charity and reduce your tax burden.
- Capital Gains Tax Avoidance: By donating appreciated assets, such as stock held for over a year, you can avoid paying capital gains taxes on the increase in value, while also claiming a charitable deduction.
- Increased Deduction: You may be able to deduct the full fair market value of the asset, which may be greater than the cost of the original purchase.
- Strategic Giving: Donating appreciated assets is a smart and effective way to maximize both your philanthropic impact and your tax benefits.
Qualified Charitable Distributions (QCDs)
If you are over 70.5, you can directly transfer funds from your IRA to a qualified charity. This is known as a qualified charitable distribution (QCD). This distribution counts towards your Required Minimum Distribution (RMD), without increasing your adjusted gross income.
State Tax Deductions
In addition to federal tax deductions, many states offer state tax deductions or credits for charitable contributions. Understanding your state laws will allow you to plan your giving and tax planning.
Record Keeping
Proper record keeping is essential for claiming tax deductions. Always remember to:
- Keep Receipts: Always make sure that you keep a receipt, either from the organization or a bank statement or cancelled check, to serve as evidence of your gift.
- Document Non-Cash Donations: For non-cash donations, document the fair market value, the date of the donation, and a description of the items being donated.
- Consult a Professional: If you are unsure about any aspect of charitable deductions, consult with a tax advisor or attorney to ensure your compliance with the law.
Wills.com and Charitable Bequests
Wills.com understands the importance of strategic giving, and offers tools to help you include charitable bequests in your estate plan. Our platform makes it easy to outline your wishes and make sure that your giving is both impactful, and reduces your tax burden, leaving more of your wealth for the causes you care about. You can easily add charitable bequests to your will, using our powerful online tools.
We also offer tools for charities to set up their accounts on the Wills.com platform, which will allow them to seamlessly access all information related to charitable bequests.
Frequently Asked Questions
- Q: Do I need to itemize to deduct charitable gifts?
- A: Yes, you must itemize your deductions, rather than take the standard deduction, in order to deduct charitable gifts.
- Q: What is the difference between a cash donation and a non-cash donation?
- A: A cash donation is a donation of money, while a non-cash donation is a donation of goods or assets. These donations are deducted differently from your taxes.
- Q: What is a Qualified Charitable Distribution?
- A: A QCD is a tax-free direct transfer of funds from a traditional IRA to a qualified charity, and can help fulfill the Required Minimum Distribution for those over the age of 70.5
- Q: Can I donate appreciated stock held for less than a year?
- A: Yes, but it will be deducted at cost, rather than the full market value. Therefore, it is recommended to donate stock held for more than one year.
Conclusion
Donating to charity is a way to make a positive impact on the world, and can also provide valuable tax benefits, allowing you to maximize your giving and increase the impact of your contributions. By understanding these benefits, and planning for your future giving, you can take more control of your finances, and become a more powerful force for good. Always make sure to keep accurate records, consult with a tax professional, and plan strategically to achieve your philanthropic goals.
Ready to plan your legacy? Create your free Wills.com account today!
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For personalized guidance, consult an attorney or visit the Wills.com Learning center.