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In the next 3 months, you are likely to be contacted by every nonprofit organization you know, asking for a donation. Nearly ⅓ of charitable giving in the United States happens in December. This disproportionate amount of fundraising in the last month of the year isn’t only because of a generous holiday spirit. Individuals and businesses can lower their income tax bills by making contributions to tax-exempt organizations.

There are a variety of factors that influence whether and how much of a tax benefit you may receive. With tax laws constantly changing, it’s best to ask professional accountants, like the team at BATS XPress, about your unique tax situation because they keep up with these rules through continuing education courses. In this article, we breakdown the main concepts of deductible charitable contributions.

First, what’s a donation? You can donate money as well as non-cash property or services to a charity. The tax treatment varies based on the type of asset given (ie. cash or non-cash gifts), tax-exempt status of the recipient organization, and who is making the donation (eg. individual, business, or corporate donor). There are also standards and limits to how much can be deducted from your taxes.

For example, taxpayers may be able to deduct a percentage of a cash gift or the market value of a good or service they donated, like food or landscaping. If the donor receives a gift with the contribution or attends a charitable dinner, then the fair market value of the item, like a t-shirt, or meal must be subtracted to determine the eligible amount of the deduction.

Second, are all gifts tax deductible? No, we’re not talking about money you give to friends or family. Only donations made to “qualified organizations” as determined by the Internal Revenue Service (IRS) are eligible for federal tax deductions. The IRS FAQ on Charitable Contribution Deductions lists 8 types of qualified organizations. Organizations must be legally formed in the United States, too. 

Click on the “Begin” button to use this Interactive Tax Assistant tool from the IRS to determine if your charitable contribution may be deductible. “The IRS Tax Exempt Organization Search tool can [also] help verify an organization’s tax-exempt status and determine its eligibility for deductible contributions,” advises Investopedia. 

Third, how can you claim your tax benefit? The IRS rules require the contributions to be paid by the end of the tax year. That’s why so many donations are made at the end of the calendar year. Nonprofit Tech For Good notes that “12% of all giving happens in the last 3 days of the year.” Typically, taxpayers must provide verified records of the contribution, such as a receipt from the organization, and file itemized tax returns, instead of taking the standard deduction. 

Local taxing jurisdictions may establish their own rules and procedures. For example, Idaho State Tax Commission says,“Any potential deduction or credit for a donation would be handled through donors' income tax returns. They should see the instructions for their income tax returns for more information.”

Sometimes the government actively incentivizes philanthropic actions. For example, Congress temporarily suspended the limits on charitable contributions in tax years 2020 and 2021 to encourage donations during the COVID-19 global pandemic. Some states also make it simple to donate your individual income tax refund directly to registered charitable organizations. 

Investopedia claims “charitable contributions are one of the best tax-saving opportunities available. Not only does the charity benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns.” Make sure you’re maximizing the impact of your money. Contact BATS Xpress today to talk about tax deductible charitable contributions or other year-end financial planning questions. Do more good and feel good doing it.