In the U.S., individuals donate almost $400 billion every year to qualified charities that are in need, helping people from all over. By doing some charity planning and making an effort to track your giving, you can ensure that you get the most tax benefit that you can from your giving. While you shouldn’t give only for the tax benefit, getting relief on your taxes is a welcome benefit to most Americans.
Here are five ways to ensure you get the most from your next contribution.
1. Itemization Required
If you really want to maximize your charitable donations, you need to itemize all of your deductions. This is the only way that you can ensure that you make the most out fo things on your tax return.
Most people start off with the standard deduction on their tax return, but by itemizing deductions, you can sometimes deduct even more. When itemized deductions end up being higher than standard deductions, that’s when you’ll find your charity works in your favor. If, when itemized, you end up with a lower number than the standard deduction, charity ends up meaning very little, at least in terms of tax benefits.
One of the most common ways for people to have enough deductions to itemize is by deducting home mortgage interest. For homeowners, this is a valuable tool. For people who don’t own a home, it’s hard to donate enough to make it worth your while.
If you work freelance or have a lot of other business-related expenses to deduct, you could end up getting a lot back thanks to your charitable donations.
2. You Need Substantial Donations in a Given Year
When you’re thinking about making charitable deductions work for you, planning is important. While it seems obvious to some, there are charitable pledges that come up throughout the year that people forget about. When you pledge to give in future years, it doesn’t count towards your current tax year.
To count towards a tax return, the actual cash or the property that you donate needs to be forfeited in the year of your tax return.
If you want your donation to qualify, keep all of your receipts or keep a record of your donations. If you make a commitment to donate in the following year, set a reminder so that you can ensure that you get documentation next year. Don’t mix your documentation for the upcoming donation with the donations that you’ve already made.
3. You Can’t Just Donate to Anyone
While you might want to donate cash or property to someone or some organization that you think needs it, it won’t count unless they’re qualified. For you to consider what you’ve given as a charitable donation, the cash or property needs to be given to an organization with 501(c)(3) status. Any group that takes a donation from you otherwise is simply receiving a gift.
The IRS only recognizes what’s given to a 501(c)(3) or a religious organization as a charitable donation. Anything else that’s donated won’t qualify and the tax deduction won’t count legally.
If you want to claim a donation on your return, find out whether or not this organization has the right status. While it isn’t necessarily a waste to donate otherwise, it’s not going to give you the benefits that you might be looking for.
If you can’t find the information online, your tax professional can usually help.
4. Individuals Don’t Count
While you might think that the donations that you give to individuals mean the most, they mean little to the IRS. Although you might not necessarily be wrong that giving someone a car is more powerful than donating a car to a non-profit, that organizational apparatus matters. Without that organization set up, your donation won’t matter all that much.
Giving to homeless people is nice or giving money to a friend’s GoFundMe campaign is a good thing to do. However, these aren’t going to matter when it comes time to do your taxes.
There is a loophole, however. You can help people with their personal, medical, or education expenses so long as you don’t give the money to the individual. Giving money to the individual keeps you from being able to write things off.
When you pay a hospital directly, you can write off your expenditure. Paying an academic institution rather than the student who is going to school makes the payment deductible.
5. Property Has Limits
If you’re contributing a non-cash donation that’s worth more than $500, you have to use Form 8283. This form covers furniture, clothes, property, or even automobiles. This form takes all of the vital information that lets the federal government know what exactly you donated.
Non-cash donations are a little bit harder to track. They can be faked or manipulated, so the government requests a little more documentation to prove their veracity.
Make sure that you keep good records for everything that you’re aiming to deduct. Documentation not only protects you from issues but it also ensures the government that you’re being honest with them. In case you get audited, having good records and receipts ensures that you won’t have to pay back anything you claim.
Charity Planning Gives You the Maximum Benefits
If you’re not charity planning your next major charitable contribution, you could be failing to get what you deserve for it. You should be able to get a reasonable amount of benefit from whatever you donate, so keep good records and verify that your giving counts.
For more about why charitable planning matters, check out our latest guide.