Giving feels good—but understanding these tax implications will make you feel even better.
Helping others can provide greater meaning in our lives, and a Harvard Business School study even found that people are happier when they spend money on others.1But charitable giving can have potential tax benefits, too. With careful planning, charitable donations can reduce your taxable incomeand—depending on the amount you give and your income—possibly get you into a lower tax bracket.
While altruism and building stronger communities may be the main motives of giving, it can be helpful to understand how charitable giving can impact your finances. These guidelines can help you figure out whether your giving has tax implications.
1. Know how much you need to donate to get a tax break
The first step is to determine if you’re even eligible for tax benefits from your donations. Most tax filers claim the standard deduction, which lowers your tax bill by a certain amount. Instead of taking the standard deduction, you can choose to itemize your deductions—and charitable giving can be included in this.
If you file your taxes as an individual, the value of your itemized donations would need to exceed $12,000 in order to beat the standard deduction, while couples would need to donate more than $24,000.2,3 You are required to keep detailed records of all charitable contributions included in your tax returns such as receipts in case the IRS audits your return.
2. Donate to qualified charity organizations
Before making a contribution, find out if the charity or nonprofit organization is tax exempt. You can only deduct your donation on your federal taxes if the charity has a 501(c)(3) status. Find out by checking the IRS exempt organization database. Also, by checking on the charity’s 501(c)(3) status, you can verify that it is a legitimate organization.
3. Know the types of donations you can deduct
Beyond monetary donations like cash, credit, and checks, you can also claim tax breaks on donated goods and personal property like vehicles, jewelry, art—even stocks, patents, and real estate. Ensure that the value of noncash contributions aligns with their fair market value. When donating stocks, you can take a tax deduction on the full fair market value, with the possibility of it increasing over 20%.
4. Know the deductible value (and the proof required) for each donation type and amount
In general, donations are fully deductible for the exact amount you contribute, but you’ll need a receipt if you donate more than $250. If you donate in cash instead of using a credit card or check, a receipt or bank statement from the recipient is required, regardless of the amount. As mentioned, tangible items such as clothes or art can usually be deducted for the full amount based on current market value. Certain goods may require an expert appraisal.
5. Keep all records of your charitable contributions
Set up a place in your home or office to maintain proof of your donations. Hang onto your bank and credit card statements, receipts, letters of acknowledgement, and Form 8283s (for noncash contributions). The documents should include the name of the charity, the date of your contributions, and the amount or value contributed.
6. There are limits to how much you can deduct
The rule of thumb is that you can deduct up to 60% of your adjusted gross income through charitable donations made to qualifying public charities and certain private foundations. For example, if your adjusted gross income is $80,000, your annual deduction limit is $48,000. If your contribution exceeds this limit, it can be carried over up to a maximum of five years.
7. When in doubt, work with a professional
Get professional advice on your charitable giving plan if you think it may have tax implications. Consult with a tax advisor about whether your philanthropy could save you money and what kind of documentation you need.