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Use Charitable Giving to Lower Taxes & Advance a Cause (Part I)

charitable giving to lower taxes

Historically, most charitable donations come from individuals rather than corporate entities, and the last couple of years were no exception. Even in the pandemic, 78% of charitable donations came from individual taxpayers. Clearly, your support makes an impact. Donating to charity is fulfilling, and receiving tax incentives for doing so can add an extra layer of gratification.

Charitable Contribution Deduction

Making annual charitable donations can reduce your tax liability, but only if you itemize your deductions.Today, the standard deduction is so high that only around 10% of taxpayers itemize their deductions (down from 30% in 2017, when the standard deduction was much lower). A temporary tax law allows all taxpayers to deduct up to $300 of cash contributions in 2020 and up to $600 in 2021, regardless of whether they itemize or take the standard deduction.

Standard Deduction Charitable Contributions 

2022 Standard Deduction
Single + Married Filing Separately$12,950
Married Filing Jointly$25,900
Head of Household$19,400

To calculate your itemized deductions, add up all deductible expenses. This includes charitable donations, mortgage interest, real estate taxes, personal property taxes, medical expenses above certain thresholds, casualty losses and other expenses listed on Schedule A of your tax return. If your itemized deductions exceed the standard deduction, your charitable contributions may help lower your tax bill.

Keep the standard deduction in mind when planning charitable contributions. Donating a large lump sum in one year rather than spreading that donation out over several years may help you cross the standard deduction threshold. In those years you donate a large sum to charity, you can itemize your deductions so that your contributions yield you a tax deduction. In other years, you can take the standard deduction. This strategy is often called “bunching” or “stacking” your charitable donations, and it can be quite effective in maximizing the tax benefits you get from your donations.

Calculate Charitable Contribution Deduction

When calculating your charitable contribution deduction, there are three things you should keep in mind:

  1. The type of property you’re donating
  2. Your adjusted gross income (AGI)
  3. The type of organization you’re donating to

For example, when you donate appreciated shares of stock that you’ve held for at least a year to an IRS-qualified 501(c)(3) homeless shelter, your deduction will be the fair market value of that stock but limited to 30% of your AGI.

The chart below helps you determine your deduction for the most common types of donations.

Type of DonationDeduction Amount (Generally)Deduction Limits* (Generally)
CashDeductible at cash value
Donations can be made with cash, check, debit card or credit card.
100% of AGI in 2020 and 2021
60% of AGI starting in 2022
Appreciated stock held more than one year
Securities worth more today than when you acquired them
Deductible at fair market value
Donating stock directly to the charity (rather than selling it and donating the proceeds) helps you avoid both capital gains and the net investment income tax (NIIT).
30% of AGI
Stock held for one year or lessDeductible at the lesser of fair market value or basis30% of AGI
Virtual assets held more than one year
e.g., cryptocurrency, NFTs, tokens
Deductible at fair market value
Donating virtual assets directly helps you avoid capital gains and the NIIT, much like when you donate appreciated stock.
30% of AGI
Personal Property
e.g., clothing, household goods, artwork, jewelry in “good” condition or better
Deductible at fair market value50% of AGI
Unreimbursed charitable travel expenses
e.g., parking costs, tolls, rideshare (not reimbursed by the charitable organization)
Deductible at cost
Charitable miles driven are deductible at 14 cents per mile.
60% of AGI
*All donations may face further limitations depending on the type of organization. If you made donations in excess of AGI limitations, you can carry that excess forward up to five years.

Other Things to Know

Charitable contributions are typically only deductible when made to a qualifying 501(c)(3) organization. To check if a charity is qualified, use the IRS Tax Exempt Organization Search Tool.

To substantiate your donation, you should document the date, type of donation, name and address of the charity, as well as the following:

  •  If your gift is below $250, keep your receipt, bank record or written confirmation from the charity.
  •  If your gift is $250 or more, you must request written communication from the charity.
  • This is often called a contemporaneous written acknowledgment.
  • For non-cash gifts above $500, complete Form 8283.
  • Noncash gifts above $5,000 may require you to submit an appraisal.

Summary

With all its rules, limitations and caveats, the charitable deduction is surprisingly complex. But knowing at least some of these rules is important. When you optimize your charitable deduction, you can stretch those donation dollars to provide even better support to organizations you believe in.

To learn about other tax-advantageous methods for donating to charity, click here to read more about donor-advised funds, charitable trusts and private foundations.

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