The Power of Purposeful Giving: Tax Planning Insights for Charitable Deductions

Charitable contributions are personally rewarding and also have the potential to be tax-saving opportunities.

A donation is a gift, such as cash or property, that is given to a non-profit organization to help them in pursuit of their goals. The donor must receive nothing in return to get the full deduction value for their contribution.

 

How Does it Work?

Contributions must be claimed as itemized deductions on Schedule A of IRS Form 1040. The limit for cash donations is generally up to 60% of the taxpayer’s adjusted gross income; however, in some cases 20%, 30%, or 50% limits may apply. Deductions are permitted by the IRS for cash and noncash contributions depending on that year’s rules and guidelines which may change, so individuals should stay up to date.

 

Is it Counted as a Charitable Deduction?

Deductions can only be made for contributions that plan to serve a charitable purpose. The IRS also requires the organization to qualify for tax-exempt status.

 

What Determines a Qualified Organization?

According to the IRS, qualifying organizations include those that operate for charitable, scientific, literary, religious, or educational pursuits, or to combat child or animal abuse. There is a long list of qualified organization examples that can be found on the official IRS website.

 

What if I Have Noncash Gifts?

Charitable contributions of goods such as household items and clothes, are acceptable just like artwork and real estate, and must be in good condition so the recipient can use the donation. The deduction amount is based on the item’s fair market value. If the deduction for the noncash gifts is over $500, individuals, corporations, and partnerships must include Form 8283 when they file their tax returns.

 

Vehicles

Vehicle donations are a bit different. If the fair market value of the vehicle is over $500, taxpayers can deduct the lesser of:

• The vehicle’s fair market value on the date the gift is given, or
• The gross proceeds from the sale of the vehicle by the organization.

However, if the individual sells the vehicle for $500 or less, a taxpayer can deduct the lesser of:

• $500, or
• The vehicle’s fair market value on the date the gift is given.

Capital Gains

Appreciated capital gains are generally limited to 30% of the taxpayer’s AGI if they are made to qualifying organizations and 20% of the AGI for non-qualifying organizations.

 

What if There is an Economic Benefit Attached to a Donation?

If a donor is given an economic benefit in return for their gift, for example, a calendar, this is called a “quid pro quo” donation. If this is the case, their contribution is limited to the amount of the donation in excess of the fair market value of the calendar. If the fair market value of the calendar is $10 and the contribution is $50, the deductible amount is $40.

 

Non-Financial Benefits of Purposeful Giving

Not everything is about money. Some of the non-financial aspects of giving include:

Making a difference in people’s lives

• When you give to charity you are providing less fortunate people with a way to make their lives more manageable and less stressful.

Improving your own health

• It may make you feel good, and that can make you happy. According to Northwestern Medicine, happiness is great for your health. It may lower your risk for cardiovascular disease, lower your blood pressure, improve sleep, and numerous other health-related benefits.

Helping to foster a sense of purpose within yourself

• Giving provides some people with a sense of purpose in life. Studies indicate that individuals can fair much better in their lives when they have a purpose.

Helping to build stronger, safer communities

• People can benefit in several ways from charitable giving, such as improving life skills, learning a trade, or some other activity that can give back to the community. This, in turn, can help grow, develop, and inspire a culture of giving within the community.

 

Consider discussing giving ideas with a financial professional

Charitable giving can be complex and impact you in a variety of ways. To get the most out of your charitable donations, consider consulting a financial professional to ensure you are taking the steps necessary to align with your financial strategies and goals while working to mitigate the risk of financial implications due to uninformed decision-making.

 

 

Sources: Charitable Contribution Deduction: Tax Years 2023 and 2024 (investopedia.com) Publication 526 (2023), Charitable Contributions | Internal Revenue Service (irs.gov) What is Form 8283? (thomsonreuters.com) Charitable contribution deductions | Internal Revenue Service (irs.gov) How Happiness Impacts Health | Northwestern Medicine The Health Benefits of Giving | RUSH

_{Important Disclosures:}

_{This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.}

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