Ask an Advisor: 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 lower my taxable adjusted gross income (AGI) by $50,000? So if my adjusted gross income was $100,000, and I gave $50,000 to charity, is my taxable income now $50,000?
-Bill
Making charitable donations gives you the opportunity to do good and get a valuable tax deduction.
In the case of a $100,000 adjusted gross income (AGI) with a $50,000 cash donation, you can probably deduct the $50,000 and reduce your AGI to $50,000.
But because we’re dealing with the U.S. tax code, the real answer is this: It depends.
It’s not always quite as simple as “donate $x, get a $x tax deduction.” But when you support charitable organizations, you’ll usually see a tax benefit. As long as you follow the rules, that is. Here’s what to know.
Ask an Advisor: Help Me Understand the Math. How Does Donating to Charity Reduce My Taxable Income?
Which Donations Can You Deduct?
Deductible charitable donations aren’t limited to cash. You can also donate assets – anything from used baby clothes to artwork to cars. Plus, when you volunteer to do charitable work, your related out-of-pocket expenses may be deductible as well. The rules are a little different for asset and volunteer donations, so make sure you follow them to get your full allowable deduction.
For asset donations, follow these guidelines:
Determine the fair market value. Basically, that’s the amount you could reasonably sell donations for on the date of donation.
Make sure that 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-related 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 volunteering 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 mile mileage deduction. Make sure you save any relevant receipts and get documentation from the charity you’re volunteering for, which is required for deductions of $250 or more.
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Follow the Rules
Like everything IRS-related, 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’ve donated to are IRS-qualified before taking any deductions. You can visit the IRS website to find out whether the organizations you’re supporting qualify.
Know the deduction limits. For tax year 2022, the deduction for cash donations is typically limited to up to 50% of your AGI, though in some circumstances the limit may be reduced. You can also deduct non-cash donations of up to 30% of your AGI if you’ve held those assets for at least one year. If your donations exceed these limits, you can carry the deductions forward on your tax returns for the next five years.
Keep records of your cash donations. For donations of $250 or more, get a written receipt from the charity explicitly stating the amount of your cash gift or a description of the property donated. That acknowledgment must also include the value of any goods or services you received from the charity in return.
Submit the proper forms when needed. If you donate property worth at least $500, you must include IRS Form 8283 as part of your tax return. If necessary, attach any appraisals related to the donations.
You’ll Have to Itemize to Get the Deduction
Unlike last year, you’ll need to itemize deductions on Schedule A to include your donations on your tax return in the upcoming tax season. And with the high standard deduction amounts for tax year 2022, many people won’t end up itemizing. Those standard deductions, based on your filing status, are:
Single: $12,950
Married filing jointly: $25,900
Head of household: $19,400
If your itemized deductions fall short of the standard deduction, you can use a bunching strategy to push them over the line. That means fast-forwarding payments to 2022 that you would have normally made in 2023. That way you can itemize for the 2022 tax year and take the high standard deduction for tax year 2023.
Here’s what that looks like:
Say you normally donate $5,000 every year to charity. In 2022 you’d 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 bigger reduction to your taxable income.
Charitable Giving Strategies That Maximize Tax Savings
Ask an Advisor: 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 bigger tax savings. Make sure to consult your tax preparer before making any of these more complex moves.
Using a donor-advised fund (DAF). These funds can work especially well combined with the bunching 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 would normally. You only get a tax deduction when you fund the DAF, not when the DAF distributes the money to organizations.
Donate appreciated assets. When you directly donate appreciated assets – for example, stocks – you get two extra benefits. You avoid paying the capital gains taxes that would apply if you sold the asset. And you still get a charitable donation deduction to reduce your tax bill.
Make a qualified charitable distribution If you’re at least age 70 1/2, you can make a qualified charitable distribution (QCD) of up to $100,000 directly from your traditional IRA to the charity of your choice. These donations won’t be deductible, but you’ll still get a tax benefit. They count toward your required minimum distributions (RMDs) but won’t increase your taxable income the way regular RMDs do. Reduced taxable income means a lower tax bill, which may help you avoid paying taxes on Social Security benefits.
Consider speaking with a financial advisor who can help you navigate the nuances of your situation and build an effective tax strategy.
Bottom Line
There’s more to the charitable donation deduction than simply getting a dollar-for-dollar reduction of your adjusted gross income. The rules can get complicated, so consult your tax professional to make sure you get it right.
Michele Cagan, CPA, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Michele is not a participant in the SmartAsset AMP platform, nor is she an employee of SmartAsset, and she has been compensated for this article.
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