How Donations Can Benefit You Financially

Donating to your favorite charity is always a great way to give back to the community and show support for a worthy cause.

A donation can be described as a gift of money, time or property to another entity, without receiving anything in return. While a donation is defined by its selflessness, there are benefits to donating to a charity or nonprofit organization.

Deducting charitable donations from your annual taxes can help you save money by lowering your taxable income. Depending on your income level, and other contributing factors, you can deduct between 20 to 50 percent of your adjusted gross income in charitable donations. This can lower your annual tax rate and put money back in your pocket. This extra cash can be invested and used to help more charities in the future.

There are certain rules that apply to charitable donations and specific requirements for each donation. You can only claim charitable donations if you itemize your deductions instead of opting for the standard deduction. The standard deduction for a single person filing in 2018 is $12,000. This means you would have to claim over $12,000 in deductions to qualify for itemized deductions. All applicable donations must be made by the end of the tax year to qualify.

Types of Donations That Can Be Deducted

Before you donate to an organization, cause or charity, it is important to know the limitations. Only certain types of donations are eligible and only qualified institutions can receive them. Below are the three main factors to consider when donating.

  • Cash donations – Any donation made in cash, such aschecks, credit card payments or even payroll deductions, must include a receipt of the transaction that states when the donation occurred and what was given. If the cash payment is over $250 you must include a written note from the recipient of the donation in your tax return, clarifying and confirming the donation in question.
  • Property donations – Property can include anything from gems to used clothes to vehicles. You must determine the fair market value of the property when donating it. The fair market value is the price that a buyer and a seller would agree on in today’s market. This value can be tricky to calculate. Factors such as desirability, and scarcity must be considered when estimating the cost. Larger items, such as cars and boats can also qualify as a deductible donation. However, either the fair market value or the sale price of the vehicle at auction can be claimed, whichever is lower.
  • Eligible organization – Not all 501(c)(3) charities are eligible. An entity must be qualified under section 170(c) of the tax code and one of the verified categories approved by the IRS. These organizations include State and federal governments, foundations, nonprofits, trusts, funds, community chests and corporations. Religious organizations, schools, hospitals and veteran organizations are also eligible. Belonging to one of these categories does not automatically make an organization qualified. Additional IRS requirements must be met. Asking your local charity if they are qualified to receive a tax-deductible donation is an easy way to quickly determine their eligibility.

If you exceed your maximum of 50 percent in charitable donations, you can roll any surplus donations into future years to be used in other returns. Further restrictions may apply and only donations that were marked to be used over several years can be rolled.

Reducing Your Annual Gross Income

The limitations placed on how many charitable donations you can deduct each year depends on the type of donation given and the overall donation amount. Generally, you can deduct up to 50 percent for your adjusted gross income each year. If you do not qualify for itemized deductions you cannot benefit from the charitable donations you make. The standard deduction limits for 2018 are as followings.

  • Single: $12,000
  • Married Filing Jointly: $24,000
  • Married Filing Separately: $12,000
  • Head of Household: $18,000

If you are in a higher tax bracket, a large charitable deduction will help lower your taxable income. Typically, these larger donations help those who are in higher tax brackets. This does not mean you should not make charitable donations if you have a low income. You may want to consider donating your time rather than your funds earlier in your career. Donating your time earlier in life when your income is lower will allow you to save money and donate funds later in life when you can receive the benefits.

Reaching the itemized deduction limit is not always possible. There are options to bundle your donations and extend their lifespan to cover a few years. Similar to the way excessive donations can be rolled, these bundles can also be used to benefit you in future years.

Additional Methods

There are more direct ways you can receive financial benefits through donations to charitable causes. These additional techniques can provide an income for the donor and even avoid income tax altogether.

A Charitable remainder trust is funded by assets, which are then invested. These investments come with tax breaks, which helps lower your taxable income. The investments in the trust also produce a steady income. After your death, the remaining funds are donated to a charity.

 

Charitable gift annuities work very similarly. An initial donation is made into an investment fund set up by a nonprofit organization. Depending on eligibility, this initial donation may be tax deductible. The annuity pays the recipient an income and upon death, releases the remaining funds to the nonprofit.

In some cases, you can use donated stocks to fund these annuities.

Retirement plan distributions can also provide some tax benefits. If you are over 70 and a half years old and are taking the minimum distribution on your retirement plan, you can donate a withdrawal to a qualified charity. You are not required to pay income tax on these donated distributions. If you are planning on donating money to a charity, sending your distribution payment before you have withdrawn it will avoid the tax you would have paid if the funds were withdrawn and then donated. There is a donation limit of $100,000 of retirement distributions each year.

Stocks that are donated to qualified charities are tax-deductible and also avoid capital gains tax. Similar to retirement distributions, the cost of donating the stock is lower than if you sold the asset and donated the proceeds. If you are in a higher tax bracket, this option would save you more money as the sale of any stock would be subject to higher capital gains tax. Lower limits apply to these types of donations. Generally, only 30 percent of your adjusted gross income in stock donations can be deducted.

 

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