Charitable giving reached an all-time high in 2014,1 with Americans giving $358.38 billion to charities, according to National Philanthropic Trust.2 Giving feels good, but the benefits of giving don’t end there. You can also reduce your taxable income through charitable giving by making sure you follow the tax guidelines for charitable donations.
If you haven’t yet done so, you can join the millions of Americans who donate to charity and receive a reward for themselves: a lower overall tax bill.
In order to make a difference in your taxes, follow these 7 guidelines:
- Choose Qualified Charities. Not all charities qualify for tax deductions. If you’re unsure about a charity’s status, ask to see their letter from the IRS or search online at the IRS Exempt Organization Select Check website. If you’re donating to a church, mosque, synagogue, or temple, keep in mind that religious charities are considered de facto charitable organizations, even if they’re not on the IRS list.
- Itemize Your Contributions. In order to claim charitable donations on your 1040 tax form, you’ll need to itemize the contributions you’ve made to charities. You need to support your claim with proof, generally in the form of a receipt from the charity.
- Don’t Forget About Charitable Payroll Deductions. More and more employers are allowing their employees to contribute directly to charities through their payroll. This is a great way to support your favorite causes all year round, but don’t forget to include charitable payroll deductions on your tax return. As with other contributions, you’ll need to itemize payroll contributions, and you can do so by documenting them with your pay stubs or a W-2 form, along with a copy of your pledge card.
- Report the Value of Non-Cash Donations. Although it’s a bit trickier, you can claim deductions on the charitable giving of non-cash as well as cash donations. For instance, if you donate household items to Goodwill or an old car to a local charity, record the fair-market value for these items and include them on your tax return. If the value of an item is more than $5,000, the IRS requires that you acquire a written appraisal of the item’s value to include with your tax return.
- Remember that you can’t Deduct Your Time. Although you may spend significant time volunteering for charitable donations, the IRS does not allow you to deduct contributions of time from your taxes. However, you can deduct out-of-pocket expenses that you incur while you’re volunteering. For example, you can deduct the cost of transportation (including parking fees and tolls) for your trips to volunteer at your favorite local charity.
- Watch the Calendar. Keep track of the dates of your charitable donations and report each donation on the appropriate year for your taxes. Contributions made by December 31, 2015 can be deducted from your 2015 taxes. If you write a check and mail it off by the end of the year, even if it’s not cashed until 2016, you can still count it as a 2015 contribution. Likewise, if you charge the donation to your credit card in 2015 but you don’t pay off your card until 2016, it still counts.
- IRA Charitable Rollovers. [Updated 12/23/15] Tax-free transfers for charitable purposes from certain individual retirement plans have been permanently extended.4 This allows individuals to transfer up to $100,000 per year from an Individual Retirement Account (IRA) held by an individual who is 70½ or older to a public charity without having to count the IRA distribution as income.3
For more information about reducing your taxable income through strategies such as charitable giving, or to speak with one of our Wealth Managers about any other financial planning issue, call us at 1-800-541-7774 or contact us here.
Sources:
1. Forbes
2. National Philanthropic Trust
3. Forbes
4. Kiplinger
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
