What to Consider When Making Charitable Contributions
Choosing to give to charitable causes is an admirable act. Many important initiatives are solely dependent on charitable contributions. And while the greatest benefit of making such contributions is the impact it can make on an issue or cause you care about, it can also have financial benefits.
If you itemize your tax return, donating to charities can potentially help you minimize your tax burden. Your contributions don’t have to be monetary either. Donating items of value, such as cars, equipment, furniture, and clothing can all potentially help you cut your taxes come April.
Say you earn $100,000 in 2017, and donate $15,000 in value to several charities, including contributions of cash and goods. Your taxable income could reduce from $100,000 to $85,000, bringing you down a tax bracket and lowering the tax rate on your income.
To Benefit, You Must Follow Specific Steps
In order to benefit from these charitable donations, you must follow specific steps, or the IRS may not deem your contributions tax-deductible. In this article, we’ll outline these steps, and help you choose the right charities to contribute to.
Since everyone’s situation is unique, you should always check with your tax advisor prior to making charitable contributions.
Donating to your favorite charity?
Avoid these 5 mistakes so you can give more and make a greater impact on the organizations and causes you support.
Choosing Charities That Make The Most Impact
Before choosing an organization to donate to, you must first determine their non-profit status. If a charity is not legally deemed a non-profit organization, the IRS won’t accept your donation as a deductible contribution You can check the status of organization at Charity Navigator, Guidestar, or other online resources.
Organizations such as Charity Navigator assess and rate charitable organizations on their accountability and transparency. It also examines charities’ federal tax records to decipher how much of their income is actually spent on impactful programs, as opposed to executive salaries and administrative expenses. Organizations that spend at least 75% of their income on programs support their cause are considered a worthwhile charity.
Once you’ve researched and identified the charities you wish to contribute to, you can move to the process of record keeping your donation, and making the contribution itself.
How To Reap The Financial Benefits Of Charitable Contributions
Itemize Your Donations
When you file your taxes, you have the choice between taking a standard or itemized deduction. As mentioned above, in order to claim charitable contributions on your tax return, you must choose to itemize your deductions.
Standard deductions are specific dollar amounts set by federal authorities that you can subtract from your income before your income is taxed. The amounts are based on your filing status. The 2017 dollar amounts are listed in the table below. If you contribute charitable contributions greater than the relevant figure below, you will save more by filing an itemized deduction.
Always Keep Your Receipts
In order to write off your charitable contributions, you must provide proof of your donation, whether a credit card receipt, bank record, or a written document from the charity itself. It must also include the name of the organization to which you’ve donated, the amount you contributed, and the date you made the contribution.
While you won’t need to submit a receipt or document with your tax filing, you will need it in the event of an audit.
Don’t Forget About Payroll Deductions
It’s also possible to make a post-tax contribution to a charity, in which your donation is deducted from your paycheck. If you choose this route, you must also keep records of these contributions in the form of your pay stub, W-2, or other documentation your employer might provide you.
These documents must detail the amount of income withheld from your paychecks for charitable purposes. You’ll also need a pledge card that identifies the charity to which you donated.
Donating Assets Whose Value Can Grow
While cash may be the most common “item” donated, followed by physical goods, you can also donate financial assets, such as stocks. Contributing appreciated investments has an even greater benefit than minimizing your standard income tax.
If your financial asset(s) appreciated – grew in value – you’d normally have to pay a capital gains tax on those profits. However, if you donate such an asset to a charitable organization, you can potentially deduct the market value of that asset (e.g. its stock price), and you won’t have to pay the capital gains tax.
Deducting In The Correct Year
While we may file taxes in April, we’re actually submitting tax returns for the previous year, from January 1 to December 31. So only the contributions you’ve made from January 1, 2017 to December 31, 2017 are deductible on your 2017 tax return, which is due in April 2018.
However, the taxable date of your contribution isn’t necessarily the date your cash or assets leave your accounts.
Say you wrote a check on December 20, mailed it to your charity of choice (which took a week to be delivered), and the organization deposited the check 10 days later. Technically, the cash didn’t leave your account until January 6. You can still deduct that contribution on the upcoming April tax return.
The same logic applies to credit cards. If you charge your credit card to make a charitable contribution in 2017, but don’t pay off your expense until 2018, you may still deduct this donation on your 2017 tax return.
Consider Creating A Charitable Trust
Aside from the aforementioned benefits of a deducting charitable donations, charitable trusts help you maximize the value of any portion of your estate that you donate to a charity. After your death, your assets will be subject to estate tax – and assets that have appreciated will be subject to capital gains tax.
Assets you’ve put in a charitable trust, however, are not subject to these taxes, maximizing the value your charitable organization will receive. It’s important to note that, once you’ve transferred assets into a charitable trust, the donation is irrevocable.
Charitable trusts also provide numerous financial and tax benefits during life and enable you to make substantial gifts to favorite causes. An experienced advisor specializing in charitable giving can guide you through the process.
Limits On Taxable Deductions
In case you now plan to donate a massive sum of your income to maximize your tax deductions, be aware that there are limitations. If you contribute more than 20% of your adjusted gross income (AGI) to charity, complex and specific limitations will apply.
Generally speaking, you can deduct:
- Cash contributions up to 50% of AGI
- Appreciated capital gains assets up to 20% of AGI
- Non-cash assets up to 30% of AGI
Avoid The Biggest Mistakes When Making Charitable Contributions
Making charitable contributions and successfully receiving tax deductions can be overwhelming. And it’s easy to make mistakes, especially in the details.
Since everyone’s situation is unique, we recommend you check with your tax advisor prior to making charitable contributions.
If you’re at all concerned about failing to maximize your tax savings, your advisor can ensure you’re on track and taking every step to reap the benefits of charitable donations. But first, learn the most common mistakes people make when making charitable contributions.
Download your copy of 5 Mistakes to Avoid When Giving to Charity so you can get on track to make your giving count.
About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.