A tax-deductible donation encourages charity works by reducing the benefactor’s taxable income. If you often donate to charity, you might want to start listing the amount you give. Here’s everything you need to know about what a tax-deductible donation means.
In this article:
- How Do Tax-Deductible Donations Work?
- Tax Deductible Donations: How Much Do You Get Back?
- What Are Tax-Deductible Donations?
- Is There a Donation Tax Deduction Limit?
- Can You Donate Investments?
- Tax-Deductible Donation for Senior Citizens
- Can You Claim a Deduction for Volunteering?
- What Is Clustered Giving?
- Can You Claim Charitable Donations on State Tax Returns?
Tax-Deductible Donation | The Tax Benefit That Keeps on Giving
How Do Tax-Deductible Donations Work?
If you want to qualify for charitable donations tax deductions, you need to itemize every deduction on your income tax return. That means you need to select itemized instead of standard deduction when you file your tax return.
The standard deduction is a set amount based on your filing status. As of 2018, you can claim $12,000 if you are single. Married couples who file their taxes separately also get $12,000. On the other hand, those who file as the head of the household have a standard deduction of $18,000. Meanwhile, married couples filing as a joint have a standard deduction of $24,000.
In contrast, an itemized deduction is not a set amount. Rather, it is the total amount of all the small deductions you listed on your tax return. This includes charitable donations and mortgage interest payments, among others.
To determine whether you qualify, add all of the items you listed. If the total exceeds the standard deduction, then you should claim it.
Tax Deductible Donations: How Much Do You Get Back?
If you are an individual who made a total of $15,000 in charitable donations last year, plus an additional $5,000 in your other deductions, that brings your itemized deduction to $20,000. Since you are filing as an individual, your standard deduction is $12,000. That means you can claim the $20,000 filed under itemized deduction.
If your gross income is $50,000, you reduce it by $20,000. Which means you only need to file your income tax based on the reduced amount of $30,000.
What Are Tax-Deductible Donations?
Before you can claim your tax-deductible donation, you need to know whether or not the amount you declared qualifies. In particular, you must donate to a qualifying charity or non-profit organization. Other qualifications include the following:
- Community chest, trust, or foundation, created in the United States or its territories, operated for charitable, religious, or educational purposes
- Church, synagogue, mosque, or other religious organization
- War veteran’s organization
- Volunteer firefighter organizations
- Civil defense organizations
- Domestic fraternal societies that plan to use the donation for charitable purposes
- Nonprofit cemeteries, but only if the donation is for the perpetual care of the entire cemetery, not just a particular plot
As a general rule, contributions to 501(c)(3) organizations are tax deductible. But if you make a donation to a nonprofit group that does not have this designation, you cannot claim the amount on your tax return. Additionally, donations to 501(c)(4) nonprofit organizations are not tax deductible.
You do not necessarily have to donate cash to claim a deduction. Non-cash donations can also qualify. For instance, if you donate a bag of clothing to a qualifying charity organization, your tax deduction will be approximately based on the appraised market value of your donation.
Is There a Donation Tax Deduction Limit?
If you decide to itemize your donation tax deduction, you can claim up to 50% of your adjusted gross income (AGI) as charitable deductions. However, there are a few exceptions to this rule.
If your donations are to private foundations, veterans organizations, fraternal societies, or cemetery organizations, you can only deduct 30% of your AGI.
For example, if your AGI is $60,000, you can only deduct up to $30,000. That means even if you give away every penny you have, you will still face income tax on at least half of your income.
Can You Donate Investments?
You can also donate investments such as stocks, bonds, and mutual funds. With these donations, you can sell the investment and then give the proceeds or donate the investment directly.
Generally, if your investment has appreciated, it is more advantageous to donate the asset directly. But if the asset you plan to donate has depreciated, you might want to reconsider.
To explain, imagine you are thinking about donating a few stock shares. You bought them for $1,000, and now, they are worth $5,000. If you sell them, you have to report a capital gain of $4,000. Then, when you donate the $4,000, you can claim a deduction for that amount, which helps to counteract your capital gain.
However, if you simply donate the investments, you can claim a deduction for $5,000, and you do not have a capital gain to worry about.
On the other hand, if your $5,000 investment has depreciated to $1,000, you won’t get a tax-deductible donation for $5,000. Since the asset you donated is now worth $1,000, that’s all you can file on your income tax return. Plus, you need to claim a capital loss of $4,000.
It helps reduce your capital gains for the tax year, and if you do not have any capital gains, you can save the loss for a future tax return. Then, you can give the $1,000 in cash to charity and also claim the $1,000 tax deduction.
Tax-Deductible Donation for Senior Citizens
If you are over the age of 70.5 years, you can also make charitable donations directly from your individual retirement account (IRA). Donations count toward your required minimum distribution.
Once you are over this age, you are — by law — required to take out a certain amount of money every year, but the exact figure varies based on several factors.
You can donate up to $100,000 per year from your IRA, and the entire amount is then excluded from your income. Congress made this rule permanent in 2015.
Can You Claim a Deduction for Volunteering?
Volunteering for outreach programs and similar events do not qualify you for a tax-deductible donation. However, you can claim a deduction for any expenses you incurred while volunteering. This includes any ingredients you bought for meals and the gas consumed while traveling to the venue.
As of 2018, the mileage deduction for volunteer work is 14 cents per mile. That is significantly less than the amount you can claim if you drive your vehicle for business. But, it can add up if the program requires you to do a lot of driving.
For instance, if you are driving hundreds of miles transporting rescue dogs for a non-profit organization, every gallon of fuel you consume counts as tax deductible.
What Is Clustered Giving?
If you want to claim the full tax benefits of your donations but they do not exceed your standard deduction, you may want to consider clustered giving. Clustered giving is when you save up your donations over several years before giving them to an organization of your choice.
Let’s say you were planning on donating $5,000 annually, but you realized that it’s not enough to get you above the standard deduction for an individual taxpayer. What you can do is to save your money in an investment vehicle such as stocks, bonds, equity, or even a savings account for a couple of years. Once the amount goes above the standard deduction, you can donate the total amount you saved up in the past years.
Can You Claim Charitable Donations on State Tax Returns?
If you do not itemize, you may still be able to deduct your donations on your state tax return. For example, in Colorado, you can claim a donation tax deduction worth over $500 if you failed to itemize on your federal return. Keep in mind that the rules vary from state to state, so you need to check the specifics for your state.
A tax-deductible donation is a great way to encourage people to start giving back to the community. It might be a complicated process, but it’s all worth it knowing your time, effort, and money are being used for good. Apart from donation tax deductions, there are plenty of others you may qualify for when you file your income tax return. Be sure to check them all out! Remember, a penny saved is a penny earned.
Have you claimed a donation tax deduction? Tell us about your experience in the comments below.
Up Next: How Are Bonuses Taxed?
Editor’s Note: This post was originally published on August 2, 2018, and has been updated for quality and relevancy.