Every year, millions of Americans support causes that are important to them by donating to charities and nonprofits.
A 2023 Giving USA Annual Report of Philanthropy found that individuals gave an estimated $319.04 billion in 2022, comprising 64% of total charitable giving. Such contributions not only help organizations fulfill their missions, they can reduce personal income tax obligations.
[READ: 15 Tax Questions Answered.]
Ready to give? Here’s your guide to understanding how and when your charitable donations might be tax deductible.
Standard vs. Itemized Deduction
Tax deductions work by reducing taxable income.
The IRS gives you a choice of taking the standard deduction or itemizing your deductions. The standard deduction on Form 1040 is a flat figure based on your filing status, but if you itemize, the amount you deduct will vary based on your total deductions.
[Read: The Pros and Cons of Standard vs. Itemized Tax Deductions]
Although the standard deduction is the easier option, you can’t deduct your charitable contributions, which are a type of itemized deduction.
It pays to do the math first.
When the total of your allowable itemized deductions exceeds the standard deduction amount, you should come out ahead by itemizing. In that case, you’d claim charitable donations on Schedule A (Form 1040). As a general rule, you can deduct donations totaling up to 60% of your adjusted gross income (AGI).
The Organization Must Qualify as Tax Exempt
There are many ways and places to give, but to deduct contributions on your taxes the organization must be a qualified nonprofit or charity.
So, while you may be a generous benefactor to friends, family members or strangers who are down on their luck, the IRS will not consider such gifts as charitable deductions that can lower your tax obligation. 170(c) of the Internal Revenue Code specifically states that contributions to needy individuals do not qualify.
Which organizations do qualify? Plenty.
According to USAFacts, as of 2022 there were 1.48 million 501(c)(3) tax-exempt organizations operating in the U.S. There’s an organization for just about every interest you may have.
Not all nonprofits qualify for a charitable deduction, though, so before you give, take a moment and check. Use the IRS’s online tool, Tax Exempt Organization Search to make sure you can claim your donation on your tax return.
How to Claim a Cash Donation
Ready to donate cash? Great! The qualified organization of your choice will gladly accept your money.
For contributions of under $250, make sure you get a receipt that shows the name of the organization and the amount you donated on a specific date. Keep the receipt handy in case the IRS wants to verify your donation and the organization.
For contributions greater than $250, you’ll need to show proof of the amount, the date you gave and the organization. The charity or nonprofit should send you a letter with those details.
Be aware that if you received something in exchange for your donation, the fair market value of that item will be subtracted from the amount you gave.
For example, say you attended a charity gala and there was a silent auction. You bid on a signed jersey from your favorite NHL player, which was valued at $1,000 and you won with a $3,000 bid. The difference,or $2,000, is your deduction.
You should receive a letter from the organization that outlines all the necessary details, but if you don’t, request one.
How to Claim Noncash Donations
Dropping off a bag of clothes, a bicycle or appliances to an organization like the Salvation Army can be the perfect way to give back and declutter while also receiving a charitable deduction for a worthy cause.
However, accuracy is important when estimating the value of noncash contributions. It must be what the item can sell for today (the fair market value, or FMV), not the original purchase price.
For items with FMVs less than $500, you can provide the FMV estimation. Make sure you get a receipt from the organization that includes its details and the date you donated. Very often you’ll fill in the paperwork, noting the items and how much you believe they could be sold for today.
You won’t need to complete IRS tax Form 8283 when the noncash donations have FMVs less than $500, but if it’s more than that figure you will.
For noncash donations with FMVs of over $5,000, like an expensive work of art, you’ll need a written appraisal from a qualified appraiser.
How to Claim Volunteer Expenses
Spending every Saturday serving meals at the local soup kitchen is a noble activity, but can you total up the time you spent and deduct the value of it as a charitable deduction? No, but some expenses that are related to such volunteering may be tax deductible. These may include:
— Transportation costs to get to and from the location.
— Out-of-pocket expenses for things you purchased for volunteering.
— Costs you incurred to entertain potential donors, excluding your entertainment, food and beverages.
— A uniform you needed to purchase.
It’s important to get written documentation from the charity for any of these types of deductions. It should specify what you did and how the expenses were related to your volunteering.
[Read: Top 5 Donation Sites and How to Budget for Charitable Giving]
How to Claim Appreciated Stock
Another way to get a charitable deduction is by donating stock. Most organizations will gladly accept it, but confirm first. If they do, contact your broker who will help you make the transaction. You can typically take its fair market value as the charitable deduction.
There’s another advantage: When you donate appreciated stock that you’ve held for over a year, your contribution can help you avoid long-term capital gains tax.
For example, maybe you have stock that escalated in value. If you wanted to sell it, you would be taxed on the gains. By giving it to a qualified charity instead, you can escape that tax bill. It’s a win-win.
How to Claim an IRA Distribution
The IRS has incentivized charitable giving for people 70 1/2 and older. With a qualified charitable distribution (QCD) you can transfer up to $100,000 to charity, tax free. The money would have to go directly from your IRA to an eligible charitable organization.
Giving a large sum can be especially meaningful to an organization, but a QCD can also satisfy your required minimum distributions for the year.
Even better, the IRS doesn’t require you to itemize your deductions on Schedule A when making a QCD, so you can keep filing simple and claim the standard deduction.
Manage Your Charitable Contributions
Donating to causes that are important to you isn’t just altruistic, it can lower your tax liability. Take care to keep excellent records, though.
This will be relatively simple when you make one or two donations to an organization, but if you donate to multiple charities throughout the year and do so on a non-regular basis, you may lose track.
Use these tips to stay organized:
— Consider narrowing your giving to a few great organizations.
— Log each donation you make into a spreadsheet.
— Use an app to streamline the process, such as Intuit’s ItsDeductible.
— Take photos of donated items and send them to a special file.
— Put all documents, from receipts to estimates, in one place.
When In Doubt, Ask a Professional
If you’re confused about how to determine the correct value of your donation or what contributions really do count as a charitable deduction, don’t guess. Get advice about your specific situation from a professional.
In most cases, a tax preparer will clear up any doubts, but if you have a more complex tax situation, a CPA can answer detailed questions about the tax code.
Both will charge for their time — and CPAs can be very expensive — so if you’re on a budget look into places that offer free tax advice. After all, the more you save, the more you can give.
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A Guide to Tax Deductions for Charitable Donations originally appeared on usnews.com
Update 04/02/24: This story was previously published at an earlier date and has been updated with new information.
