How Charitable Donations Lower Your Tax Bill

November 20, 2021

The Tax Benefits of Doing Good

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You probably don't donate to your favorite causes just to save on taxes. But doing good comes with a side benefit: charitable donations lower your tax bill.

Giving back has been part of my life for as long as I can remember. Long before I even knew what taxes were.

And since my kid was big enough to hold coins without trying to swallow them, it’s been part of theirs too. Even when we haven’t had very much ourselves, we found a way to donate something to help those in need. Sometimes it was money, sometimes it was toys and books, and once it was a car.

We built a charitable habit that my kiddo follows to this day. Just like savings, adding donations into your budget helps keep up and strengthen that habit of giving.

And, honestly, the tax deduction is a nice bonus. It frees up even more cash to give.

Here’s a look at the tax different breaks you can get for doing good.

Deduct Your Charitable Donations If You Don't Itemize

Before last year, people who took the standard deduction didn't get any donation-related tax break. That didn't stop them from giving, of course, but the tax break would still be nice.

Then Covid happened, and a lot of things changed - especially when it came to taxes.

Now every if you don't itemize, charitable donations can still lower your tax bill. You can take the standard deduction AND a special $300 deduction for cash donations to charity. And the deduction doubles to $600 if you're filing a married-joint tax return.

The extra deduction will show up on its own line on your 2021 tax return. It's easy to spot and easy to use.

But make sure to keep proof of your donations just in case the IRS wants to see it. What counts as proof?

  • A receipt from the charity
  • A cancelled check
  • Your credit card bill

Make sure you donate to qualified organizations. There are a lot of scam “charities” out there., so do your homework and check. You can find out whether or not an organization is legit by looking them up on CharityWatch.

The Rules for Deducting Donations When You Itemize

Charitable donations have always lowered taxes for people who were able to itemize on Schedule A.  

Here, you can deduct more than $300 cash donations. You can also get deductions for:

  • Any items you give, from old T-shirts to rocking chairs to vehicles
  • Expenses you pay while volunteering, such as buying supplies to make posters
  • Mileage for charitable use of your vehicle, like for delivering meals to people or transporting rescue dogs

IRS Rules

For Cash Donations:

If you donate $250 or more, the IRS requires a written acknowledgment from the organization. Your own cancelled check or credit card record won’t do here.

As for deduction limits, you can normally deduct up to 60% of your Adjusted Gross Income (AGI) for cash donations. Of course, because it's tax law, there are some exceptions to that (see IRS Pub 526). For tax year 2021, that lmit increased to 100%. So you can deduct every penny you donate.

For Donated Items:

First thing: get receipts from the charity for every item you donate. It's a good idea to create an itemized list when you donate. If it's a bunch of stuff with minimal value, you can group it like household goods, books, and clothing for the list. You can also include the approximate "yard sale" value at the time so you don't have to figure it out months later at tax time.

If your total donated items come to more than $500, you’ll need to include IRS Form 8283 in your tax return. If any single item is worth $250 or more, you need a receipt that clearly shows the value of the item on the date of donation.

If the item or items you’re donating are worth $5,000 or more, you’ll need a qualified appraisal signed by the appraiser to attach to Form 8283.

Make Direct Donations From Your IRA

Once you've retired, you can qualify for a special tax break. If you continue charitable donations post-retirement, make the contributions directly from your traditional IRA to significantly lower your tax bill.

Here’s how this special rule changes your tax situation:

When you take money out of your traditional retirement account, you have to pay income taxes on the amount you withdraw. That amount gets included in your taxable income, sometimes bumping you up into a higher tax bracket. If you then take that money and donate it to charity, you can include it in your deductions to get a tax break.

Using the direct contribution method, you can avoid income taxes completely on the entire amount you donate. Plus, that money won’t be included as part of your taxable income, so it can keep you at a lower tax rate. It bypasses your tax return altogether and goes straight to the charity of your choice.

This tax-saving strategy works especially well if you don’t need your RMDs (required minimum distributions) but are forced to withdraw the funds anyway. You can learn more about RMDs and other beneficial retirement tax strategies in my book Retirement 101

Giving generously is its own reward… but an extra benefit in the shape of a tax break doesn't hurt.

If you need help figuring out where donations fit on your tax return, feel free to contact me here.

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