Understanding Charitable Contributions
Understanding Charitable Contributions
Thanksgiving is right around the corner, and with 2016 winding down, it’s also time to start thinking about reducing next spring’s tax bill. I’m sure you’ve heard the famous line “it’s better to give than to receive.” Well, when it comes to tax minimization, giving is almost always better than receiving. Donating to qualified charities not only benefits others but could also reduce your tax bill if you itemize your deductions. Here are a few things to keep in mind if you are planning to minimize tax with charitable donations:
- Not all nonprofit organizations are qualified charitable organizations and not all donations are tax deductible. Supposedly there is a big election coming up. Keep in mind that political contributions are not tax deductible. Donations made directly to individuals in need are also not tax deductible. While it might be nice to give money to your crazy Aunt Susie, the IRS isn’t going to let you reduce your taxes for that kindness.
- There are different types of donations which may have a different effect on taxes. Cash donations are generally deductible in full, up to 50% of your Adjusted Gross Income (AGI). If you contribute more than the limit in a given year, the excess contribution may be carried over for five years. Non-cash donations are also a great way to give. These may include clothing, furniture, vehicles, toys, collectibles, and even stocks. If you donate appreciate items, consider donating the property directly to a qualified charitable organization to avoid paying tax on the appreciation in the form of capital gains. If you were to first sell stock and then donate cash, you would have pay capital gains tax on the appreciation.
- Record keeping is important. To claim a deduction, you have to be able to document your gifts. You must keep a bank record or written communication from the charity for any charitable contribution to claim a deduction on your tax return. No record, no deduction…. Unless you are looking to get in trouble under potential audit. If you donate clothing, furniture, books, or any other household items ad can document your gift, you can estimate the FMV of the items donated that are less than $5,000. Anything greater than $5,000 requires an appraisal – so don’t go giving away your vintage 1965 Mustang without an appraisal!
Donating to your church or favorite charity is a great way to minimize tax while helping those in need. Keep the above points in mind as you enter the giving season and you’ll reap the benefits next spring.
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