Help me understand the math. How does donating to charity reduce my taxes?

Ask a counselor: help me understand the math.  How does donating to charity reduce my taxes?

Ask a counselor: help me understand the math. How does donating to charity reduce my taxes?

If I give $50,000 in cash to a charity, does that reduce my taxable adjusted gross income (AGI) by $50,000? So if my adjusted gross income was $100,000 and I donated $50,000 to charity, my taxable income is now $50,000?

-Invoice

Making charitable donations gives you the opportunity to do good and get a valuable tax break.

In the case of an adjusted gross income (AGI) of $100,000 with a $50,000 cash donation, you can probably deduct the $50,000 and reduce your AGI to $50,000.

But since we’re dealing with the US tax code, the real answer is this: it depends.

It’s not always as simple as “give $x, get $x tax break.” But when you support charities, you’ll usually see a tax benefit. As long as you follow the rules, that is. Here’s what to know.

For help with low-tax charitable strategies, consider working with a financial advisor.

Ask a counselor: help me understand the math.  How does donating to charity reduce my taxable income?

Ask a counselor: help me understand the math. How does donating to charity reduce my taxable income?

What donations can you deduct?

Deductible charitable donations are not limited to cash. You can also donate resources — anything from used children’s clothing to artwork to cars. Also, when you volunteer for charity, your related out-of-pocket expenses may also be deductible. The rules are slightly different for donations of goods and volunteers, so be sure to follow them to get the full deduction allowed.

For donations of goods, follow these guidelines:

  • Determine the fair market value. Basically, this is the amount you could reasonably sell the donations for on the date of the donation.

  • Make sure the donated household items are in good used condition or better before taking the deduction.

  • Get a formal, signed appraisal if the asset you’re donating is worth $5,000 or more. You can find more details in IRS Publication 561.

With volunteer deductions, you can include unreimbursed expenses you paid but not your time or the value of your service. You can deduct things like travel expenses when you volunteer away from home, snacks you provided during an event, and the cost of uniforms you must wear while volunteering.

If you use your car while volunteering, you can deduct directly related expenses, such as gas, or use the 14 cents per mileage deduction. Be sure to save all relevant receipts and obtain documentation from the charity you are volunteering for, which is required for deductions of $250 or more.

Follow the rules

Like everything with the IRS, there are several rules to follow when taking deductions for charitable donations. Here are four important things to keep in mind:

  • Make sure the charities you donate to are qualified by the IRS before taking any deductions. You can visit the IRS website to find out if the organizations you are supporting are eligible.

  • Know the deduction limits. For tax year 2022, the deduction for cash donations is typically capped at up to 50% of AGI, although the cap may be reduced in some circumstances. You can also deduct non-cash donations of up to 30% of your AGI if you’ve held those assets for at least a year. If your donations exceed these limits, you can report the deductions on your tax return for the next five years.

  • Keep a record of your cash donations. For donations of $250 or more, obtain a written receipt from the charity that explicitly states the amount of your cash gift or a description of the donated property. This acknowledgment must also include the value of any goods or services received in return by the charity.

  • Submit the appropriate forms when needed. If you donate property worth $500 or more, you must include IRS Form 8283 as part of your tax return. If necessary, attach any assessments related to donations.

You will have to list to get the deduction

Unlike last year, you’ll need to list deductions on Schedule A to include your donations on your tax return next tax season. And with standard deduction amounts high for tax year 2022, many people won’t end up listing. These standard deductions, based on your filing status, are:

  • Single: $12,950

  • Joint Marriage Declaration: $25,900

  • Head of Household: $19,400

If your itemized deductions are less than the standard deduction, you can use a bundling strategy to push them over the line. This means quickly forwarding payments to 2022 that you would normally have made in 2023. This way you can itemize for the 2022 tax year and take the high standard deduction for the 2023 tax year.

Here’s how it looks:

Suppose you normally donate $5,000 each year to charity. In 2022, you would donate $10,000 – this year’s and next year’s donations combined. That double donation pushes your itemized deductions over the standard deduction for this year for a larger reduction in your taxable income.

Charity strategies that maximize tax savings

Ask a counselor: help me understand the math.  How does donating to charity reduce my taxable income?

Ask a counselor: help me understand the math. How does donating to charity reduce my taxable income?

Depending on your personal situation, you may be able to use advanced strategies for more tax savings. Be sure to consult your tax preparer before making any of these more complex moves.

Using a donor recommended fund (DAF). These funds can work particularly well in conjunction with the pooling strategy. With a DAF, you make a sizable tax-deductible contribution in one year to maximize your itemized deductions for that tax year. You can distribute the money in the DAF to various charities over the next few years as you normally would. You only get a tax break when you finance DAF, not when DAF distributes the money to organisations.

Donate appreciated goods. When you donate valued assets, such as stocks, directly, you get two extra benefits. You avoid paying capital gains taxes that would apply if you sold the asset. And you still get a deduction for charitable donations to reduce your taxes.

Make a qualified charitable distribution If you are at least 70 and a half years old, you can do a Qualified Charitable Distribution (QCD) up to $100,000 directly from your traditional IRA to the charity of your choice. These donations will not be deductible, but you will still have a tax benefit. They count towards your minimum required distributions (RMDs) but won’t increase your taxable income like regular RMDs do. Lower taxable income means a lower tax bill, which can help you avoid paying taxes on Social Security benefits.

Bottom line

There is more to the charitable donation deduction than simply getting a dollar-for-dollar reduction in your adjusted gross income. The rules can get complicated, so consult your accountant to make sure you get it right.

Michele Cagan, CPA, is a SmartAsset financial planning columnist and answers readers’ questions on personal finance and tax topics. Have a question you’d like an answer to? Please email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Michele is not a participant of the SmartAdvisor Match platform and has received compensation for this article.

Find a financial advisor

  • Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.

  • Tax refunds are a big financial boost. Whether you plan to save for retirement, pay off college or credit card debt, or invest your money differently, SmartAsset’s tax return calculator can help you figure out how much you’ll receive from the government so you can plan ahead.

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