As the clock winds down on 2018, many people are scurrying to make their final charitable donations of the year and tally up ones already made. In 2017, Americans gave $410 billion to charities, an increase of five percent over the previous year. For those looking for ways to make the most of charitable donations before the end of the tax year, here are some tips and insights from experts around the country.
Under the new tax laws recently adopted, the standard deduction for filers has roughly doubled. It’s now $12,000 for single filers, $18,000 for head of household, and $24,000 for joint filers. Those increases will likely have a profound impact on people’s interest in making charitable donations. “If you’re taking the standard deductions, you cannot itemize,” explains Mark Charnet, founder and CEO of American Prosperity Group. “That’s going to horribly dissuade people from making charitable donations. Unless they itemize on their taxes, they will not get a reduction on their tax bill for the charitable contributions and therefore will be disincentivized to make donations.”
If making a charitable donation and receiving the tax write-off is important to you, then you must forgo the standard deduction, says Mark Charnet of American Prosperity Group. “You can still give to charity, but you won’t benefit tax-wise if you don’t have deductions above and beyond $12,000, $18,000 or $24,000,” he says. “So, for 2018 and after you must itemize in order to benefit.”
Those who still want to give to charity should try what’s known as bunching deductions. Under this approach, all donations are clustered together in a particular year, allowing them to build up to a level that makes them worth itemizing. In other words, one year you itemize and the other year you don’t, says Michael Law, a CPA at Canopy. “If you were bunching deductions, you would save these … up until the year you were going to itemize, and likely donate near of the end of the year,” he says.
The law generally allows for deducting contributions up to 50 percent of your adjusted gross income, when such contributions are made to qualifying 501 (c)(3) entity or other qualifying organization, explains Caitlin Worm of Blackbird Philanthropy Advisors in South Bend, Indiana. “Some organization types only qualify for a 30% limitation, such as private foundations, while others qualify for a 60% limitation, such as federal government units,” says Worm.
Keeping track of receipts when making donations is a necessity, says Jacob Dayan, CEO and Co-founder of Chicago-based Community Tax. Donations made in cash are included in this rule. “The receipts should clearly have the organization's name on it, while also stating the date and the entire amount that the organization will receive,” Dayan explains. “Charities will happily provide you with the necessary receipt for your gracious donation.” It’s important to note that you don’t have to submit the receipt with your tax return, but keep it in your possession in case you’re ever audited.
If someone in your family passes away and leaves you their home and all its contents, you may decide to donate the items that you don’t want to charity. Those donations are deductible, says Michael Law of Canopy. Be sure to create a list of items you donated and keep it with the receipt the charity provides you, he says.
If you’re planning to donate to a non-profit organization, otherwise known as a 501(c)(3), find out how your contribution will be used. How much will go toward the cause and how much goes toward administration? A variety of third-party evaluation and ratings sites can help with this effort, such as the Better Business Bureau’s Wise Giving Alliance, Charity Navigator, and Charity Watch, which review a charity’s finances, governance and effectiveness. “Better ratings will indicate that the organization allows for the majority of the donations to go right to the cause,” says Jacob Dayan of Community Tax.
When giving a car to a charity, you’re only allowed to deduct the fair value of the car, says Michael Law of Canopy. So that beat up 1990s Ford Explorer dripping oil in your yard is not likely to translate into a charitable donation with all that much value (or much of a write-off). However, “if the charity sells the car to raise funds, you get to deduct what they sold it for,” he says.
Helping a less fortunate individual in your community is a wonderful thing to do, but it won’t necessarily yield a tax write-off. “Many times, clients bring me donations they made to individuals or entities that are not eligible,” says Scott Vance of Taxvanta. “The donation cannot be made to an individual directly, for instance giving your old car to someone down the street because he has cancer and needs transportation.”
For those who choose to volunteer for a cause, out of pocket expenses can be written off. You need to have receipts, says Michael Law of Canopy. “Participation fees, event costs, training costs and supplies are all deductible if not reimbursed by the charity,” he says. If that charitable position requires a uniform like Boy Scouts of America, then uniform costs are deductible too.
Do you use your car to assist a charity? The miles you drive are deductible. However, it’s not a substantial amount. “Mileage is not a great deduction for charitable purposes, but it does add up over a year,” says Michael Law of Canopy. The standard mileage rate for charity is 14 cents a mile. “If you don't drive much, it’s hardly worth keeping track of,” he says.
Those who are 70 and a half and older are able to make a donation to a charity directly from their individual retirement account (IRA). “This strategy is known as a qualified charitable distribution,” says Eric Bronnenkant, head of tax at online financial advisor Betterment. “The distribution also counts towards their required minimum distribution for the year.” Since the distribution is not counted as income, it may help reduce the taxable portion of Social Security benefits, adds Bronnenkant.
When volunteering, your time is not deductible, says Michael Law of Canopy. “The IRS does not let you say your normal billing rate is $50 per hour and you donated two hours,” he notes. “Likewise, your self-created art works are also not deductible at your estimation of fair value — you get to deduct the cost of your materials.”
When donating to charities, it makes more sense to give appreciated assets such as stocks, bonds, collectibles, or anything else that has a current value that’s higher than its original purchase price. This is because “even though you may have paid very little for the shares of stock a long time ago, when you donate it to a charity, you get to deduct the current fair market value of the security as a charitable contribution,” explains Larry Solomon, director of financial planning and investments for OptiFour Integrated Wealth Management.
Contributing items to a fundraiser for a charity is another way to help a good cause. But keep some basic rules in mind when making your donation. “When you donate items to a fundraising auction, you do not get to deduct the selling price of the item because fundraising auctions are not a reasonable representation of fair value — particularly if you donate your services,” says Michael Law of Canopy. “Again, you get to deduct your out of pocket costs that went into the item donated."
Having contributions to a charity deducted from a paycheck is a relatively popular way to make donations. However, there’s no tax advantage to this approach. “It’s really a matter of preference, says Caitlin Worm of Blackbird Philanthropy Advisors. “There’s no added benefit to contributing through payroll deductions, other than convenience. It may feel better to donate $100 per paycheck rather than writing a $2,400 check at the end of the year. It’s really a matter of preference.”