You know the season of giving starts when the holiday decorations go up and the radio starts playing festive music. While donating to a charitable cause is a good thing to do, it can also come with a bonus of saving you money when you file your tax return in the spring. If you’re looking to make a tax-deductible donation, there are useful tips you should be aware of before donating.
For anyone in the giving mood or trying to save money on their tax bill, we’ll go through five things you should know before making a charitable donation.
1. Make Tax-Deductible Donations to Qualified Organizations
Unfortunately, you cannot donate to just anybody and expect to receive a tax deduction. Only donations to qualified organizations are tax deductible. Organizations with tax-exempt status, like charities, religious entities, or educational ones, are eligible for tax-deductible donations. The IRS has a list of organizations with tax-exempt status, so you can check if the organization you want to donate to is on the list before gifting.
Donations made through popular platforms like GoFundMe are usually not considered a qualified recipient. So, while your donations through these sites are appreciated, they won’t result in a tax deduction.
2. Donations Don’t Need to be in Cash
When most people think about making a charitable donation, they think of giving cash. While cash is certainly an option for a tax-deductible donation, there are other noncash options you can also consider gifting.
Noncash donations include clothes, household items, artwork, real estate, stocks, and even crypto. If you want to declutter your closet, before throwing anything away, see if any charities will accept your items as a donation.
3. Keep Records of your Donations
You don’t have to staple your donation receipts to your tax return when you send it to the IRS, but you do need to keep them available in case the IRS asks to verify your donations.
This is especially important for donations of noncash items. If you donate old property like clothes and household items valued at more than $250, you should receive a receipt with a description of the donated property and a good faith estimate of the item’s value.
For donations of appreciated property (including cryptocurrency) valued at more than $5,000, you must also obtain an appraisal, which is filed with the tax return. There are specific requirements for appraisals, and if you fail to receive one, it could result in the denial of your deduction. Check whether the charity you’re donating to provides appraisals or if you need to obtain one yourself.
4. You Must Itemize Deductions to Receive a Tax Benefit
Do you know if you itemize your deductions? It’s okay if you don’t—many taxpayers are unaware whether they itemize or take the standard deduction. The standard deduction is a set amount based on your filing status that reduces the amount of income you pay tax on. It generally increases annually. For 2024 single taxpayers, it is $14,600.
Itemized deductions, on the other hand, are the amounts taxpayers pay during the year for certain things like state and local income tax, mortgage interest, and charitable contributions. Generally, if your total itemized deductions exceed the standard deduction, you itemize on your tax return. Only taxpayers who itemize their deductions receive a tax deduction for their charitable donations.
5. Save on Capital Gains Tax by Donating Appreciated Property
Donating long-term (held for more than 1 year) appreciated assets like stocks or crypto can help you save a lot on your tax bill. Not only can you receive a tax deduction for the fair market value of the donated assets, but you can also avoid capital gains tax on the sale. Depending on your tax bracket, you could potentially save up to 20% in capital gains tax on the net proceeds from the sale of the asset.
Even the charitable organization wins by accepting donations of appreciated property since you’ll be donating a higher value amount than if you cashed out the property and only donated your after-tax proceeds. Be careful not to donate securities that have decreased in value, though, as you won’t be able to recognize the capital gains tax savings.
As the year starts to wind down and we enter the season of giving, remember these things when making charitable donations. Also, keep in mind that if you want your deduction to count towards your 2024 tax return, be sure to donate by December 31!
How Gordon Law Can Help
Tax season is right around the corner. Whether you’re looking for tax planning or tax preparation services, Gordon Law can assist. Reach out today to our team of experienced tax professionals to see how we can help.
