Tax Deductible Donations: Charitable Giving Strategies w/ Impact

You’ve spent your life building your personal wealth, and as it’s grown, so has your sense of social responsibility. Whether through impact investing strategies, donor-advised funds, or simple one-off charitable donations, you do your best to give back to the communities that have helped you prosper.

The U.S. government recognizes that people like you are partners in its mission to serve the public good. Where government programs stop, nonprofit and charity work begins. The government, therefore, has an interest in supporting your financial commitment to the causes you care most about. If you can save a little money on your taxes by deducting your charitable donations, they reason, then you’ll have more money to contribute, thus boosting your positive impact on society.

Provided you follow all the rules and are donating to charities that are considered qualified charitable organizations, your donations can save you some money on your taxes when you itemize. Finding yourself on the same side as the Internal Revenue Service is a springtime grand slam, my friend

The IRS defines a qualified charitable organization as “nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.” Veterans organizations, volunteer fire departments, Native American tribal governments, and some organizations facilitating national amateur sports competition may also qualify.

We’ve designed this guide to give you practical information about what donations are tax deductible and how to boost your tax savings. We will look at how and to whom you give, IRS limits, and some charitable giving strategies designed to help you make the biggest impact.

What Donations Are Tax Deductible?

When you want to simultaneously boost your philanthropic impact and tax benefit, knowing which donations are tax deductible makes all the difference. Here’s a breakdown of what types of contributions qualify for deductions.

Cash 

• • Contributions made in the form of cash, checks, electronic funds transfers (EFT), or credit card payments are usually deductible. 
  • It is necessary to keep records such as bank statements, receipts, and written communication from the qualified charity to substantiate your contributions.
  • Your records must detail the organization’s name, the amount, and date of the contribution.

• Cash donations up to 60% of your adjusted gross income (AGI) are tax deductible, if you itemize deductions on your taxes.

• A written statement from the charity is required for cash contributions more than $250. In addition to name, date, and amount, the statement must include an acknowledgement and estimated value of any goods or services you received for your donation.

Appreciated Assets

• • You can claim a deduction for the fair market value (FMV) of appreciated stocks, bonds, or mutual fund shares donated to charitable organizations. 
  • FMV is the average of the high and low prices for the day your chosen charity receives the donation.

• By transferring assets directly to the recipient, you can bypass taxes on capital gains. This provides an immediate tax benefit even if you don’t itemize deductions for taxes. 

• Deductions equal to the FMV of the security donated are tax deductible up to 30% of your AGI if you itemize deductions.

Goods and Property 

• Tangible property donations, including clothing, household goods, vehicles, and real estate, to charitable organizations may also qualify for tax deductions.
• Specific rules set by the IRS govern how you value and report tangible donations. It’s essential to understand these guidelines to ensure compliance and receive your deduction.
• Donations of less than $250 must include the organization’s name, description of the goods, as well as the date and location of the contribution.
• If you donated goods or property of $5,000 or more, the contemporaneous written acknowledgement must include a written statement of worth from a qualified appraiser. 

Charitable Giving Strategies To Maximize Your Impact

Donor-Advised Funds (DAFs)

• A Donor-Advised Fund (DAF) is a charitable fund managed by a third-party organization that distributes your contributions to the charitable organization(s) of your choice. When utilizing a DAF, you get immediate tax deductions for contributions and streamlined philanthropy.
• Since so many people don’t itemize deductions on their tax returns, Donor-Advised Funds have become an especially useful tool. You can add up multiple years’ worth of donations and instead make the contribution to the DAF at one time.
• This “bunching” strategy will help get you over the hurdle of the standard deduction, providing an additional tax benefit by allowing you to itemize deductions.
• Additionally, you can fund your Donor-Advised Fund with appreciated investments, which will also help avoid capital gains taxes.

Qualified Charitable Distributions (QCDs)

• Qualified Charitable Distributions (QCDs) allow individuals aged 70½ (Yes, seriously. 70 ½.) or older to make tax-free distributions from their Individual Retirement Accounts (IRAs) directly to qualified charities. 
• QCDs sidestep taxation as income, and contribute to fulfilling required minimum distributions (RMDs), reducing your taxable income.

Leveraging Retirement Accounts

• Designating charitable organizations as beneficiaries on your retirement accounts offers significant tax advantages and only requires you to complete a beneficiary form.
• If you have any interest in leaving a bequest to a charity, this should be one of your first considerations. Upon your passing, the charity will receive funds tax free, whereas your kids or other heirs would be facing income taxes on their withdrawals.

Final Thoughts

Meticulous record-keeping is essential to verify your contributions. Remember that the IRS requires receipts detailing the amount, any benefits received, and the value for all donations exceeding $250. Donations of cash, stock transfers, or QCDs must be made by December 31st each year to deduct them on your taxes the following April.

Understanding which donations are tax deductible, looking into charitable giving strategies, and keeping on top of documentation and IRS deadlines are essential steps. Thoughtful consideration, forethought, and a solid tax plan are highly recommended when itemizing your charitable deductions. 

Consulting with a qualified financial planner or tax professional can provide personalized guidance for  your specific situation, so that you make informed decisions to support your philanthropic efforts while optimizing your financial outcomes.

At SK Wealth, our financial advisors have been helping our clients make informed choices regarding your tax efficiency and charitable giving for 25 years. We’ve honed our financial planning process, The Integrated Financial Advantage™, in order to offer recommendations that are personal to you, your lifestyle, and your goals so that you can live with intention, tomorrow and today.

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