How to Lower Taxable Income by Donating to Charity
November 11, 2021 - The holiday season is upon us, and it’s natural for thoughts to turn toward those in need – especially after a year like this one. Luckily, even the IRS is in the spirit. Those with a little extra left over have long been encouraged to give to good causes through attractive benefits at tax time.
Individuals and couples have many opportunities to support the less fortunate while reducing their tax obligation. While many benefits have been in the Tax Code for decades, some of them offer new details to be aware of for the 2021 tax year. Knowing them now can make a significant difference in April.
Let’s take a closer look at individual tax benefits for qualified charitable giving:
Individuals Taking the Standard Deduction
Individuals using the standard deduction can still receive a charitable deduction of up to $300 for Single and $600 for Married Filing Jointly. Only cash contributions qualify for this deduction, excluding contributions to donor-advised funds. This is a dollar-for-dollar deduction in Adjusted Gross Income (AGI), which is used as the basis of a variety of calculations for taxation and benefits eligibility. As always, more opportunities for savings are available with itemization.
Individuals Itemizing Their Deductions
If you like to be more thorough and detailed with your deductions, you’re in luck. The charitable deduction for individuals who itemize can offset anywhere from 20% to 100% (2021 only) of the individual’s AGI.
What Contributions Qualify for Deductions
The following types of contributions may be eligible for tax benefits:
Cash contributions made to a qualifying public charity are typically limited to 60% of the individual’s AGI. For tax year 2021 only, individuals making qualified cash charitable contributions may elect to raise their charitable deduction limit up to 100% of their individual AGI.
Before making a noncash contribution, be sure to contact the organization directly and make certain they accept the proposed donation. Depending on the type of donation being made, an organization may have different procedures or require different forms of documentation.
Noncash contributions to qualifying organizations are limited to between 20% and 50% of the lesser of fair market value at time of gift or individual basis in gift. If total non-cash contributions are greater than $500, the individual must file IRS Form 8283, Noncash Charitable Contributions.
Any individual can donate a car, a boat, or an airplane to a qualifying organization, but the organization retains the right to request an appraisal of the gift at the donor’s expense. The individual may be required to file IRS Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes.
The two forms noted above are common and your personal tax accountant can help you complete these forms properly during the preparation of your personal tax return.
Where You Can Give
Qualifying contributions may generally be made to any of the following organizations:
- Churches, mosques, synagogues, temples, and other faith-based organizations and places of worship;
- Scouting organizations such as Girl Scouts and Boy Scouts;
- Youth organizations including Boys and Girls Clubs of America and similarly constituted groups;
- Established public charities like Goodwill, Red Cross, and its affiliates, United Way, Twin Cities Habitat for Humanity, and The Salvation Army;
- Military veterans’ organizations and some cultural groups;
- Recognized Rotary Club affiliates, masonic lodges, and other organizations if gifts are used exclusively for qualifying charitable purposes;
- Nonprofit hospitals and medical research organizations, including those affiliated with hospitals, schools, colleges, or universities;
- Most nonprofit educational organizations, such as colleges (not including any payment made for tuition or other enrollment fees).
To verify that an organization qualifies for tax-deductible contributions, you can search for the organization at the IRS Tax Exempt Organization Search website https://apps.irs.gov/app/eos/ and it will let you know the organization's deductibility on your personal return.
If you are planning your charitable contributions, be sure to connect with a trusted advisor.
Ashley Rehn, CPA
Ashley Rehn is a director and the tax-exempt service area leader. She provides tax compliance and consulting services for a variety of exempt organizations including charities, foundations, charter schools, member organizations, business leagues, civic organizations, and social clubs. Ashley assists clients with tax planning, form 990 series preparation, and research. Specific areas of expertise include unrelated business income, private foundation compliance and excise tax reporting, entity structuring (including multiple entities and joint ventures), monitoring and analysis of public charity status, and board education. Ashley is a holder of the Not-For-Profit Certificate I issued by the AICPA. The Not-for-Profit Certificate I offers a comprehensive, foundational overview of a non-profit’s unique financial needs. Certificate holders learn to recognize applicable GAAP reporting standards, identify state and federal filing requirements, understand best practices in board governance, risk assessment, and internal controls, and are able to outline the planning steps of a successful audit engagement. She has provided public accounting services at Redpath and Company since 2007.
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