Give the Gift of Charity – and Deduct It, Too!
The holiday season is upon us once again, and that means increased opportunities to donate to charity. According to Charity Navigator, 31% of all annual giving occurs in the month of December – and 12% occurs the last three days of the year. Not only does charitable giving help a worthy cause, it can also help lower your taxes!
First, do you itemize your deductions, or take the standard deduction? To take advantage of charitable deductions, you must “itemize” your deductions on Schedule A. Many taxpayers assume that they don’t have enough deductions to make itemizing practical and take the standard deduction. Before deciding to take the standard deduction, ask yourself these questions: Did you pay mortgage interest? Do you pay property taxes? Did you purchase a car, truck, RV, or boat in the past year? Did you have a large amount of medical expenses? These potential deductions add up, and, after adding charitable donations, can push you into the realm of itemizing.
Is it really a charity?
Before you donate, be sure to check that the organization is a 501(c)(3) – this means that you are allowed to deduct your donation on your taxes. You can donate to organizations that don’t qualify, of course, but you will be prohibited from deducting that donation.
How much should you donate?
This is ultimately up to the taxpayer, but be sure to consider your situation in deciding how much to give. For example, let’s say that you usually give Charity XYZ $1,000 each year. This year, you’ve had an especially good year in terms of income, and you don’t expect to make as much next year. By giving $2,000 this year instead of dividing it out over this year and next, you can reduce your taxable income this year, potentially saving money on taxes.
Donate that RMD!
Another option for those of you who are 70 ½ and older is to donate your Required Minimum Distribution (RMD) from your IRA. Depending on your situation, if you do not need the RMD, it may be wise to donate it to charity to help offset the increase in taxable income.
Charitable Remainder Trusts
An advanced option is to set up a Charitable Remainder Trust (CRT). These allow the taxpayer to donate cash, stocks, real estate, and more to an irrevocable trust, which will provide an income stream to designated beneficiaries. Depending on the type of CRT, once the trust has reached a certain age, or the last remaining beneficiary dies, the assets remaining in the trust are distributed to the charitable organizations designated when the CRT was created. In the meantime, the donor may take partial deductions on any contributions made to the CRT.
Donating to a charitable organization should ultimately be about giving to a worthy cause – being able to deduct the amount and lower your taxable income is just a nice bonus. It’s a win-win scenario for all involved - the charity receives your donation, and you get to deduct the donation!