10 Tips to Help Maximize Donations and Minimize Taxes

As the year draws to a close, many of us feel inspired to give back. Charitable giving can be a win-win act. You can help support the causes you believe in while potentially reducing your tax burden. But to help ensure your generosity translates into tax savings, you need to follow the rules.

Here are 10 tips to help ensure your donations will be both tax-deductible and impactful.

1

Itemize Your Deductions

To claim a charitable contribution on your taxes, you must itemize your deductions on Form 1040. For many taxpayers, the standard deduction offers greater savings, especially after the tax law changes that increased the standard deduction amount. However, if your total itemized deductions (including mortgage interest, state and local taxes and charitable donations) exceed the standard deduction, itemizing might be the right choice for you.

If you’re unsure whether itemizing is worthwhile, consult with your planner who can help you review your specific situation. Remember, charitable donations alone are often not enough to justify itemizing, but when combined with other deductions, they can make a significant difference.

2

Give to Qualified Charities

Not all charitable donations are tax-deductible. To ensure your gift counts, it must be made to a qualified organization. The IRS provides a tool called Select Check on its website (irs.gov) that lets you search for qualified organizations. This includes public charities, private foundations and religious institutions.

Certain organizations, such as churches, synagogues, mosques and government entities, are automatically considered eligible for tax-deductible contributions, even if they don’t appear in the database. It’s always a good idea to double-check an organization’s status before making a donation.

3

Pay Attention to the Timing of Donations

The timing of your gift is critical when claiming a deduction. Donations are deductible in the year they are made, so be sure to complete your giving by Dec. 31 to count for this year’s taxes.

Contributions made by check count in the year you mail them, even if they are not cashed until the following year. Donations made by credit card are deductible in the year you make the charge, regardless of when you pay the credit card bill.

For donations made via text message, they are deductible in the year your contribution is charged to your phone bill, even if the bill is paid in the following year.

4

Donate Directly from Your IRA if You're 70½ or Older

For those 70½ or older, there’s a special opportunity: You can make tax-free donations directly from your IRA, called Qualified Charitable Distributions. You can transfer up to $105,000 per year directly to a charity without counting it as taxable income, or up to $210,000 for married couples. This can be especially useful if you don’t need all the income from your Required Minimum Distributions.

The QCD not only helps you lower your taxable income but may also prevent you from crossing thresholds that could increase your Medicare premiums or cause your Social Security benefits to become taxable. Be sure that the funds are transferred directly from your IRA to the charity – if you withdraw the funds first, they will count as taxable income and you’ll miss out on this benefit.

5

Determine the Fair Market Value of Noncash Donations

Donations don’t always come in the form of money. If you’re cleaning out your closet or downsizing, the items you donate can also be tax-deductible. The IRS requires that donated goods, such as clothing, appliances and furniture, be in good condition or better. The fair market value is the price a willing buyer would pay for the items in their current condition.

For noncash donations over $500, you'll need to fill out IRS Form 8283. If any single item is worth more than $5,000, you’ll need to obtain a qualified appraisal. Some charities may assist with appraisals, but be sure to check in advance.

6

Document Your Donations

It’s essential to keep records of all donations, even small cash gifts. For cash donations, a bank record such as a canceled check or a credit card statement is necessary to back up your claim. If your contribution is $250 or more, you must obtain written acknowledgment from the charity that includes the amount of the gift, the date and a description of any noncash contributions.

For noncash gifts, the acknowledgment should include a reasonably detailed description of the property donated. Keep in mind that if you drop off items at an unattended charity location, such as a drop box, you must create your own written record of the donation, including the fair market value and how you determined it.

7

Don’t Forget Payroll Deductions

If your employer offers a charitable giving program, payroll deductions can be an easy and effective way to support a cause regularly. To claim these donations, you must keep your pay stubs or a Form W-2 from your employer, along with any documentation showing the name of the charity and the total amount withheld.

8

Donating Appreciated Assets

Donating stocks or other appreciated assets can be one of the most tax-efficient ways to give. You can deduct the full fair market value of the asset as long as you’ve owned it for more than one year, and you won’t have to pay capital gains tax on the appreciation.

This is a great way to reduce your taxable income while supporting your favorite causes. Be sure to transfer the assets directly to the charity to maximize the benefits.

9

Volunteer Expenses Are Deductible (But Not Your Time)

While you cannot deduct the value of your time spent volunteering, any out-of-pocket expenses you incur while performing volunteer work can be deductible. This includes travel costs, uniforms and supplies, provided they are not reimbursed and are directly related to the charitable activity.

Documentation is key – keep receipts and detailed records of any expenses you plan to deduct.

10

Be Aware of Deduction Limits

If your charitable donations exceed certain thresholds, the IRS imposes limits on how much you can deduct in a given year.

Generally, cash contributions are deductible up to 60% of your Adjusted Gross Income. For donations of appreciated assets, the limit is 30% of AGI, and noncash contributions are capped at 50%. If your donations exceed these limits, you can carry forward the excess contributions for up to five years.

Final Thoughts

Charitable giving is a wonderful way to make a difference while potentially reducing your tax bill. As always, consult with your tax professional to ensure that your donations are optimized for your financial situation and meet the IRS’ requirements. And work with your planner to see how these strategies may align with your financial goals.