Giving is a part of the holiday culture. In 2016, $390 billion was donated to charity and forty percent of that came towards the end of the year.
If you are concerned the IRS is on your back, you may owe the IRS money or if you just are one of the many people who generously give to charities and causes during the holiday, then you should take advantage of the financial benefits.
Charitable donations are tax-deductible and can reduce your tax bill by roughly 25 cents to every dollar you donate. Maximizing your donations can save you more in taxes.
Here are seven ways to make the most of your holiday donations this year.
7 Ways to Maximize Holiday Donations for the Best Tax Advantages
1. Give ahead
To receive a deduction on your charitable donations, you need to itemize your deductions on Schedule A of form 1040.
This form also applies to other itemized deductions such as home mortgage interest and medical expenses.
To benefit from a charitable donation, your itemized deductions should exceed the standard deduction. Since the New Tax Act, however, the standard amounts have increased.
For singles, the new non-itemized or standard rate is $12,000, while married couples get $24,000.
In addition, the 2017 Tax Act places a $10,000 cap on state and local deductions and eliminates several other deductions that taxpayers usually itemize.
These changes make it difficult for the average taxpayer to exceed the standard deductions and benefit tax-wise from charitable donations.
One way to solve this problem, however, is by giving ahead or bunching.
Bunching means donating the amount meant for two years in one.
You can use specialized charitable vehicles–more on this later–such as a donor-advised fund (DAF) to keep your contributions until you are ready to give while receiving the immediate tax benefit of your donation.
For example, let’s assume you (and your spouse) decide to itemize deductions this year.
If you pay $5,000 in mortgage interest and claim the maximum property and state income tax deduction of $10,000, you will need at least an extra $10,000 to exceed the current standard deduction amount for couples–assuming you have nothing else to itemize.
You can surpass this threshold by making a $10,000 donation, but rather than donate it all in one year, you put in a DAF and contribute over time while still getting the tax benefits this year.
2. Contribute to qualified charities
Not all charitable donations qualify for a tax deduction.
Contributions to political campaigns and parties, social welfare organizations, individuals, labor unions, for-profit schools/hospitals, and foreign governments do not qualify.
Qualified charities have a 501(c)(3) designation and usually tell you if your donation is tax-deductible.
You can also do a quick search on the
IRS website
to check if a charity qualifies.
Organizations that generally qualify for a tax deduction includes religious organizations such as churches and synagogues, war veterans organizations, non-profit volunteer fire companies, non-profit cemeteries, tax-free hospitals/schools, government agencies, community chests, corporations, and trust funds that operate for charitable, religious, educational or scientific purposes
3. Deduct out-of-pocket expenses
A common question with charitable contributions is whether volunteer services are tax-deductible?
The answer is no. You cannot get a deduction for the services you render to a charity, or the time spent helping one.
That said, you can deduct out-of-pocket expenses you made during volunteer service.
For example, if you drove in your efforts to help, you can track the mileage and deduct it later.
Other expenses you can deduct include:
- Travel expenses: You can deduct air, rail, and bus transportation costs, lodging costs, taxi fares, and the cost of meals during your volunteer service.
- Conventions: You can deduct the expenses you incurred while attending a convention for charity work.
- Telephone charges: You can deduct the charges of a long-distance phone call made on behalf of a charity.
- Events: You can deduct the catering expenses made on a fundraiser or event you host for a qualified charity.
If you claim an expense of more than $250, you will need to provide evidence in the form of an acknowledgment from the charity.
The acknowledgment must contain a description of the service and a statement of whether you received a tangible compensation for your services–you cannot make a deduction if you received compensation for your volunteer work.
4. Donate your investments
If you have a diversified financial portfolio, donate stocks, bonds, or mutual funds you’ve held for more than a year.
Donating long-term assets have many benefits. For one, you won’t have to pay the IRS mandatory capital gains tax.
Secondly, you can give more when you donate securities directly rather than selling them and contributing cash but this only applies if the investment is appreciating in value. It’s better to sell first if you are holding securities at a loss.
Finally, donating investments can increase the amount you deduct.
For example, if you put $5,000 in a stock that is now worth $15,000, you can donate the stock to charity and still deduct its current fair market value.
Whereas, if you sell the same stock and donate the cash, you will pay a capital gains tax on the$15,000, making your donation less and reducing the amount you can deduct.
One thing to note is you can only deduct 30% of your adjusted gross income (AGI) when you donate investments.
For cash, the limit is 60% of your AGI. If you want to make a large contribution that may exceed your AGI, talk with a tax professional first.
5. Keep records
Many people avoid donating because they do not know how to document their contributions.
To get a tax deduction, you must have a written record of your donations that show the name of the charity, the date of your contribution and the amount you gave.
The IRS will cancel donations of over $250 if you don’t present an official record.
The best records are canceled checks and bank statements.
They show all the necessary information and come from a credible source.
Charities also give acknowledgment letters or receipts you can use. Save your donation receipts and acknowledgment letters in a file, receipt box, or spreadsheet throughout the year so you are ready when tax season comes.
You can also use apps like ItsDeductible and iDonatedit to track your charitable donations throughout the year.
6. Donate goods
If you do not have a lot of cash to spare, donate some of your properties.
You can give away old clothes, furniture, or toys to thrift stores and charities for a tax deduction.
When you donate an item, you get a deduction equal to its current market value.
So if you donate furniture you bought for $100, but is currently worth $200, you get a tax deduction for the current price.
You can also donate non-tangible items.
A good example is if you paid $300 for a salsa dance class but can’t attend.
You can give away the class ticket to a charity and make a deduction for the amount you paid.
If you want to donate a car, be careful of how you value the donation.
If the car is worth more than $500, you can only deduct the amount the charity received from selling the car.
You cannot use the current fair market value of the car unless in one of the following conditions: 1.) The charity makes improvements to the car before selling 2.) The car was sold at a discounted price to a person with a low income or 3.) The car is worth less than $500.
Donating goods is more complicated than giving cash or investments because it’s difficult to tell the value of what you gave or show evidence of your contribution. Here are some tips to use when donating goods.
- List out all the items you are donating. This is especially important to fill out Form 8283.
- Make sure the item is in good condition. The IRS will not give you a deduction on an item that doesn’t work or is in poor condition.
- Find out the current value of the item(s) you donate. Organizations like the Salvation Army or Goodwill have valuation guidelines you can use. If you are donating property of over $5000 get a written appraisal.
- Take pictures of your donation if you can. The IRS are sticklers for proof and having pictures will make your claims more convincing especially if you are donating a lot of items.
- Get a receipt from the charity as a proof of the value of your donation. You can prepare your own receipt and have the charity sign it when you drop off the items. If you are donating a brand new item, you can keep the store’s receipt.
7. Use Specialized Charitable Vehicles
Make your donations through a planned charitable vehicle rather than your personal checkbook.
These vehicles help you organize your various donations and are tax favorable.
The most tax-effective charitable vehicles are donor-advised funds (DAFs) and charitable remainder trusts (CRTs).
Donor-Advisor funds (DAFs) are accounts that are set up by a public charity.
Some DAFs are created as a charitable gift or trust and managed by financial institutions.
With a DAF allows you to make your cash or investment donations–for multiple years–and receive the current year tax deduction.
The funds you donate can be invested to grow with no capital gains tax until you are ready to make a charitable contribution.
Other than the immediate tax benefit, DAFs are administratively efficient and provide anonymity for those who want to give quietly.
A charitable remainder trust (CRT) is an irreversible trust set up to benefit a charitable organization.
It can last for a lifetime, several generations after, or a period not more than 20 years.
In a CRT, you permanently give an asset to a charity and earn an annual income on the asset for the duration of the trust.
You also receive a tax deduction for the value of the asset.
At the end of the trust, the charity receives whatever is left of the asset and it is no longer accessible to you or your heirs.
Many people use the income from a CRT to buy a life insurance policy so their loved ones can proceed from the asset in the future.
Setting up a CRT can be complex and you will need the help of an attorney.
Conclusion
In conclusion, if you itemize your taxes, take advantage of holiday donations.
The best way to do this is by using all the mediums available to give including cash, investments, and goods.
Also, consider using a specialized charitable vehicle such as a donor-advised fund to “bunch” your donations so you can exceed the standard deduction amount.
Finally, keep all the records of your donations including canceled checks, bank statements, and receipts or acknowledgment letters from the charity.
So what other ways have you been able to maximize your holiday donations for help with your taxes? Just leave a comment below with some of the ways that have worked for you.
