The holidays are upon us and, as we are repeatedly reminded, it is the “season for giving.” In the case of charitable gifts, however, it is also a season for receiving. On top of the feelings of goodwill that charitable giving provides, this type of gift can also provide you with significant tax advantages when the holiday season gives way to tax season. When it comes to end-of-year charitable giving, there are few reasons not to do it. However, there are ways to do it improperly. Here are a few points to keep in mind as you consider all of the goodness that charitable giving provides.
You Must Itemize
Charitable gifts in the form of money, items, or assets can reduce your tax burden as they can be used as deductions from your income. However, you can only claim these gifts if you itemize your deductions.
Make Sure the Charity Qualifies
Deductions only apply to organizations that have official tax-exempt 501(c)(3) designation from the IRS. So, donations you make to the United Way will count. Donations made for your nephew’s basketball team trip to Disney World will not. The IRS maintains a list of qualified organizations on their website.
Be sure and secure written documentation of any monetary gifts you make. The IRS explains that a donor must “maintain a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.”
Keep Receipts for Items Donated
If you drop off three giant bags of clothes at Goodwill, make sure you get a receipt. Donations of clothing, household items, and equipment can all be tax deductible. Donate them rather than throw them away, and don’t just drop them in a bin where you cannot get a receipt. $500 worth of donated clothing can be a $500 deduction on your tax bill…if you have a receipt.
When you donate assets such as stock or real estate, you can double your tax advantage by taking a deduction on your donation and off-setting some of your capital gains taxes.
Donations must be made before December 31st in order to be claimed on the current year’s tax returns.
Contact a Professional
If you are unsure of how to handle charitable gifts when you are giving them, or when you want to claim them, contact a certified tax professional to maximize what you give, and what you receive.