Your charitable contributions include a wide variety of tax-saving opportunities, some you may not be aware of and some that are frequently overlooked. And there are some contributions that you may believe are deductible that really are not. Being knowledgeable of what is and is not a qualified charity, a qualified charitable contribution, and charitable giving strategies can go a long way towards maximizing your charitable tax deduction.
To be deductible the contributions must be made to qualified charitable organizations, which generally only include U.S. nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. You can ask any organization whether it is a qualified organization, and most will be able to tell you. You can also check by going to IRS.gov/TEOS. This online tool will enable you to search for qualified organizations.
Also, to be able to deduct charitable contributions, one must itemize their deductions. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction, which for example is $12,950 for those filing single, $19,400 filing head of household and $25,900 for married individuals filing jointly for 2022. The standard deduction is adjusted annually for inflation.
If the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions. Congress did revise the law to allow limited amounts of cash contributions made in 2020 and 2021 to be deducted without itemizing, but this was only a temporary provision and doesn’t apply in other years.
If your charitable deductions are not enough to bring your itemized deductions greater than your standard deduction, the bunching strategy may work for you. When employing the bunching strategy, a taxpayer essentially doubles as many deductions as possible in one year, with the goal of itemizing deductions in one year and then taking the standard deduction in the following year. Because charitable contributions are entirely payable at your discretion, they fit right into the bunching strategy.
For example, if you normally tithe at your church, you could make your normal contributions throughout the current year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution in one year and having no charity deduction for church in the next year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to decide whether to make contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows the year when the contribution was made.
As a rule, most taxpayers just wait until tax time to add up their potential deductions and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, here are some strategies that might work for you.
Qualified Charitable Distribution
If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. The tax rules don’t set a minimum amount that needs to be transferred but your IRA trustee may do so. The maximum of all such transfers is $100,000 per year, per taxpayer. Also note that distributions to private foundations and donor-advised funds don’t qualify for the QCD.
Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers.
Caution: Any IRA contributions made after reaching age 70.5 can diminish the tax benefits of this strategy. If any post-age 70.5 IRA contributions have been made, consult with this office before employing this strategy.
If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD and be sure to give the IRA custodian ample time to complete the process if you are making the request toward the end of the year. Always get a written acknowledgment from the charity, for tax-reporting purposes.
Contributing to a donor-advised fund is a way to make a large (and generally deductible) charitable contribution in one year and put funds aside to satisfy the donor’s social obligations to make charitable contributions in future years, without incurring the expenses of setting up a private foundation and satisfying annual filing and other private foundation requirements.
While generally considered a tax strategy for those with an unusually high income for the year, donor-advised funds are available to everyone, although most such funds set up through brokerages have minimum donation requirements, often $5,000–$25,000. Although they may bear the donor's name, donor-advised funds are not separate entities but are mere bookkeeping entries. They are components of a qualified charitable organization. A contribution to a charity's donor-advised fund may be deductible in the year when it is made if it isn't considered earmarked for a particular distributed. The charity must fully own the funds and have ultimate control over their distribution. To document the contribution, the taxpayer must get written acknowledgement from the fund's sponsoring organization that it has exclusive legal control over the contributed assets. Although the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are at arm’s length and do not directly or indirectly benefit the donor.
If you volunteered your time for a charity or governmental entity, you probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:
Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if your services for a charity do not involve lobbying activities.
The cost of entertaining others on behalf of a charity, such as wining and dining potential large contributors (but the costs of your own entertainment and meals are not deductible).
If you use your car or other vehicle while performing services for a charitable organization, you may deduct your actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.
Misconceptions There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:
No deduction is allowed for contributions of cash or property to the extent the donor received a personal benefit from the donation. Often, the IRS attributes at least some (if not total) personal benefit to amounts spent for items like dinner tickets, church school tuition, YMCA dues, raffles, etc. To determine the allowed contribution amount, subtract the FMV of the “personal benefit” item from the cost and deduct the remainder. Most charities now allocate the deductible, nondeductible portions.
Taxpayers who have purchased tickets for benefit football games, youth-group car washes, parish pancake breakfasts, school plays, etc., with no intention of attending these events, may think they can deduct the expense as a direct contribution to the sponsoring institution. The IRS does not allow such deductions. On the other hand, if the taxpayer returns the ticket to the organization for resale and does not receive a refund of the cost of the ticket, the entire amount paid for the ticket is deductible.
No deduction is allowed for the depreciation of vehicles, computers or other capital assets as a charitable deduction.
However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).
A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.
No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:
Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.
Household Goods and Used Clothing
One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and has become grossly out of style, the more extensively used piece of clothing could be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this v