Does Your Donation Qualify?
Understand which donations are tax deductible and which are not.
Making a donation is a great way to give back and feel like you’re making a difference, while also getting the benefits of a tax deduction. However, not all donations are tax deductible.
A recent study concluded that more than 66 percent of high net worth individuals would reconsider their donations if they were to stop receiving tax deductions. If you plan to give with the expectation of receiving tax benefits, it’s a good idea to further your knowledge on deductible donations. It’s all too common to assume your donations are deductible when they may not be.
Donations can include money or items such as clothing, books or toys. Donations going to organizations that are considered 501(c)(3) organizations by the IRS are considered tax deductible. Organizations that are considered qualified include: religious organizations, government, non-profits, public parks, public charities including Goodwill and more. There are many types of charities and nonprofits, such as a country club or social club, where donations cannot be counted as deductible.
If a donation does not go to a qualified organization and have proper documentation, such as a receipt or cancelled check, it will not count as tax deductible. So if you give dollar bills to church or to local charities at events throughout the year, these donations are not considered deductible unless you pay by check. For donations that exceed $250, a cancelled check isn’t enough. The IRS requires an acknowledgement letter dated for the year in which the donation was made. If your donation is valued at over $5,000, then the IRS requires an independent, written appraisal.
Raffle tickets or drawings, or other fund-raising tickets can’t be counted into your tax deductions either. Additional types of fund-raising, including events to raise money for funerals or medical expenses, are also not deductible, unless the events are sponsored by an organization such as the Salvation Army or another 501(c)(3). Also, political contributions do not count as charitable donations.
If you do volunteer work, any out-of-pocket expenses for uniforms or supplies can be deducted if the volunteer work is in support of a charitable organization. The cost of driving or public transportation is considered deductible too. If you donate stock that has appreciated in value, you may not only take the deduction, but also can avoid paying capital gains tax. There is an exception when it comes to capital gains tax for such donations to qualifying charitable organizations.
It could be helpful to use a tool such as ItsDeductible to keep track of your donations throughout the year. It not only makes things easier at tax time, but helps to see just how much donations and gifts can add up and benefit your tax situation. An alternative to keeping track of multiple donations is to make one donation to a donor-advised fund. These funds are like mutual funds and provide the opportunity to invest in many charities. This ensures you’re giving to qualified organizations that will get you the deduction.
If you have any questions about donations or need assistance determining the best course of action to reduce taxable income, request a call from a Bayntree financial advisor today.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.