Charitable donations are a wonderful way to support your local community or national organizations. They’re also an excellent way to lower your tax bill. That’s right – you can help at the same time you save money on taxes. Use these tax tips to make sure you get the most out of all your tax-deductible contributions.
Only charitable donations made to qualified organizations are considered tax-deductible contributions. Churches; nonprofit charitable organizations such as the ASPCA; nonprofit education organizations like Savvy Ladies – are examples of qualified organizations.
It’s crucial to verify whether or not the organization is qualified before you make the donation. Three resources you can use to verify an organization’s qualifications are:
- The EO Select Check tool by the IRS; and/or,
- GuideStar –You can perform a basic search directly from the GuideStar homepage, but if you sign up for a FREE account, you’ll have access to detailed reports; and/or,
- Charity Navigator – An independent charity evaluator. Their objective ratings will help you find reputable charities.
Know What You Can’t Deduct
Unfortunately, not all charitable donations are deductible. The following will not qualify as tax-deductible contributions:
- Donations to specific individuals. We’ve all been asked to donate to a local family’s efforts to rebuild after a fire, or help a local family raise funds to send their sick child to a specialized hospital. By all means, help them. Just know, these types of donations are not tax-deductible.
- The value of your time or services.
- Appraisal fees.
- Qualified charitable distributions from an IRA.
- Donations to political organizations and candidates.
These are only a sampling of what you cannot deduct. For more information, see Contributions You Can’t Deduct in IRS Publication 526, Charitable Contributions.
Know What You Can Deduct
Many taxpayers overlook qualifying, tax-deductible contributions. Don’t miss out on your chance to maximize your charitable donations this year. Here are a few you may not know about:
- Volunteers cannot deduct their time, but they may be able to deduct mileage as they perform their role as volunteer.
- If you volunteer at a hospital or school, you can deduct the mileage for using your car while you’re volunteering.
- If you donate goods to organizations like Goodwill, you can deduct the mileage to and from your home to that charity store. Keep in mind, the tax-deductible amount of these “good used condition” items is based on fair market value. See IRS Publication 561, Determining the Value of Donated Property for more information.
Know When the Two Overlap
As in most areas of tax law, there are gray areas. The biggest question to ask yourself is, do I benefit from this donation in any way? If you do, then you’ll only be able to deduct the amount of your gift beyond the fair market value of the benefit you’re receiving. Sound confusing? It can be. Here’s an example:
EXAMPLE #1: You buy a ticket to your favorite nonprofit’s annual gala. The ticket includes a lovely dinner during the gala. Since you’re receiving something in exchange (dinner) for your donation (ticket price), you can only deduct the difference between the two. Let’s say the ticket was $125; the dinner is valued at $85. This means your total tax-deductible contribution for this fundraiser is $40.
EXAMPLE #2: You enjoy a scrumptious box of Thin Mints® or Samoas® as a loyal supporter of the Girl Scouts of America. Who doesn’t love this kind of win-win situation? But did you know that delicious box of cookie magic isn’t tax-deductible? However, if you pay for the cookies but don’t take them home, or if you buy cookies and donate the box to another nonprofit organization, then you do have a tax-deductible contribution.
Back Up Your Claims
The better prepared you are, the more likely it is you’ll be able to deduct your charitable donations. Another reason that an organized, reliable record-keeping system is a must-have for financial success. Make sure you:
- Keep the receipts for all of your donations, especially cash donations. This includes any contributions made by check, credit card, automatic withdrawal, or payroll deductions.
- Make sure the organization sends you an acknowledgment of the donation. Normally, this will look like a “Thank You” letter. Most important is that the organization’s written confirmation include their name, the date of the contribution, and the amount of the contribution.
- Keep track of the receipts you receive by email for your online tax-deductible contributions. The same goes for any acknowledgments you receive by email. Create a new folder in your email account called Charity or Donations and, whenever you receive an email confirmation or receipt, move it immediately to that new folder.
Important: If you donate more than $250, the organization’s written confirmation must also include a description – cash or of the property donated – and a statement to the effect that you did not receive anything in exchange for your donation.
When in doubt, ask your daily money manager and/or tax professional. They will know whether or not the donation in question is one you can deduct on your tax return.