Get the Best Tax Bang for Your Charitable Buck

Tax deductions might not be the most important motive for charitable giving, but it sure is a nice bonus. Of course, if you don’t go about it the right way, you can miss out on the benefits, so here are a few tips to make sure you stretch your tax dollar as far as it will go when you file your tax return.

First and foremost, you need to know the basics of filing your income tax return and claiming deductions.

DonateButton“You can give thousands of dollars, but if you claim the standard deduction amount on your tax return, your charitable gifts will do you no tax good,” says Kay Bell, a tax expert and financial writer. “You must itemize expenses on Schedule A to deduct charitable donations. The good thing about donations is that, in most cases, there is no limit on how much you can deduct.”

Keep in mind that if total deductions, including your charitable contribution, are lower than the standard deduction allowed for your filing status, you’re better off going with the standard deduction and ignoring your charity spending when tax season rolls around. For many, though, itemizing deductions is ideal even before charitable contributions are counted. Talk to your tax professional to ensure you’re making the best decision for your household.

You should also keep in mind that not everything you might consider a charitable contribution is actually tax deductible. No matter what an organization does with your contribution, they have to have the right tax status themselves in order for your donation to be a legal deduction.

“You must contribute to a qualified tax-exempt organization,” says tax planner William Perez. “Charities will let you know if they have received their 501(c)(3) tax-exempt status. Some organizations are not required to obtain 501(c)(3) status from the IRS. These include churches and other religious organizations.”

Most 501(c)(3) organizations will be able to provide you with an ID number you can use when claiming your donation, which can be especially helpful if you make large cash donations. IRS scrutiny being what it is, the more you can document your contributions and claimed deductions the better, and in fact, recent changes to tax laws require you to have documentation of your contributions just in case.

“Get a receipt – even for cash,” says Kelly Phillips Erb, a financial and tax writer. “Cash deductions, regardless of the amount, must be substantiated by a bank record (such as a canceled check or credit card receipt, clearly annotated with the name of the charity) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation. You don’t have to submit the writing along with your return but you need to be prepared to show it at audit.”

Also, keep in mind that the value of any gifts or other incentives you receive for your donations must be deducted from the amount you claim on your deduction. A $1,000 donation that came with a gift worth $100 is only good for a $900 deduction, for example.

There are also some limits on the amount you can deduct if you’ve been especially generous. Charitable deductions for cash donations are capped at 50 percent of your annual income, and non-cash assets are capped at 30 percent. Going beyond those is great for your favorite charity, but won’t have any tax benefits.

Feel free to give freely — just keep the receipts handy when tax time rolls around.


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