Whatever cause is closest to your heart, there are countless charities out there in need of financial help. Under the Internal Revenue Code, your charitable donations are tax deductible. This means that while you are making valuable contributions to the charity or cause of your choice, you can also be improving your tax bill.
(1) The Basics
Your donations are 100% deductible from your taxable income, usually limited to 50% of your income.
Depending on the type of organization to which you donate, this limit can in some cases change to 20% or 30%, although the rules here are very complex.
The first and most crucial requirement is to keep a record of your charitable contributions. The best advice is to get into the habit of tracking your donations throughout the year, to avoid a mad dash at the end of the year to remember what you donated and to whom!
(2) Eligibility
Donations made to eligible charities and other organizations (such as religious organizations or the government) can be deducted from your annual tax bill. If you have any doubts about the authenticity of the organization you are donating to, it is worth doing some research first.
A list laying out the type of qualified organizations is contained in Section 170(c) of the Internal Revenue Code.
One of the most important things to bear in mind here is that the organizations must be American.
(3) Donating “non-cash” gifts
When most people think of donating to charity, they think in terms of financial donations. However, a tax deduction can also be applied for “non-cash” gifts.
One of the most obvious examples is clothing. As charity shops continue to grow in popularity, the value and importance of donating old or unwanted clothes is also enhanced.
The key restriction here is that the deduction will be limited to the “fair market value” of the goods. This will often be less than was actually paid. For such goods to be tax deductible, the IRS requires that they be in “good condition or better”.
If you are considering donating a larger item, such as a car or furniture, you may wish to get an appraisal. Some charities may be willing to pay for this service, so it is worth asking. For donations over $501, you must specify the date and cost of your original purchase.
(4) Deadline
Charitable contributions can be deducted from your taxable income in the year that they are made. This includes donations made on a credit card which is not paid off until the following year.
For example, if you used your credit card to donate to your local homeless shelter two weeks before Christmas 2016 but didn’t pay off the card bill until January 2017, the donation and hence tax deduction apply to 2016.
The rules surrounding tax deductions for charitable contributions can be complex. If you have any questions, get in touch with the team at American Finance and we can assist you further.
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Information provided on this website is for guidance purposes only and should not be construed or relied upon as formal tax, legal or financial advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.