Whether you’re a frequent or seasonal giver, you should know how giving affects taxes. Giving can affect taxes in several ways, primarily through deductions and credits. Here are some frequently asked questions on how to maximize tax benefits of gifts.
What is a tax-deductible donation?
The IRS considers a tax-deductible donation to be any contribution of money or goods to a qualified tax-exempt organization. In order to deduct these contributions during tax season, you must itemize your deductions by filing Schedule A.
How much can I deduct?
Typically, you can deduct up to 60% of your adjusted gross income (AGI) if you are donating to a charitable organization. If you are donating to another type of organization like a private foundation or fraternal society, the limit is much smaller. These can range from 20% to 50%. If you exceed the limit for the year, you can carry over the excess contributions over the next five tax years.
Some contributions may lead to only a partial credit. For particular donations, a taxpayer will only receive a portion of a credit. For example, if you purchase a shirt that is a part of a charitable cause, the entire price of the shirt is not deductible. The fair market value must be determined and subtracted from the cost of your purchase in order to determine the amount of your donation.
What are qualified organizations?
A qualified organization is one that you make a charitable donation to that can be deducted during tax time. Some of these organizations include religious organizations, governments, nonprofit schools and hospitals, war veterans’ organizations, and others. Some that do not qualify for tax-deductible donations are social or sports clubs, most foreign organizations, lobbyist groups, homeowners’ associations, individuals, political groups and more. More common forms of donations like blood, time and services, and raffle tickets may not be deducted. However, you may deduct out-of-pocket expenses that related to volunteering if they were not reimbursed. These can include mileage, gas, and supplies.
Tax Relief for Gift Givers
Before you give, it’s important to learn how to maximize tax benefits of gifts. Whenever you donate, it’s important to keep records, no matter how big or small the contribution amount. Bank statements or charity receipts will suffice for monetary donations. If you make donations automatically through paycheck deductions, the contribution amounts will show on your W-2 or pay stubs. If you donate goods, you are allowed to deduct the fair market value of the items. In other words, you may deduct the price a willing buyer would pay for them. The rules surrounding tax-deductible donations can be tricky. However, Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
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