Tax Deductible Donations 101
By Dan Nastou, CFA
It’s April again, which means it’s tax season. So if you’ve put off doing your taxes, now is the time to get to it. We have a few other resources to help. You can learn how to file your taxes easily with tax software, learn about working with a tax expert, or you can get a broader tax overview in our Core Content. But here we’re going to talk about deducting charitable donations. So let’s do it!
First off, what is a tax-deductible donation?
The big picture: When you make a donation to a qualified charity, in the form of cash or property, you’re allowed to deduct the donation amount from your income, potentially reducing your tax bill for the year. It’s essentially the government’s way of encouraging charitable giving.
However, there are a few rules you’ll need to follow for it to work.
The organization must be a qualified charity
In order to claim a deduction, you need to make sure the organization is “qualified”, meaning it’s a legally recognized tax-exempt organization.
The organization should clearly state whether or not they qualify in their marketing materials. But you can do an official search through the IRS website here. If they aren’t qualified, that doesn’t necessarily mean you shouldn’t donate, it might still be a worthy cause. But you won’t be able to claim the deduction on your tax return.
Also keep in mind: Just because an organization is a non-profit, doesn’t necessarily mean it will qualify as tax-exempt. So you’ll want to check first.
How much can you deduct from your income?
For the most part, the maximum you can deduct each year is 60% of your Adjusted Gross Income, or AGI.
Without getting into all the details here, your AGI is basically your annual income (including wages, investment income, business income, etc.) minus a few specific payments, like contributions to a retirement plan and student loan interest payments.
You can read more about Adjusted Gross Income on the IRS website.
Although 60% of your AGI is the standard maximum you can deduct, you may face a lower 30% cap based on the type of organization and the type of contribution. Again, the IRS has a more detailed breakdown, which you can check out here. You can also ask the organization directly how much of your contribution you can deduct – they’ll know, they get asked all the time.
And if you do end up exceeding the limit in any given year, you can probably still claim it later. You can carry over contributions for five years or until your deduction has been used up. Also keep in mind, in order to claim a deduction on your tax return, you need to make the donation by December 31st of that particular year. So for your tax return due April 2024 (your 2023 tax return), you would need to have made the donation by December 31st 2023.
Itemizing versus taking the standard deduction
Everything we’ve been talking about so far is assuming you’re taking an itemized deduction on your taxes. But you get to choose whether you want to itemize or take the standard deduction. Basically the decision should come down to whichever option saves you more money.
If you use tax preparation software, like TurboTax, then it should automatically determine whether you should itemize or take the standard deduction. In general though, you’ll want to know what your itemized deduction would add up to and then make the call to itemize or take the standard deduction. Also, if you’re using a free version of tax software, it may not offer the option to itemize – some only allow for the standard deduction.
Broadly speaking, if you pay a lot in mortgage interest or student loan interest, have high property taxes, and/or give a lot of money to charitable organizations, then your itemized deduction might exceed the standard. If you don’t have a lot of those, then the standard might be the way to go. But you’ll want to figure out which makes the most sense for you.
For the 2023 tax year (tax returns that are due April 15th, 2024), the standard deductions are;
•Single or married and filing separately: $13,850
•Married and filing jointly: $27,700
•Head of the household: $20,800
These numbers will be increasing for the 2023 tax year.
A few other things to keep in mind
Keep track of your donations – no matter how much you give, it’s always a good idea to keep a record of your gifts. The organizations you give to should send you a receipt or confirmation. If you don’t get one for some reason, your bank statement should work too.
If you give a cash or property donation of $250 or more, then the IRS requires you to keep a letter of acknowledgement from the organization. The letter also needs to document whether or not the organization provided any goods or services in return for the the gift, and if so, it must describe what those were. Basically they want to make sure it’s really a donation and not some sketchy business kickback scheme.
Deductions for volunteering – unfortunately you can’t deduct the value of your time spent volunteering on your taxes, but you can deduct certain expenses you incurred while volunteering, like mileage to and from. So keep your receipts if you want to deduct the actual cost, or you can use the IRS standard mileage deduction, which is 14 cents per mile (for 2022 and 2023).
Make giving a part of your financial plan
While the tax deduction is a nice bonus to charitable giving, it shouldn’t be your only reason for supporting good causes. So spend some time considering the role of charitable giving in your financial plan. There are many tangible, as well as intangible benefits to giving, and a lot of great organizations rely on donor generosity to keep doing what they do.
And no matter what you’re interested in, there are countless organizations to choose from. Which means you can always find something to support. Even if you don’t have a lot to give right now, any amount is a meaningful contribution. So get involved!
This is intended for educational purposes, not financial advice. Talk to your financial professional if you need help or are thinking about making changes to your investments.
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