Charitable Giving and Your Taxes

Although giving to charity comes from the heart, you’ll usually still feel it in your wallet. Of course, many contributions to charity are tax deductible, easing the financial hit.

Charitable Donation

Charitable Donation

What is a Tax-Deductible Charitable Contribution?

When you give a dollar or two to a man on the street, it might feel like charity. Heck, it probably meets the English definition of charity. But from the IRS perspective?  It’s a gift.  While that means the recipient of your generosity won’t need to pay tax on the gift, it also means you can’t deduct the amount you gave away either.

Only gifts to 501(c)(3) organizations are tax deductible. You can check to see if the organization you are going to make a donation to is a 501(c)(3) organization at the IRS web site. In short, you must give to a registered non-profit organization (not individual) which operates as a true charity.

Who Can Deduct a Charitable Donation?

If you make a charitable donation to a qualified charity, you can only deduct the contribution if you itemize. Said another way, those who take the standard deduction will not realize any tax savings as a result of their generosity.

On the other hand, those who itemize can take sizable write-offs for their contributions. An itemizer in the 25% tax bracket who makes a $200 donation will see his or her taxes reduced by $50 ($200 deduction x 25% tax bracket). Consequently, while the charity receives the full $200, the donor is really only out $150 ($200 contribution less the $50 in tax savings).

Donating Cash vs. Donating Stuff

When you write a check, charge a donation, or simply provide cash to a charity, the amount of your potential deduction is easy to determine; it’s simply the amount you contributed.  Sometimes, however, you might donate household items, such as old clothing or furniture.  In that case, things are not so straightforward. Instead of being able to deduct what you paid for the items donated, you are limited to the amount they are worth.

A reasonable estimate, usually based on what you could get for your items at a thrift shop, is sufficient.  When you use TurboTax, the ItsDeductible feature will accurately value your donations in compliance with IRS guidelines to maximize your tax savings. No matter whether you donate cash or goods, be sure to get a receipt.  If you donate something worth more than $250, a receipt is required.

Did the Charity Give You Anything?

If you receive something in exchange for your donation, like a nice meal or a gift card, you can only deduct your contribution to the extent it exceeds the value of what you received. So if you make a $150 donation to a charity which then provides you a meal valued at $50, your tax deduction is $100.

Fortunately, most charitable organizations provide you with a summary of the tax deductible amount of your contribution when they send you a letter thanking you for your generosity.

Timing Your Donations

While charities need money throughout the year, many dramatically increase their recruiting efforts towards the end of the year. Part of that strategy is undoubtedly to appeal to sentiments during the holiday season. But another force is at play: taxes. Because tax deductions are aggregated on a calendar year basis, many donors make their largest donations at the end of the year.

A donation made in late December means tax savings on a return due less than four months later.  A donation made in January doesn’t hit the income tax return for the donor until nearly 15 months later.  Which would you choose?

While you shouldn’t allow potential tax savings to determine whether or not to be generous, it will always make sense to be mindful of the opportunities provided by appropriate charitable tax planning. After all, the more you save when you donate, the more you can afford to donate again sometime later.

Michael Rubin

Author of the bestseller Beyond Paycheck to Paycheck, and the upcoming The Savings Solution, Michael B. Rubin is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER professional. In addition to his experience providing sophisticated financial advice to affluent clients, Michael has been a key source of information for over a decade to countless others. He speaks passionately about and provides guidance on virtually all personal financial planning topics. Michael has appeared in various media, including radio and TV stations across the country, plus national media such as CNN Money.com, latimes.com, The Wall Street Journal, SmartMoney.com, Chicago Tribune, Financial Advisor Magazine, and Investment News. Prior to founding Total Candor LLC, Michael worked in the personal financial services practices of two of the former "Big Six" accounting firms. Subsequently working for several years as a new venture executive for Toys "R" Us, Inc., he made sure that he never actually grew up. He holds an undergraduate business degree from the Ross School of Business at the University of Michigan and an MBA from the Kellogg School of Management at Northwestern University. Michael lives in New Hampshire with his wife and children.

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