During the holidays, many people’s thoughts turn toward giving to others. While you might want to give, just for the joy of charity, there’s no reason to discount the benefits that can come with donating as well.
Consider that when you donate to charity, you do a good deed, and you can reduce your tax liability.
There’s nothing wrong with receiving a financial benefit from your giving, in addition to the warm fuzzies that such generosity creates.
Here are some of the ways that you can enjoy tax benefits while donating to charity:
Donating Money and Goods
One of the most straightforward ways to donate is to directly give money to a charity. (If you want the tax deduction, though, make sure that you double check the charity’s tax exempt status. Donations to some non-profits aren’t actually tax-deductible.)
Itemize your deductions, and you can reduce your income by the amount you donated. Make sure you have receipts from the charities in order to accurately document your giving.
You can also donate goods for a tax deduction. The goods have to be in good condition, though, and you will need to get a receipt.
You can donate the current market value of your clothing and household goods, not what you bought them for. In some cases, you might be required to provide information about what you originally paid for the items. Be prepared to provide this estimate.
There are also opportunities to donate your car on behalf of charity. As always, documentation is required, in case of an audit. Thoroughly vet the charity ahead of time, to make sure they are legitimate.
Also, if you are donating your car, find out the delivery requirements. You might need to arrange to have the car picked up.
Donating Stock to Charity
Another option is to donate your stock to charity. The good thing is, you’re exempt from capital gains taxes on the earnings when you donate appreciated stock to charity (since you haven’t received the cash directly).
On top of that, you can also deduct the total value of your investment at the time of your donation. If you bought 200 shares of a stock 20 years ago for $10 a share (total value $2,000), the stock might have appreciated to $35 a share at some point, for a total value of $7,000.
Now, though, it might have dropped back to $25 a share for a value of $5,000. You still have capital gains of $3,000, but you are exempt from paying the tax on them. Plus, you can deduct the entire $5,000 value from your income because of your donation.
A losing stock, though, might not be the best option for a donation, since you can only deduct the value of the stock, and you wouldn’t have to worry about capital gains anyway. Instead, consider selling your losing stock first. You can deduct the loss as an investment.
Then, you can take the cash you have now and donate that to charity — so you receive the deduction for your charitable donation. This strategy can help you make the most of a losing investment.
Donating Your Time
For those who drive their own cars on behalf of charitable organizations, it’s possible to deduct your mileage. Keep track of your mileage as you make deliveries and perform other duties on behalf of the charity. Purchases you make for the charity (and aren’t already reimbursed) are also tax deductible.
However, you can’t add up your time and deduct that. It would be nice to be able to look at how much you make for an hour of work, and then deduct that amount based on the hours of service you give.
You can’t get a tax deduction for your time. But there are enough other ways to get a tax benefit for donating to charity that you need not begrudge your volunteer service hours.
Tax Benefits of Donating to Charity
You can help others and get an advantage. While a tax deduction isn’t as valuable as the dollar for dollar reduction in taxes that you get with a tax credit, it is still useful.
Indeed, a deduction reduces your taxable income. If you have enough deductions, your income is reduced, so you pay less in taxes because of your lower income. And, if you plan things correctly, you might able to reduce your income sufficiently to stay in a lower tax bracket.