Here at FSA, it’s our mission to make a positive impact on our community. (You can learn more about how we do this on our FSA Gives Back page.) We encourage our clients to do the same; not only because charitable giving is a powerful way to support causes you care about, but also because it can help reduce your tax burden. Here’s how:
The basics of donating cash
When you donate money to a qualified charitable organization as an individual, you can generally deduct up to 60% of your adjusted gross income (AGI), depending on the organization’s status.
Example: You make $100,000 a year and donate $10,000. With the deduction, your taxable income drops to $90,000, and your tax bill goes down accordingly.
Donating non-cash property
Donating property like stock, cars, or even valuable art can also lead to tax deductions. If the property has appreciated in value, you can generally deduct the fair market value, with no need to pay taxes on the capital gains you’d have faced if you sold the property.
Example: You donate 100 shares of stock worth $5,000. If you originally bought the stock for $2,000, you avoid paying capital gains taxes on the $3,000 appreciation. Instead, you can deduct the full $5,000 value as a charitable contribution.
For property like clothes or furniture, the deduction is typically based on the fair market value of the items. If you’re donating high-ticket items, like a car, be prepared for paperwork (and maybe even an appraisal, depending on the item’s value).
IMPORTANT: You can identify the limitations that apply to your circumstances using the Tax Exempt Organization Search deductibility status codes.
Special deductions for businesses
Businesses can also benefit from charitable giving, with some extra perks. The IRS allows corporations to deduct up to 25% of their taxable income for contributions made to qualified organizations. Allowable business charitable deductions include cash donations, as well as food inventory donated for the care of those in need.
What counts as a qualified organization? To qualify for a charitable tax deduction, the donation must be made to an eligible organization as defined under section 170(c) of the Internal Revenue Code. These include: 1. Government entities: Contributions to U.S. states, possessions, or political subdivisions made for public purposes, including the District of Columbia 2. Charitable organizations: A corporation, trust, fund, or foundation that is organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes 3. Religious organizations: Donations to churches, synagogues, and other places of worship 4. Veterans’ organizations: These include posts, auxiliaries, trusts, or foundations supporting U.S. war veterans and their families 5. Nonprofit fire companies: Contributions to nonprofit volunteer fire departments 6. Civil defense groups: Organizations created under federal, state, or local law to support civil defense efforts, including unreimbursed expenses of volunteers directly related to their service 7. Fraternal societies: Contributions to domestic fraternal societies operating under the lodge system, as long as the donation is used for charitable purposes 8. Nonprofit cemetery companies: Donations made to cemetery organizations that are irrevocably dedicated to the perpetual care of the cemetery as a whole (not specific plots or mausoleum crypts) These organizations must meet the necessary requirements to be recognized as qualified for tax deductions. Verify that the organization is qualified before donating. |
The tax benefits of donating through an IRA
If you’re over 70½ years old and have an Individual Retirement Account (IRA), there’s another way to give back without triggering a tax bill. The IRS allows for Qualified Charitable Distributions (QCDs) from your IRA directly to a charity. These QCDs count toward your Required Minimum Distribution (RMD), but they’re not included in your taxable income, which can help you avoid paying taxes on that amount.
Example: Let’s say your RMD for the year is $10,000, and you donate $5,000 directly from your IRA to a charity. That $5,000 donation doesn’t count as taxable income, so it reduces your overall taxable income for the year.
You may also be interested in: 6 smart strategies to manage RMDs and reduce your taxable income in retirement
The importance of record-keeping
When you donate, especially if the donations are large, keep thorough records. For cash donations, it’s as simple as saving your bank statements or getting an acknowledgment letter from the charity. For non-cash donations, such as property, you’ll need an itemized list of the donated goods and their fair market value.
- Donations of $250 or more require a written acknowledgment from the charity
- Donations of significant items (over $500) mean you’ll also need to file IRS Form 8283
- If the value of the property exceeds $5,000, you may need an appraisal from a qualified appraiser
Timing your contributions
Contributions must be paid in cash or other property before the close of your tax year to be deductible. As we’ve mentioned, a corporation may deduct qualified contributions of up to 25% of its taxable income. Any contributions that exceed that amount can carry over to the next tax year.
Charitable giving for tax-efficient planning
Tax-efficient charitable giving isn’t only about reducing your tax bill today; it’s about planning for the future. If you’re looking to lower your taxes in retirement or beyond, consider setting up a donor-advised fund (DAF), which lets you contribute to a fund, take the deduction upfront, and distribute the money to charities over time. This strategy works well for people who want to give generously but don’t want to do so immediately.
Make your generosity work for you—and for the causes that matter most
Tax-efficient charitable giving allows you to make a bigger impact while reducing your tax burden. Save on taxes, help a charitable organization in need, and leave a legacy—sounds like a win, win, win! Just remember to give to qualified organizations, keep your records in order, and be aware of the special rules that apply to different types of donations.
If you want to find out more about how charitable giving can fit into your tax strategy, let’s talk. There’s no one-size-fits-all approach, but with the right planning, you can give back while saving on taxes.
Learn more about why FSA Gives Back
I talked with Alex Kellison on Legacy of Leaders about how giving back is an integral part of leadership at FSA. Click here to view the interview.