Charitable giving is a win-win for everyone. Those in need get help, the givers feel good about themselves, and the government rewards them with tax incentives. With the recent changes in the rules for charitable contributions, though, how can you maximize your tax deductions?
Times have been tough for everyone, but that hasn’t stopped Americans from charitable giving. In 2022, US citizens and organizations donated almost $500 billion to national charities.
Today, you’ll learn a few smart money tactics for filing taxes to make the most of donating to charity.
The 2023 Change in Tax Rules
From 2020 to 2021, people could deduct non-itemized cash donations. This was thanks to the CARES Act, a piece of legislation in response to the pandemic. The act expired and no longer applies for the tax years of 2022 and beyond.
A 60% AGI is now the current threshold for cash donations. Non-cash assets come in at 30% of your AGI.
Despite this, inflation is high at the moment, and thus, so is the standard deduction regardless of your tax bracket.
With that in mind, let’s take a look at how to make the most of your donations.
What Counts as a Donation?
You can’t just donate to a seemingly charitable cause, dust off your hands, and call it good. The IRS has strict criteria for determining whether or not a recipient counts as a charity.
Some organizations are obvious, such as churches and big-name organizations like the Red Cross. Political donations also count, to a certain degree. Check Section 527 if in doubt.
Other types of charitable organizations may include social clubs, civic leagues, labor organizations, and more. Non-profit social betterment is the operating word here.
Is it unclear whether your preferred donor qualifies? The most surefire way to know is if they have tax-exempt status as per Section 501(c)(3). Use the IRS’ nifty tool to be sure.
What’s the Limit on Donations?
While it’s noble to give as much as you possibly can, be aware that you can’t write it all off. As mentioned earlier, 60% of your AGI is the new limit.
That means (for cash donations) 60% of your AGI is the monetary amount you can write off on your taxes. This AGI helps to account for having multiple income streams as well.
Keep in mind that this applies to all donations made in a certain tax year, even to multiple organizations. Anything that exceeds the limit may be subject to carryover. This means that for the next five years, you can continue to deduct the leftover amount provided it doesn’t exceed 60% of AGI.
However, the percentage changes anywhere between 20-60% based on contribution type and organization type. Also, keep in mind that you can’t receive anything in return for this donation. If you do (such as, say, a t-shirt) you will need to deduct the fair market value of that gift from the deduction.
Get Extra Documentation for Big Donations
Big donations are anything at or above $250. To write them off, the recipient’s charity should provide you with a letter of acknowledgment that discloses the amount that you donated. Make sure it details any gifts the charity gave you in return and has a date during the tax year in question.
What About Non-Cash Donations?
Non-cash donations, i.e. items and assets, need a fair market appraisal to determine their worth before you can write them off. Form 8283 is the form to use for them. Anything exceeding $5,000 in value needs professional appraisal.
What About Volunteering?
Volunteering does count for deduction, but not in terms of your time or the value of your service. In other words, you can’t volunteer and then deduct your hourly rate.
Instead, any related expenses are tax-deductible. These expenses must be directly related to the volunteer work, and nothing else. Think of the cost of gas to drive to the location, the on-site meals, or the tools you purchased for the project.
What’s the Deadline for Donations?
Pay close attention to the date that you decide to make a donation. Anything you donate, whether cash or non-cash items, counts towards a tax year if you do so on or before December 31 of that year.
Keep in mind that you must report the date you made the donation, not when they processed it. For example, you make a donation via credit card but pay the bill a month later. The date that your credit card company processed the transaction is what counts, not the day you paid the bill.
If you make it after the December 31 date, you can file it for the following tax year. If you’re trying to maximize the donation limit, though, keep track of your contributions. You may discover you can squeeze another one in before the year is through!
Which Filing Option Is Best?
You have two options to claim charitable giving: itemization, or the standard deduction.
If you choose to itemize, you’ll need to file a Schedule A with your tax return and itemize your charitable deductions. Do keep in mind that itemization will take a lot of work, so you may need some help with it. Itemization allows you to maximize charitable contributions when the standard deduction falls short.
Do You Need Any Documentation?
Just like anything else on your tax return, make sure you have thorough documentation. A receipt is often all you need for tax-deductible donations.
Make sure the receipt shows the amount and to whom you donated. Email receipts or digital PDF receipts are fine, too.
Remember, anything above $250 needs a letter of certification from the recipient.
Find More Smart Money Tactics
Charitable giving feels great because it helps the needy and takes a chunk off your taxes. Be wary of the recent changes to tax-deductible donations, and ensure you are giving to organizations that qualify. Document your cash, non-cash, and volunteer expenses to submit them for your upcoming tax return.
Looking for more smart money tactics to ease your tax burden? Physician Tax Solutions can help. Use our contact form to get in touch.