Tips for Claiming a Tax Deduction on Your Charitable Donations during the Holidays

Peacock & French CPAs
Dec 01, 2023

When you give during the holidays, you can help those in need and also enjoy the benefit of tax deductions. However, navigating the complex landscape of tax deductions can be tricky, and it's essential to make sure you're following the rules and maximizing your tax benefits. Keep reading to get valuable tips on how to claim a tax deduction on your charitable donations during the holidays.

The holiday season is a time of giving, and many individuals generously contribute to charitable organizations during this time. Besides the warm feeling that comes from helping those in need, you can also enjoy the added benefit of tax deductions when you make charitable donations. However, navigating the complex landscape of tax deductions can be tricky, and it's essential to make sure you're following the rules and maximizing your tax benefits. Keep reading to get valuable tips on how to claim a tax deduction on your charitable donations during the holidays.

Understand Eligible Charities

One of the first steps in claiming a tax deduction for your charitable donations is to ensure that your chosen charity is eligible. To be eligible, an organization must have tax-exempt status under section 501(c)(3) of the Internal Revenue Code. This status is typically indicated in their documentation and is readily available on their website or by contacting the organization directly. If you're unsure about an organization's eligibility, you can consult the IRS's Exempt Organizations Select Check tool, which will verify the charity's tax-exempt status.

Keep Accurate Records

The IRS requires documentation to support your charitable deductions. This means you should keep detailed records of your donations, including receipts, canceled checks, or credit card statements. The records should include the name of the charity, the date of the donation, and the amount donated. If you make a single donation exceeding $250, you will need a written acknowledgment from the charity, including a description of the donated property or services. Keeping organized records will not only help you claim deductions accurately but will also serve as a crucial backup if you ever face an audit.

Value Your Donations Properly

When it comes to donating property or goods, you should be aware of the fair market value (FMV) of your contributions. The FMV is the price that the property would sell for on the open market between a willing buyer and a willing seller. If your donations are valued at $500 or more, you must file Form 8283, Noncash Charitable Contributions, with your tax return. It's important to be accurate in determining the FMV, as overestimating can lead to complications with the IRS.

Itemize Your Deductions

Claiming a deduction for your charitable donations requires itemizing your deductions when filing your tax return. This means you'll need to forgo the standard deduction and list out all your eligible expenses. By doing this, you'll be able to account for all your charitable contributions and other itemized deductions, such as mortgage interest, medical expenses, and state and local taxes. If your total itemized deductions exceed the standard deduction amount, you'll benefit from a lower taxable income.

Be Mindful of the Annual Limit

The IRS sets limits on the amount you can deduct for charitable contributions each year. Generally, you can deduct up to 60% of your adjusted gross income (AGI) for cash contributions to eligible organizations. However, there are some exceptions, and the rules can be different for different types of donations, such as appreciated property or clothing. It's essential to be aware of these limits and ensure that your deductions fall within the prescribed guidelines.

Consider Donating Appreciated Assets

If you have investments, consider donating appreciated assets like stocks or real estate to your chosen charity. Donating appreciated assets can be a tax-savvy strategy because you can avoid paying capital gains tax on the appreciation while still receiving a deduction for the asset's FMV. This can be particularly beneficial for individuals who have highly appreciated investments. However, you should consult with a tax professional to navigate the specific rules and potential advantages of such donations.

Utilize Qualified Charitable Distributions (QCDs)

For individuals aged 70½ or older who have traditional IRAs, utilizing Qualified Charitable Distributions (QCDs) can be an excellent way to donate to charity while reducing your taxable income. With QCDs, you can transfer funds directly from your IRA to an eligible charity without incurring a taxable distribution. This means the donated amount won't be included in your income, and it can count toward your required minimum distribution (RMD) if applicable. It's important to follow the specific rules surrounding QCDs, so consulting with a tax professional is advisable.

Plan Your Donations Strategically

The timing of your charitable donations can significantly impact your tax deductions. Consider bunching your donations in a single year to exceed the standard deduction threshold, and then take the standard deduction in the following year. This strategy, known as "bunching," can maximize your tax benefits while allowing you to support your favorite charities. Alternatively, if you expect a significant increase in your income, you may want to accelerate your charitable donations to offset the higher tax liability.

Consult with a Tax Professional

Navigating the complexities of charitable donation deductions can be overwhelming, and the tax laws are subject to change. It's essential to consult with a qualified tax professional, such as the experienced accountants at Peacock & French CPAs, to ensure that you're taking full advantage of the tax benefits available to you. A knowledgeable CPA can help you determine the most tax-efficient strategies for your charitable giving, keeping you compliant with the latest tax laws and regulations.

Contact Peacock & French CPAs today to schedule a tax planning consultation and let us help you make the most of your giving spirit while reducing your tax liability. Together, we can make the holiday season brighter for those in need and your financial outlook even more secure.