How Charities Can Reduce Your Tax Bill

How Charities Can Reduce Your Tax Bill

Charitable giving comes with tax benefits. Considering that 15% of Americans itemize their taxes, charitable giving can lead to meaningful, additional tax deductions for millions of people. This is because charitable donations to qualified charities can be deducted from your income taxes, reducing your overall taxable income. Here’s how you can earn a tax deduction on your charitable donations.

Donate To a Qualified Charity

The charity you donate to must be a 501(c)(3) organization. This is a corporation; trust, unincorporated association, or other kind of organization, that is exempt from paying federal income tax under section 501(c)(3) of Title 26 of the United States Code. As a 501(c)(3) organization, the Internal Revenue Service (IRS) recognizes the organization as a charitable organization, and therefore, your donations to that organization will be classed as charitable donations, allowing you to enjoy tax deduction benefits. According to Premier Primary Care Medicine, charitable hospitals are a much neglected charitable organization type that people should think about donating to. Charitable hospitals do vital work, and in many instances, life-saving work.

Plan Your Giving

Deductions for charitable donations have a limit of 60% of your adjusted gross income (AGI), i.e., your income from all income sources. (There are cases where limits are set at 20%, 30% or 50%, but let’s use 60% as a general rule.) Gross income is the important number to consider when you file your taxes. So, for example, if you have a gross income of $100,000, and claim various deductions worth, say, $20,0000, you then have an AGI of $80,000. AGI is your gross income minus any claimed deductions. You are only allowed to get a deduction on charitable donations to the tune of 60% of $80,000, or $48,000. Anything beyond that will not earn you a tax deduction.

You want to be aware of your income flows so that you can plan ahead and make your donations in such a way that you can claim the maximum deductions possible. It is also important to consider if your gross income is going to increase over the next fiscal year. If you expect to be in a higher tax bracket, you should stagger your donations so that the bulk of them are made in the fiscal year when you expect to get to a higher tax bracket.

In considering your gross income and its evolution, you will reduce the out-of-pocket cost of the donation.

Get Proof of Your Giving

For most people, the standard deduction is a better option than itemized deductions. If you want to claim on charitable donations, you have to provide proof of the charitable donations, as well as all the other items for which you are seeking deductions.

You have a choice between a standard deduction, which for one person is $12,550, or, itemized deductions. For the average person, you are unlikely to find deductions bigger than $12,550, and the time and effort of trying to do so is often not worth it. This is because the biggest hurdle for most people is finding evidence for all those deductions.

If you believe that your charitable giving will result in a larger deduction than is possible with the standard deduction, then, you need to file with itemized deductions, and provide proof of that giving. According to the IRS’ rules, any donation of $250 or more should get a “contemporaneous written acknowledgment”. Smaller donations require nothing more than a bank record or receipt. If donations under $250 are made through payroll deductions, you should provide a W-2 form, pay stub, or other employer record detailing the date and donation. You can also provide a pledge card from the charity, that declares that the donation was not a quid pro quo donation, ie, you did not receive anything in return.