Find answers to common tax questions around charitable giving.
By Keila Hill-Trawick, a certified public accountant (CPA) with a master in business administration (MBA)
Giving to charitable nonprofits is one of the most important and selfless acts we can perform as individuals. It’s a way to share our abundance with others. As an added bonus, charitable contributions are also tax deductions!
In order to appropriately manage your contributions on your tax return, we need to talk about a few things.
The IRS defines deductible charitable contributions as cash or property donated to a qualified organization, generally 501(c)(3) tax status. These include, but aren’t limited to, the following types:
All of the organizations on ALMA are eligible charities are in good standing with the IRS.
Remember that you cannot deduct donations to individuals, groups run for personal profit, or political candidates and groups. Social welfare organizations with 501(c)(4) status are tax-exempt and can accept donations, but donors to these orgs can’t deduct their contributions.
The amount you can deduct for charitable contributions is generally limited to no more than 60 percent of your adjusted gross income, but this amount might be further limited with certain types of donations.
You can nearly always deduct donations of 20 percent or less of your adjusted gross income without additional limitations. As the average American gives about three percent of their personal income to charity, most givers are well within this threshold.
Charitable contributions are only deductible if you itemize on your tax return, and it’s an all-or-nothing option. You are allowed to choose the larger of the two — either itemizing or taking the standard deduction — but not both.
If you take the standard deduction on your return, your charitable donations will not count toward lowering your tax burden.
If you itemize and want to deduct your donations, you must have support, which can include items like receipts, letters from the organization confirming your gift, or canceled checks. Be sure the name of the organization, the date of the contribution, and the amount given (or fair market value, if you donated property) are included. Large gifts over $500 might require a few additional forms, too.
Maybe. Your ability to claim charitable deductions on your tax return is dependent on the type of business entity you run.
Since partnerships and S-corps are pass-through entity types, charitable contributions made by the business will ultimately flow through your individual returns via a K-1 document and be treated similarly to LLCs and sole proprietorships.
If you run a C-corporation, you’re in luck! You are allowed to take the deduction using federal tax form 1120.
Even if you can’t claim your donations as a charitable deduction, there may be some payments made to charities and other nonprofit organizations that can be claimed as a business expense instead. Check with your accountant or tax advisor to properly reflect the nature of the payment and how to appropriately categorize for tax purposes.
As we continue to give from our hearts, it’s important to know the tax implications and benefits of doing so. In spite of the many recent tax changes, charitable deductions remain a valuable way to lower your taxable income if you qualify. There are some nuances that will vary based on your tax situation, but don’t let that deter you from a win-win situation of being able to donate to a worthy cause, and reduce your tax burden at the same time.