Itemization vs. Standard Deduction
Taxpayers may choose to take the standard deduction, which is a set deduction that does not rely on the specific details of giving and spending throughout the year, or they may choose to itemize and add up all qualifying deductions, including charitable contributions. If you are unsure whether or not you will be itemizing, find out. Those who take the standard dedication will not need to track their giving. (In 2020 and 2021, tax law did allow for individuals taking the standard deduction to add an additional $300 charitable deduction. As of June 1st, 2022, the IRS has not extended this change.)
If you are itemizing your deductions, keep reading to find out how to maximize your benefits.
Different types of organizations within the charitable sector have different legal designations. For tax purposes, the type of organization you give to matters. One of the simplest ways to ensure that your donation will be tax-deductible is to make sure you are donating to a registered 501(c)(3). Donations made to individuals do not count. Charity Navigator uses Form 990, which all 501(c)(3)s are required to submit to the IRS to rate organizations. Therefore, any organization you find rated on Charity Navigator is a qualified 501(c)(3).
Once you have decided on a nonprofit (or nonprofits) to support, ensure you obtain a receipt as proof of donation. You can’t deduct what you can’t prove! Your receipt should indicate that it is a donation, usually with a phrase like, “...no goods or services were exchanged…” This shows that you did not purchase anything, an important distinction because purchases from nonprofits are not tax-deductible. For example, if you donate clothing and furniture to Goodwill or make a cash donation to their program, that is tax-deductible. However, if you purchase clothing or furniture at Goodwill, that expense is not tax-deductible.
When to Give
Charitable contributions provide an income-tax deduction in the calendar year they are given (January 1st - December 31st). To maximize your benefits, consider your tax burden and how it might change from one year to the next. Giving your donation just before or just after the New Year may mean a significant difference in your tax bill. The change may not matter much to you, but this is worth noting. Keep in mind that itemized charitable tax deductions are limited and cannot relieve your entire income tax burden.
Experienced givers are likely well-versed in the standard practices of donating cash to charities, but there are other ways to give that may make more sense for your situation.
• In-Kind Donations: Donated items that are useful and in good condition can also count toward your tax-deductible contributions. Learn more.
• Donor-Advised Funds (DAFs): DAFs are an excellent way for donors to give without committing to a specific cause or organization. Tax deductions are distributed for the calendar year that contributions are made to a DAF, so donors can put money in and watch it grow before distributing the funds. DAFs can also help you donate various assets at once, making them a convenient and streamlined giving vehicle. Learn more.
• Cryptocurrency: Owners of cryptocurrencies and NFTs can reap tax benefits from donating these holdings directly to nonprofits, but circumstances dictate how much you can benefit. If you are not already in the crypto market, donating is not a good reason to jump in. Learn more.
• Appreciated Stock: Your unrealized capital gains can do a lot of good for a charity while taking a bite out of your long-term capital gains taxes. In the case of highly appreciated assets, these tax savings may exceed the amount initially paid for the investment. Consider rebalancing your portfolio by donating appreciated stock. Learn more.
• IRA Required Minimum Distribution (RMD): The RMD is the smallest amount of money account holders must withdraw from employer-sponsored retirement plans each year once they reach retirement. If you fail to meet your RMD, the amount not withdrawn will be taxed at 50%. Donating your unneeded RMD is an opportunity to lower your tax bill while doing good. Learn more.
Every donation has meaning, but by maximizing your tax benefits, you can ensure you are giving as much as possible to the causes that matter to you. Which strategy will help you do the most good?