As a business owner or high-net-worth individual, supporting your community or causes that you care about may be a priority — and you're not alone. Giving has increased by more than 15% for out of 6 out of 10 companies in recent years. Not to mention 67% of charitable giving came from individuals in 2023, up from 64% in 2022.
While supporting charities and nonprofit organizations is an important use of our money, it's essential to consider how tax deductions associated with charitable giving can help lower your tax burden.
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Key Vocab
Charity tax deductions allow you to reduce your taxable income by the amount of your qualifying charitable donations, but there are some important rules to keep in mind before you get started.
First and foremost, you can only deduct these donations if you itemize your deductions on Schedule A (Form 1040). This means that if you take the standard deduction, you won’t be able to claim charitable donations. Additionally, not all donations are eligible for tax deductions.
Gifts made to individuals, for example, are not deductible. Only donations to qualified organizations can be claimed. To ensure your chosen charity is eligible, you can use the IRS Tax Exempt Organization Search Tool.
As we mentioned earlier, you can deduct charitable donations made to qualified organizations if you itemize your deductions on Schedule A (Form 1040). These deductions can include:
There are certain donations that you cannot deduct, either partially or fully. These include:
To claim a deduction for your charitable donations, you will need to:
If you receive a benefit in return for your donation, such as merchandise, goods, or services, you can only deduct the amount that exceeds the fair market value of the benefit you received. For example, if you donate $100 to a charity and receive a gift valued at $30 in return, you can only deduct $70.
Accurate record-keeping is crucial for claiming your deductions. For donations of cash, check, or other monetary gifts, you must maintain a record of the contribution, which can be either a bank record or a written communication from the qualified organization.
This documentation should include the name of the organization, the amount of the contribution, and the date it was made. For any donations of $250 or more, you must also obtain a written acknowledgment from the organization, detailing the contribution amount, a description of any donated property, and whether any goods or services were received in exchange for the gift.
Refer to IRS Publication 526, Charitable Contributions, for more detailed guidance on what you can deduct and how to properly document your donations.
Maximizing your charitable donation tax deductions can really help you save on taxes while still supporting the causes that matter to you. With a bit of planning, there are a few options that can help you get the most out of your deductions.
A donor-advised fund (DAF) is a great way to maximize your charitable donation tax deductions. When you contribute to a DAF, you get an immediate tax deduction, even if you decide to distribute the funds to charities later on. This setup gives you some flexibility to plan your giving, especially if you’re looking to make a larger deduction in a specific year.
Plus, the funds in a DAF can be invested and grow without being taxed, which means you could end up with more money to donate over time, making your donations go even further.
On top of that, DAFs offer some pretty helpful tax perks. For example, if you have stocks or other assets that have appreciated in value, you can donate them to a DAF without having to pay capital gains taxes. This can leave you with a bigger donation amount compared to selling the asset first and then donating the cash.
DAFs can also be a smart move when it comes to estate planning, as they can help reduce the size of your taxable estate, potentially lowering your estate taxes. Overall, these benefits often make DAFs a more tax-efficient option compared to setting up a private foundation, especially if you’re looking to get the most out of your charitable giving.
If you’re managing charitable giving through a trust or estate, there are some unique opportunities to maximize your deductions that go beyond what’s available for individual taxpayers. Charitable donations from a trust or estate fall under different sections of the tax code, which can offer more flexibility. For example, trusts and estates can make deductible donations to foreign charities, something that isn’t always possible with individual income tax deductions.
Additionally, there’s an option to elect to treat donations as if they were paid in the previous tax year, which can be particularly useful for tax planning and timing your deductions effectively.
Another key advantage is that trusts and estates aren’t subject to the adjusted gross income (AGI) limitations that apply to individual donations. This means that up to 100% of the taxable income of a trust or estate can potentially be deducted when it’s donated to charity, making it a powerful tool for maximizing tax benefits.
However, it’s important to note that these deductions can’t be carried over to future years, so careful planning is essential, especially if you’re expecting to make a significant donation. By understanding and utilizing these specific rules, you can make the most of your charitable giving through a trust or estate.
Donating appreciated assets like stocks or real estate is a smart way to maximize your tax benefits while supporting the causes that matter most to you. When you donate these long-term appreciated securities directly to a charity, you not only avoid paying capital gains tax on the appreciation, but you can also claim a deduction for the full fair market value of the asset.
This approach can be much more advantageous than simply donating cash or selling the appreciated assets and then donating the after-tax proceeds. When you sell an appreciated asset, you’re typically subject to capital gains taxes, which can reduce the amount you have available to give.
This strategy is particularly effective for those who hold assets that have significantly appreciated in value over time, as it enables you to make a larger contribution and maximize your tax savings in the process.
Charitable giving is more than just supporting causes you care about—it’s also a chance to make smart financial choices that can benefit you at tax time. By exploring options like donor-advised funds, trusts and estates, and capital gains tax deductions, you can make sure your charitable donation tax deduction works to your advantage.
With a bit of planning, you can align your financial goals with your desire to give back, maximizing both the impact of your donations and your tax savings. As you plan your charitable contributions, keep in mind that the right strategy can help you do more good while also reducing your tax burden, making it a win-win situation for everyone involved.
If you want to ensure you're making the most of your charitable donations tax deduction, reach out to the tax professionals at the MB Group. We can help you navigate the complexities of tax planning and maximize your deductions.
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