Tax Planning for Charitable Contributions & Deductions

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

Donations to charity can help reduce your tax bill, but getting the most of out of these deductions requires some planning. Let's review the basic rules regarding charitable contributions.

Tax Planning for Philanthropy

Tom believes in being generous, and gives away a fair amount of money and time each year toward a number of charitable causes. It's tax season now, and Tom has learned that since this is the first year he can itemize his tax deductions instead of taking the standard deduction, he should keep better track of his charitable contributions. In this lesson, we will help Tom figure out which of organizations he donates to are eligible for this tax break, define what kind of contributions he can claim, and clarify the limits on the amount of deductions that he can against his taxes.

Why go to all this trouble to talk about charity and taxes? The IRS allows taxpayers to reduce their tax bill by reporting contributions made to charitable causes. These deductions reduce a taxpayer's taxable income, resulting in a smaller tax bill. Tom can think of it as a discount on his taxes because he is funding causes that benefit the public good. If people like Tom don't support these private groups, sooner or later there would be pressure to raise and spend tax dollars to support those goals instead.

Qualified Organizations

All of Tom's questions about the rules for charitable contributions and deductions can be found in IRS Publication 526. The IRS defines a qualified organization as a non-profit group that serves causes that are charitable, religious, scientific, educational, or literary in nature. Groups that work to prevent cruelty to children and animals are also qualified organizations. Tom primarily gives to his church, the local non-profit hospital, and a war veterans' society. Tom's contributions to these organizations may be tax deductible.

A number of organizations that fundraise do not qualify for special tax treatment. Donations that are not eligible as deductions include political campaigns, lobbyist groups, for-profit businesses, and individual gift recipients.

Types of Contributions

At various times throughout the year, Tom makes donations with cash and checks, but there are other ways he can make a charitable contribution. (The one major exception is time; Tom can't claim the value of his time as a tax deductible donation.) Cash and checks are easy, but donating shares of stocks or mutual funds have a number of additional tax benefits.

Let's say Tom bought 100 shares of stock at $10 a share a few years ago, and it is now worth $20 a share. If Tom sold that stock and took the $10 per share profit and then donated it, he would have to pay capital gains tax on the money, which reduces the amount of money he can give to charity. But if he instead donates the shares directly to a qualified organization, he gets to claim the deduction based on the price of the stock the day he transfers it. The organization can sell the stock and get the money tax free through its tax exempt status.

Donating goods like used clothes, toys, furniture, or other property is also deductible. The items must be in good condition, and the fair market value must be used to determine the deduction. The fair market value is what an item would sell for in its current condition. A reliable way to determine this is to find out what the item would sell for at a thrift shop. For example, an $800 dollar suit bought new two years ago that was worn a few times might be worth about $100 at a thrift store. But if the suit has stains and is going threadbare, it's not in good enough condition and is not deductible.

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