Donating in support of charities helps build the communities. According to Investopedia, charitable donations of money, goods, etc., to qualified corporations can easily be deducted from income taxes. In fact, you may get tax deductions of up to 50% of your gross income.
Before we go through the tax benefits of donating to charity, let’s highlight what a tax-deductible donation is.
What Are Tax-Deductible Donations?
Donations are considered tax-deductible when at least $2 or more is donated to an eligible charity organization. This donation will be deducted from your taxable income. This will reduce your income tax within a particular financial year. There must be zero benefits offered to you as a result of this exchange. According to the United States government, always research a charity before donating if you want your donations to count.
How To Know If Your Donations Are Tax-Deductible Or Not?
The way in which you can claim charitable donations on your taxes can surprise you. Below are some rules about which charity donations are considered deductible and which donations aren’t.
Deductible charity donations
Ensure you are donating your money or assets to a qualified charitable organization if you intend to deduct your donation. The following donations are tax-deductible:
- Volunteer expenses
- Payroll deductions to charities
- Donations to religious organizations
- Contributions to war veterans’ groups
- Bills incurred from a student living with you
- Donations to non-profit hospitals and schools
- Contributions to local, state, and federal governments
Non-deductible charity donations
Donations to the following organizations are not tax-deductible:
- Donations to labor unions
- Gifts donated to individuals
- Donations to foreign organizations
- Grants to homeowners’ associations
- Donations to foreign governments
- Grants for-profit schools or hospitals
- Assistance to social and sports clubs
- Donations to lobby groups
- Contributions to chambers of commerce
- Contributions to action committees, political parties, or fundraisers
The IRS provides a guide on charitable contributions to help you avoid any uncharted tax territory.
Limits on Charitable Contribution Deductions
- Your donated time is not tax-deductible.
- You cannot deduct the cost of a raffle, bingo, or lottery ticket bought from a charitable organization.
- If you vow to donate a certain amount to a charitable organization, you can only deduct the money donated during the year.
- If you donate by check or credit card towards the end of the year, you can include the donation on your tax return in that same year, even if you do not balance the account or pay off until after the year.
- Suppose you receive compensation for your donation, such as tickets to a charity ball, a sporting event, a cinema, a theatrical performance, or merchandise, goods, or services. In this case, you are only allowed to deduct the donation amount that exceeds the market value of what you received.
The Tax Benefits Of Donating To Charity
There are many tax benefits you will enjoy when donating to a charity organization. Here are some of the benefits you should know:
Reduce Tax Burden After a Windfall
Donating to a charity organization can reduce tax burdens after a windfall, such as receiving an inheritance, getting strong market returns, and selling a business. You can take an instant tax deduction when you make a charitable contribution, reducing your tax liability.
Reduce your Taxable Estate
If your estate tax is more than the estate tax exemption limits of $23.4 million for joint filers and $11.7 million for single filers, the excess will be taxed at the highest tax rate of 40%. Fortunately, you can gift assets to a charitable organization to reduce the size of your taxable estate.
Avoid Capital Gains Taxes
You can increase your tax benefits and the value of the gift received by charity organizations by giving appreciated assets such as real property or stocks instead of donating cash. Charities are not taxed on the sale of gifted money or assets. You get a tax deduction according to the asset’s market value while avoiding the capital gains tax you would have paid upon the sale of the asset.
You can make a charitable gift through a charitable trust if you need the income generated by your cash or non-cash assets. You can benefit from a current tax deduction on the gift and current income created by the gifted assets. The remaining trust assets are sent to the charity of your choice.
Donating money or goods to a charity organizations is an excellent way of showcasing your giving spirit to the less privileged. However, you will also reap the benefits through your taxes, but you must be given to a charity organization eligible for a tax deduction.