Charitable Giving and Tax Deductions — What You Need To Know
Are charitable donations tax deductible? If so, how do you maximize the benefits of a tax deductible donation? Read on to learn more.
October 12, 2021
Donating to a charity can be a great way to show support for a cause you’re passionate about. But did you know donations can also benefit your taxes? Tax-deductible donations can be an added benefit on top of contributing to a cause. Bu, is all charitable giving tax-deductible?
In short, yes: charitable donations to qualifying charities are tax-deductible. But “tax-deductible” is commonly misunderstood. Keep reading to learn about charity and tax deductions.
What does tax-deductible mean?
Tax-deductible means that qualifying expenses (or donations) can be deducted from a taxpayer's adjusted gross income when filing their tax return.
A tax-deductible donation reduces your taxable income and lowers the amount you will owe in federal income taxes (and potentially state income taxes).
Let’s look at an example:
A woman works full time and has an adjusted gross income of $100,000 annually and donates $10,000 in the same year to a combination of 501(c)(3) nonprofits.
Now, she owes tax on $90,000 income instead of $100,000. She can deduct this $10,000 from her taxable income with those donations, resulting in a new adjusted income of $90,000. At the 24% tax bracket, this means she will save approximately $2,400 on her federal income tax.
This is a simplified example, but it demonstrates the basics of how charitable contributions reduce taxes.
However, there’s a catch: These donations are only deductible if you choose to itemize your deductions. Most taxpayers now take the standard deduction.
Standard deduction vs. itemized deductions
When filing taxes each year, there are two options:
Take the standard deduction. This means you can deduct $12,550 from your taxable income (or $25,100 for couples filing jointly).
Choose to itemize deductions. This means you’ll need to add up all the qualified expenses that are tax-deductible to find out how much you can deduct.
If you take the standard deduction, you can’t deduct charitable contributions or other itemized deductions. This includes charitable contributions: A taxpayer can’t take the standard deduction of $12,550 and then also deduct a $2,000 charitable contribution.
When itemizing deductions, you can deduct:
State and local income
Real estate taxes
Personal property taxes
Losses from a Federally declared disaster
You may also be able to deduct a portion of the amount you paid for medical and dental expenses.
Most households benefit from taking the standard deduction, which also means that their charitable contributions won’t be deductible. On the other hand, if your qualified deductions are more than the standard deduction amount, it may make sense to itemize your deductions.
Ultimately, whether or not to itemize should be discussed with your accountant or tax professional.
What is a qualified charitable contribution?
Not all donations or gifts are tax deductible. The contribution must be a cash donation made to a qualifying organization in the year the tax return is filed to qualify as a tax deductible donation.
Qualifying organizations may include:
501(c)(3) charitable organizations
Religious organizations and churches
Nonprofit volunteer organizations
Civil defense organizations
Taxpayers may use the Tax Exempt Organization Search from the IRS to determine the tax-exempt status of a particular organization.
Donations that are not deductible include political contributions and cash gifts to individuals, among others. However, donations of property and assets may be tax deductible, but the rules are more complex. Speak with your CPA for details.
What does this mean for my taxes?
Charitable donations will not affect your taxes for most taxpayers simply because most households take the standard deduction.
With that said, it’s a good idea to keep records of all the contributions you make, just in case you do end up itemizing. Charities will typically email you a receipt when you contribute. Make sure to save it, and take note of their federal identification number.
Suppose you end up having more than $12,550 in qualifying deductions (or $25,100 for couples filing jointly). In that case, you may wish to itemize and report all the charitable contributions you have made (as well as other qualifying deductions).
How much do charitable donations reduce taxes?
The answer to this question is highly dependent on income level, tax filing status and taking the itemized or standard deduction.
If you take the standard deduction, charitable donations won’t reduce your taxes (but you are entitled to the full $12,550 standard deduction, regardless of your expenses and donations).
If you itemize deductions, charitable donations will reduce your taxable income dollar for dollar. Donations will also reduce your federal income tax owed by approximately your current tax bracket. If you are in the 24% tax bracket and donate $10,000, you’ll save approximately $2,400 on federal income tax.
There are other factors at play, but this is the basic concept. Work with your tax professional to determine if taking a tax deductible donation is the right financial move.
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