How Charitable Giving Can Impact Your Taxes

From donating money or goods to your favorite charity to volunteering at a soup kitchen, charitable giving is a great way to help others year-round. But from a financial planning standpoint, charitable giving should be on your mind at the close of the year. That's because charitable contributions can impact your federal taxes. Some taxpayers itemize charitable deductions on their federal tax returns, which can reduce their tax bill or even get them a refund in the spring.

Some types of charitable giving provide different tax breaks than others. No matter what type of charitable giving you prefer, it’s important to know the tax implications so that you can plan and budget for donations while knowing how your taxes will be affected.

Charitable Giving and Tax Deductions

Charitable giving can be deducted from your taxable income, possibly bringing you down into a lower tax bracket. Deductions generally rely on three factors:

1. The recipient (qualified charities are the only ones that can receive a donation that is tax deductible, so gifting to your family will not give you a tax break)
2. How you structure your donations
3. The form in which you donate

You're generally limited to deducting no more than 60% of your adjusted gross income (AGI), although there may be lower thresholds depending on the type of donation. You couldn't donate and deduct more than $60,000 in one tax year if your AGI was $100,000, but that's pretty generous.

Tax Implications of Various Donations

Cash donations are generally fully deductible for the exact amount you donated. You'll need a receipt if you donate more than $250. You'll have to request some kind of bank statement or receipt from the recipient, no matter the amount, if you donate cash to a charity rather than write a check or charge your credit card.

Tangible assets can usually be deducted for the full value of the items based on their current worth when you're donating things that correlate to the charity, such as old clothes to the Salvation Army or art to a museum. You're allowed to deduct the amount you paid for the item or its reasonable value, whichever is less, if the assets have nothing to do with an organization’s aim or mission.

The full fair market value can generally be deducted from appreciated long-term assets. You can deduct long-term securities that you've held for more than one year in most cases, but the deduction is limited to 30% of your adjusted gross income (AGI). Donating your stocks directly to a charity may offer more tax benefits and can lower your tax bracket.

Limitations for Deducting Contributions

The Internal Revenue Service (IRS) has many guidelines for tax-deductible charitable contributions. There are a few limitations to be aware of if claiming deductions is a part of your financial charity-giving strategy.

You must have a written statement from the charity if you donate and want to claim a deduction for donated cash or goods of $250 or more. The statement should display the amount of the donation, describe any property given, and indicate whether the organization provided any goods or services in exchange for the gift.

Your deduction will be limited in cases when you get something in return for your donation. You can only deduct the difference between the amount of your donation and what you received in return.

The IRS also has guidelines regarding qualifying charities. You must donate to a qualified charity if you want to claim a deduction for your charitable contribution. Giving $500 directly to a homeless person, friend or relative isn't deductible. And you can't deduct donations made to political organizations or candidates, either.

Accurate recordkeeping is important. As you make contributions throughout the year, you must keep records to prove the types of donations you're making. Regardless of the amount you donate, you'll need a record if you choose to take a deduction.

The Bottom Line

Regardless of how you want to give your time and money to charities, it can be a good idea to sit down with a qualified financial planner first. An expert can offer advice on the types of donations that would work best for you, for your estate, and your future plans. They may also be able to help you find an organization that shares the same philanthropic goals and ideals as you. 

Another resource that might be helpful is the Charity Navigator. This website will give you tons of options if you're looking for a charitable organization, and it makes it easy to find an organization that's not only legitimate but caters to causes you want to support.  

Frequently Asked Questions (FAQs)