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As the holiday season rolls around again, we are reminded of the importance of giving back. Whether this means a toy drive, monetary donation, or more, giving back to your community can be beneficial from a financial perspective, too! I remember growing up around Christmas time and participating in my church's local toy drive. It was part of our family tradition to pull a stocking off the tree and return with gifts off their wish list. But did you know that you can deduct charitable donations on your taxes? Today, we talk about the tax benefits of giving back and how to get started. As always, please remember to speak with your tax and financial advisers for specifics.
Itemizing your Deductions
You can only claim charitable deductions if they are itemized. Also remember that based on how you are filing (single, joint, or head of household) this will also affect your deductions. To itemize your deductions, add up the amount of money or monetary value you donated over the past year. Many organizations can provide you with a form to help you with this step. Be sure that your total deductions are greater than the standard deduction! This is especially important this year as the standard deduction has increased to $12,000 for single filers and $24,000 for joint filers. If you are not going to exceed the standard deduction you may want to "bundle" deductions into next year to get more bang for your buck. Most organizations won't care if you wrote a check on December 31 or January 1 but that one day difference can make a sizable difference in your tax return.
Also note that contributions must be payed in cash or other property before the end of the year. This means even if you pay with a credit card, you will add it to your itemized list even if the payment to that card isn't until later in the year.
Donating cash vs non-cash
Different rules exist depending on whether you are donating cash or non-cash to organizations. For most individuals, there is no limit on charitable contributions unless you donate 60% or more of your adjusted gross income to charity. Consult your tax adviser if you fall under this umbrella for more details! If you are donating non-cash, such as items, property, or vehicles, there are more specific rules to follow. If you choose to donate land that you have owned for more than a year, the value of the deduction is normally equal to the fair market value. You are not taxed on appreciation, either. If you're donating used goods, the IRS only permits deductions for items that are considered "good condition or better". Be sure to get a receipt from the organization to help you itemize your deductions when tax season rolls around.
If you choose to donate a vehicle worth more than $500, you will only be able to deduct the amount the charity received from selling the vehicle. Once again, be sure to get a receipt to substantiate your deduction claim. There are also conditions where you can use the fair market value; be sure to consult your tax adviser to see if you qualify to use the fair market value.
Why do we track this so specifically?
If you are audited, you must be able to verify the amount you claimed as a charitable deduction. A contribution is only deductible the year it is made, so be sure to itemize each and every donation you plan to claim.
If you are in the Fredericksburg area, please stop by and see us at Practical Accounting Solutions ! We would love to help you claim your charitable contributions.