‘Tis the season of giving! The holiday season is a special moment when thoughts and actions are geared toward making others feel loved. For many, that giving spirit resonates with causes close to their heart and community.
Spreading holiday cheer to your favorite charities brings countless smiles. Your holiday spirit shines bright knowing your dollars are making a significant difference for others in need, and local charities can continue their virtuous missions.
Our nation thrives by helping one another, and Uncle Sam rewards those who assist others. In addition to bettering others, your charitable donations provide financial benefits during tax time. In this article, we’ll highlight how your holiday contributions can empower others and help your bottom line.
Understanding the Tax Advantages of Charitable Giving
Giving to charities is a win-win scenario for all those involved – you better the lives of those in need, and you’re rewarded with potential tax savings next year.
For most people, the tax benefits will shine through a reduction in taxable income. Some will benefit through advanced strategies, including capital gains and estate tax reductions. In this article, we’ll focus on the former since it’s most common.
Every dollar (or qualifying non-cash item) you donate to an eligible charitable organization helps to lower your taxable income – meaning, Uncle Sam taxes less of your earned income. These itemized deductions can be listed on your upcoming tax return.
To qualify for tax benefits through charitable giving, your donations must be made before December 31st of the current year.
What Types of Charitable Organizations Qualify?
Giving to others in need is admirable. But how can you tell if your donations will qualify for tax advantages?
To qualify for tax benefits, the organization you donate to must be classified as a 501(c)(3) or tax-exempt organization under the Internal Revenue Code. To verify if a charity or group is classified as a 501(c)(3), you can use the IRS Tax Exempt Organization Search tool on their website.
The 501(c)(3) designation often includes:
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Charitable organizations
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Educational & literary organizations
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Non-profit churches & religious groups
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Some private foundations
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Ineligible Organizations:
Many organizations help the community and others in need; however, they might not be eligible for tax advantages, according to the IRS. Examples include:
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Individuals, including donations to crowdfunding sites like GoFundMe, Crowdfunder, Kickstarter, etc.
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Political organizations or individuals
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For-profit schools or hospitals
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Labor unions
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Social clubs
What Types of Giving Qualify?
Now that you know who you can donate to and receive tax benefits, it’s important to determine what giving qualifies.
The following donations are eligible for tax deductions:
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Cash, check, or online donations
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Credit card payments (processing fees may reduce donation amount)
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Clothing and shoes
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Furniture
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Household items
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Mileage reimbursements or expenses incurred while volunteering
Not all donations are eligible for tax savings. Here are examples of some that will not benefit you come tax time:
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Time given by volunteering
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Pledged donations (you can only claim the tax benefit the year you donate)
How Can My Deductions Qualify?
In addition to ensuring your donation is eligible for tax deductions and that you’re giving to a qualified organization, there are a few other steps you need to take to ensure you’re able to take full advantage of the benefits of charitable giving.
For any monetary donations, no matter the size, you need to retain a record of the donation either through your financial records or written documentation from the charity. The proof of donation must include the amount given, the date of donation, and the organization's name.
If you donate things like clothing or items rather than money, you must maintain a receipt or other record of the donation. This should include a list of what was given, the condition of the items, and fair values for each item.
For donations valued above this amount, the IRS requires a written acknowledgment from the organization stating the amount donated. The acknowledgment must also state if the donor received goods or services in return.
There are additional requirements for donations of larger amounts. Donations of items valued at more than $5,000 typically require a qualified appraisal.
How the Credit Union Can Help
Giving to charities is commendable as you help those in need and spread holiday cheer throughout the community. Every donation, no matter how big or small, has a lasting impact on both the giver and receiver.
For many, tax benefits from charitable donations can be confusing – but they can also play a significant role in retirement planning and overall tax strategies. If you would like to speak with a professional before contributing to an eligible organization, our Financial Advisor team can help. They will provide guidance and help incorporate your giving into your overall retirement plan.
We’re Here to Help!
Spreading cheer to those in need is what the holiday season is all about. If you plan to donate to a charity or cause close to your heart this year, don’t forget to obtain a receipt for tax time in the coming year.
If you want to speak with our financial planning team to organize your charitable giving and factor it into your overall retirement plan, we’re ready to help. Please stop by the Credit Union or call 410-687-5240 to schedule an appointment today.
Happy Holidays!