Thinking of deducting charitable donations? Citizens who are socially conscious can have their altruism recognized by the IRS. Annually, the IRS collects over $2 trillion, and it can be posited that a great deal of money can be returned to the taxpayers through charitable deductions. In 2008 alone, nearly $180 billion went right back into people’s pockets. A deduction on one’s taxes limits the amount that the IRS can levy, and many people consult tax professionals and attorneys every year to help pick their best options.
Charitable giving presents multiple options for people, including religious organizations, nonprofit groups, public uses like parks, and veterans’ organizations. Common nondeductible groups are for-profit organizations, foreign organizations and charities, political organizations, civic leagues and unions.
Not all deductions are alike, however. Charity Navigator reports that itemized deductions for those in different tax brackets are indeed different. The benefits increase with income.
“For example, if you are in the 33% tax bracket, the actual cost of a $100 donation is only $67 ($100 less the $33 tax savings). As your income tax bracket increases, the real cost of your charitable gift decreases, making contributions more attractive for those in higher brackets. The actual cost to a person in the lowest bracket, 15%, for a $100 contribution is $85. For a person in the highest bracket, 35%, the actual cost is only $65. Not only can the wealthy afford to give more, but they receive a larger reward for giving.”
It is almost limitless to how much one can deduct, but there are rules. Typically, people need not worry about those specifics unless they give greater than 20% of their yearly income. Obviously, it is imperative that one has documentation proving their charitable gift.
The IRS itself provides strategies for taxpayers thinking of charitable deductions:
- The charity must be a qualified one.
- File form 1040 and use Schedule A for deductions on it, including non-cash deductions. If non-cash deductions exceed $500, add Form 8283 to your paperwork. Any amount over $5,000 requires filling out Section B on 8283 and needs appraisal.
- If you receive a benefit for your donation, your deduction is the number surpassing the fair market value of what you got back. This means any products, goods, services, and even event tickets.
- Stock and non-cash donations receive fair market value and used items must be in decent, presentable shape.
- Document the donation. Get the name, location, date, and any other information you can for proof.
- Deductions exceeding $250 need proof of gift from the organization, itemized if applicable. If there was anything given back in return, that must also be noted.
- William Baldwin for Forbes advocates clever tax tactics that help people get the most from giving. Lumping donations can be a boon. Giving a large amount to a nonprofit for example, and saying that it constitutes five years of planned charity will kick back more in deductions than a smaller amount every year. Lumping is a very popular and sound way to maximize a charitable investment.
People collect money each year on what they give, and more can realize income savings if they donated. The higher income bracket has the most to gain, ironically, from their gifts, highlighting an important but neglected relationship between those with much disposable capital and charities. Regardless of anyone’s income, charitable giving has proven itself to be a worthwhile venture because it helps society and lightens the tax burden in a rebuilding economy.
– David Smith
Photo: Axis of Logic