Have you thought about giving this season? Charitable contributions are accepted as a deductible expense by tax authorities. Benefits include a reduction of taxable income, resulting in lower tax liability. However, there are certain limits and criteria for the deductibility of the taxable contribution.

In this article, we will discuss the limits of deductions, criteria, and the strategies leading to max tax benefits on charitable contributions.

Criteria for claiming a deduction on a charitable deduction

• Only contribution paid to qualified charitable organizations is deductible – Contribution paid to most but not all charitable organizations is deductible. For instance, contributions to foreign Governments, individuals, foreign charities, and certain private foundations are not tax-deductible.
  
  It’s important to note that an organization’s exemption from income tax does not make it an approved organization for charitable deductions. All organizations IRS qualify for charitable status, and donations to these organizations can be deducted. However, there are certain limitations for the same. Be sure to do your research before giving to an organization.
• Charitable deductions can only be claimed if you choose to itemize tax returns. The contribution made to qualified charities can only be deducted if you opt for an itemized approach of expense deduction. In the case of the standard deduction, it’s not relevant. So, there is a need to closely analyze the gap between itemized and standard deduction before opting for any options.
• Charitable contributions can be carried over – The charitable contributions can be carried over for the next five years. For instance, if your contributions exceed 50% of adjusted gross income, it may not be adjusted in the current tax year and can be carried forward.

Limits for claiming a deduction on a charitable deduction

There are limits of deduction on tax benefits of giving, but these are only applicable in a higher charitable contribution. It’s because limits are applicable if your contribution is more than 20% of adjusted Net Income – ANI. If a contribution is made to a public charity, the deduction is limited to 60% of the total contribution. For instance, if your ANI amounts to $15,000, the deductions for charitable contributions will be limited to $9,000.
In addition to this, there are different rules depending on the amount of contribution. So, it would be better to contact a tax advisor, such as TakeAway Tax, and obtain an expert opinion on matters related to deductions.

Helpful Strategies to maximize tax deduction on account of charitable giving

Make sure to document all donations.

No tax deduction can be claimed if you have not properly documented receipts and supporting documents for the donation. In case of monetary contribution, supportive documents include a credit card statement, bank statement, and a receipt from the charity (should include the name of the charity, date and amount, etc.).

Further, if the donation amount exceeds $250, you need to obtain written acknowledgment of the contribution from the recipient charitable organization to claim the deduction. And if an organization does not provide acknowledgment, it has to face a certain penalty. However, it’s your responsibility to ensure proper documentation to claim the deductions.

Donate to qualifying organizations

You can claim only donations made to qualified charitable organizations. So, there is a need to ensure the donation is only made to qualified charitable organizations.

Donations made to political groups, lobby groups, homeowners, foreign organizations, sports and social clubs are not considered qualifying donations. Further, if you receive economic benefits from charitable organizations against donation, the fair value of the benefit received needs to be deducted. For instance, if you have donated $500 to the charity and they gave you a ticket for the upcoming event, the fair value of the ticket amount to $100. So, in this case, taxable deduction amounts to $400.

Compare if you get more deduction on standard filing

You can choose between standard and itemized filing of the tax return. Itemized filing is when your item-wise deduction (like charity deduction) is claimed. On the other hand, the standard deduction is when a fixed amount of dollars is deducted from taxable income.

So, the pro tip is to calculate tax liability under both itemized and standard filing and then opt for the lower tax liability pathway.

Exercise due consideration while donating a vehicle

If you have donated a vehicle with a value of more than $500, the deduction amount is restricted to the proceeds received by the sale of the vehicle (sale by the charity). This rule was applied after reported incidents of inflated vehicles valuation by donors.

Gift appreciated securities and avoid paying capital gain tax.

If you have significant unrealized expenses, it can be better to donate underlying assets rather than realizing in cash and giving as a charity. For instance, suppose five years back you had purchased securities amounting to $5,000, and current market value amounts to $50,000. So, if you sell securities, the realizable gain would be $45,000 ($50,000-$5,000), and the net realizable amount would be $38,250 $($45,000*85%).

On the other hand, if you donate an underlying asset, the charity can sell and obtain proceeds amounting to $100,000 (as charities are exempted from paying taxes). Hence, you can claim a deduction on a complete amount of $100,000.

So, the net impact is savings of the capital gain tax and deduction of higher expense value.

Conclusion

Tax benefits of giving can be deducted from taxable income, leading to a decrease in tax liability. However, there are certain criteria and limits for obtaining tax relief via donation. The deduction criteria include paying charity to the qualified organization, itemizing the expense in a tax return, and limiting the deduction to the allowable limit of adjusted net income –ANI.

Typically, the contribution paid to the political party, lobby groups, homeowners, foreign organizations, sports, and social clubs is not considered qualifying donations, and no deduction is available against the same.

Similarly, better tax planning and the application of certain techniques can help to reduce tax liability. For instance, paying to appreciate value as a gift can help increase deduction and save tax on the capital gain; comparing tax liability by standard and itemized filing can help to opt for the lower tax liability.

If you are still unclear about the tax benefits of giving, the TakeAway Tax Pros can help you; we can further help you manage all aspects of your business taxation. Our services include tax planning, early business assessments, tax strategy, one-on-one virtual meetings, and a tax professional dedicated to your business needs.

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