Donating to charity is a truly rewarding and fulfilling endeavor. The IRS offers tax deductions for contributions made to charity during a given tax year. Businesses and individuals can declare their donations on their annual federal tax returns to lower their taxable income. However, to claim these tax deductions, you need the correct paperwork to back up your claims and ensure your charitable donations are tax-deductible. Here is everything you should know about charitable donations and how to take advantage of IRS incentives.
Are My Charitable Donations Tax-Deductible?
If you are sure that your itemized deductions will surpass your standard deduction, tax deductions on your charitable donations may reduce your annual tax bills. Itemized deductions are restricted to 60 percent of the taxpayer’s adjusted gross income. Keep in mind that qualified deductions are not eligible for this limitation. A corporation can deduct qualified contributions of up to 25% of taxable income. On the other hand, individuals can deduct qualified contributions of up to 100% of the adjusted gross income. Contributions exceeding this amount are usually carried over to the next tax year.
If you are seeking tax deductions, you should begin by researching the IRS’s definition of charitable donations. The IRS describes a charitable contribution as a donation or gift to, or for the use of, a qualified organization,” also noting that “It is voluntary and is made without getting, or expecting to get, anything of equal value.”
What Charities Are Eligible for Tax Deductions?
The way the IRS treats charitable donations can vary based on the nature of the recipient organization; whether the donor is a business, corporate, or individual; whether the donor is giving time, cash, or in-kind contributions; and the amount that was donated.
Donations may only be tax deductible if given to a “qualified organization” that has been granted tax-exempt status by the IRS, and there are several nonprofit categories that meet this requirement. In many cases, a donation to a qualified organization is only tax deductible if the donation is given for a specific purpose. It is always best to check the IRS documentation to confirm whether your donations are tax deductible. If you’re ever uncertain, reach out to a tax professional.
You can reduce your tax bill by donating to a variety of tax-exempt organizations. These include, but are not limited to:
- Nonprofit Schools and Hospitals: Organizations that provide healthcare or educational services to communities without generating a profit are tax-exempt, and donations toward these groups are generally tax deductible.
- Federal, State, and Local Governments: You may donate to the government at any level and deduct the amount from your taxes, so long as your gift is for the public good (as opposed to lobbying or political campaign donations).
- Churches or Religious Organizations: Donations made to mosques, churches, synagogues, and other faith-based charities are also eligible for tax deductions as long as they have office locations in the U.S. or its territories.
- War Veterans Organizations: These charitable organizations offer beneficial services to war veterans who previously served the country. They help them to obtain medical treatment, counseling, financial aid, housing, and other services. To qualify for deductible tax donations, war veteran organizations must be operated in or by the United States and its territories.
- Community Corporations: These charitable programs strive to offer educational, literary, scientific, or religious needs. They may also include organizations raising awareness regarding domestic, child, or animal abuse. To qualify for deductions, these community corporations should also operate within the U.S. and its territories.
- Civil Defense Organizations: These organizations protect civilians of the U.S. and its territories. Civil defense organizations are owned and operated at the federal, state, or local levels.
- Domestic Fraternal Societies: Domestic fraternal societies are clubs or associations for men, where they dedicate their time to social or charitable acts within their community. They may also offer professional and religious services. Donations to these groups are only tax-deductible if they are for philanthropic purposes, such as charity, education, or for the benefit of children or animals.
- Nonprofit Volunteer Fire Companies: Volunteer fire companies usually operate locally and have residents volunteering to deal with emergencies. Since these organizations operate out of the political subdivision, their donations qualify for charitable tax deductions.
Whether you are an individual or own a multi-dollar corporation or local business, there is always enough room to serve your community. By providing funds to your community, you can make a difference in people’s lives while enjoying some tax deductions. However, the ever-changing tax laws can make it challenging for donors to know the rules and requirements surrounding deductible donations. It is advisable to document all of your donations and remain up to date with changes in the tax code. Don’t hesitate to seek help from a tax professional to ensure you get the tax benefits entitled to you whenever you give to charity.