The Tax Benefits of Giving to Charity
We here at Tobias thought it would be helpful to give you an overview of some of the tax benefits of giving to charities. Of course, the great feeling that comes from being part of something greater than yourself is an immeasurable benefit in and of itself, but there’s no reason you can’t also reap the financial benefits of saving on your taxes from your good deeds. Here are some important things to keep in mind when it comes to tracking and benefiting from your charitable donations.
Donating to Charity Can Lower Your Taxes
You may have already known this, but it bears mentioning – when you donate to a legally recognized charity, you may experience a reduction in taxes. There are rules regarding how and when you can take these deductions, and the best way to gather all the proper information regarding your desired donation is by checking with the IRS or a reputable resource like Charity Navigator. Once you’ve established that a deduction might be possible, here are some tips to keep in mind as you prepare your taxes.
Timing is Everything
If you were unaware of the tax benefits of giving to charity in the past, this might be a bit of a let down, but the rules state that you must take a deduction in the year you made the donation, or it will not be valid. So, if you have donations from 2015 that you did not take full advantage of, the bad news is you will not be able to use those this year, but depending on the amount, you may want to consider amending the already filed 2015 tax return. The good news is that 2016 is not over yet, so anything you donate between January 1st of this year and December 31st will be eligible as a potential write off for your upcoming tax return.
Written Documentation is Necessary
It’s important to request a receipt for any charitable donation that you make. If you donate an amount of $250 or greater, you must have written documentation from the charity stating the amount given. This written document is imperative in the case of an audit. If you’ve already donated more than $250 to a charity they are required to send you a written acknowledgement of that donation at the end of the year (if they have not already done so). Their letter will also notify you of any “goods or services” that you received in exchange for the donation, which is used to reduce your deductible contribution. You can also “prove” the amount through cancelled checks or credit card statements if necessary, so be sure to keep track of those items.
Non-Cash Items Count as Donations
Tax deductions are not limited strictly to cash/credit donations. You can also take a write off for non-cash items as well. For example, if you donate clothing or furniture to a charity, you are allowed to take a charitable deduction for the fair market value of the items (in the condition in which they are donated). In order to qualify for this type of deduction, the charity must provide you with a written receipt of the goods you provided and the monetary value assigned to those goods. While clothing and small pieces of furniture can be valued based on a best guess, any single item that is worth $500 or more from your donation (and not in good used condition when donated) will require an appraisal if you are going to use it as a tax deduction.
It is also important to note that for larger donations we generally recommend clients use long-term appreciated securities, which allows them to deduct the fair market value of the securities while not having to recognize the unrealized gain. In this case, the charitable organization should simply acknowledge receipt of the # of shares and the date of the transfer.
Charitable Donations are a Win-Win
While the monetary benefits of donating to charity are certainly a positive benefit, nothing can outweigh the feeling of doing something positive for another person or your community. There is nothing wrong with also benefiting from our tax laws in the process of doing good for others, and it in no way takes away from the good deed. In fact, we like to think of it as a win-win. With that in mind, let’s finish the year strong and find a charity you care about to support.
Do you have any questions about how you can start taking more deductions for charitable donations on your taxes? Please feel free to get in touch with us to find out how charitable donations can factor into your financial plan.