How Your Gift Gives Back in Tax Deductions

Stephen Crawford |

We all want to do good and make a positive impact in the world. Many of us choose to give charitably to organizations that are near and dear to our hearts. But did you know that not only does your donation help the charity, but it can also benefit you come tax time? Charitable donations to a tax-exempt organization can result in valuable tax deductions.

What are charitable contributions?

First, let’s define what charitable contributions are. A charitable contribution is a gift of money, property, or other asset made voluntarily to a qualified organization. Examples of qualified organizations include non-profit organizations, religious organizations, and charitable trusts – basically, any organization that is exempt from federal income tax. It’s important to note that the organization must have tax-exempt status with the IRS for the contribution to qualify for a deduction.

You can search for tax-exempt organizations from the IRS's website here:

Types of Donations

The types of donations that you can make are diverse. Monetary donations are the most common form of donation, but you can also donate tangible property such as clothing, furniture, and vehicles. You can also donate appreciated securities and real estate, which not only provides a tax deduction but can also eliminate capital gains taxes. Make sure to keep a record of all items or cash donated with a receipt from the organization.

Itemized Deductions

One of the most common tax deductions from charitable donations is the itemized deduction. If you choose to itemize your deductions, you can deduct the donated amount from your taxable income. For example, if you make a $1,000 donation and your marginal tax rate is 24%, you would receive a $240 tax deduction. Keep in mind that the total amount of your itemized deductions must exceed the standard deduction to be beneficial.

Qualified Charitable Distributions (QCDs)

For those giving from retirement funds, qualified charitable distributions (QCDs) are an attractive option. QCDs allow investors to donate up to $100,000 per year directly from their Individual Retirement Account (IRA) to charitable organizations. This increases the amount that can be donated tax-free and can lower the amount of income that is subject to tax. While QCDs can be made from a Roth IRA, there is no tax benefit because distributions are already tax free.

Qualified Charitable Contributions (QCDs) are especially beneficial for those who are taking Required Minimum Distributions (RMDs) from their IRA. By donating funds directly from their IRA to a qualified charity through a QCD, these individuals can offset, or possibly meet, their RMD requirements without increasing their taxable income. This can be particularly advantageous as it can reduce the amount of tax owed.

If you are currently taking required minimum distributions (RMDs), donating money to charitable organizations, and not utilizing qualified charitable distributions (QCDs), it is worth considering this opportunity to decrease your annual tax liability.

Donating money or goods to charitable organizations can benefit both the charity and the donor through valuable tax deductions. Understanding the types of donations, the recipient organization’s requirements, and the deductions available can allow you to maximize your contribution and minimize your tax bill. Consult with a financial advisor to determine the best approach for your charitable giving and your unique situation.