Every year, Americans donate billions of dollars to charities, driven by a desire to make a difference. But beyond the moral and social incentives, there’s a tangible financial reward for your generosity: the tax benefits of donating to charity.
In this guide, we’ll explore how donating money to charity not only fuels positive change but also offers substantial tax advantages, making your act of kindness a win-win.
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Are charitable donations tax deductible?
Yes, you can get a tax break for donating to charity. When you file your taxes, you have the option to itemize deductions or take the standard deduction. If you itemize, you can deduct donations. This lowers your taxable income.
To qualify, you must contribute to a qualified, tax-exempt charity. This includes most religious organizations, educational institutions, hospitals, and organizations whose purpose is to help the poor, sick, or needy. You’ll need a receipt or bank record to prove your donation.
The tax benefits of donating to charity
Donating to charity isn’t just a noble act; it also brings several tax advantages. Let’s explore these benefits and how you can make a difference, both in society and in your tax returns.
Cash
One of the financial benefits of donating to charity is the ability to deduct cash contributions. Usually, the individual deduction limit for cash contributions is 60% of your adjusted gross income (AGI).
So if your AGI is $50,000, you can deduct up to $30,000 in cash donations. If your donations exceed this limit, you can often carry over the excess and deduct it in future tax years.
Donating cash is convenient as it doesn’t require you to part with physical possessions or determine the fair market value of donated goods like you would with other donation types.
Food inventory
If you own a business, you can get a tax benefit for donating food inventory to charity. Here’s how it works:
If your business donates food inventory to qualified charities—like those helping the ill, needy, or infants—you can deduct these donations from your taxable income.
Generally, you can deduct up to 15% of your net income. So, if your business nets $100,000 this year, you could potentially deduct up to $15,000 in food donations.
Donating excess food items provide a triple win for businesses, charities, and communities. Just be sure to document donations properly with receipts from the receiving organization.
Non-cash items
The tax benefits of donating to charity extend far beyond cash donations. You can also deduct the fair market value of noncash items like property, stocks, coin collections and other goods from your taxable income.
For example, if you donate a piece of artwork that’s appraised at $10,000, you can deduct $10,000 from your taxable income. Or, if you bought stocks for $10,000 that are now worth $15,000, you can deduct the full $15,000, often without paying taxes on the $5,000 gain.
Donating appreciated assets is especially beneficial since you avoid capital gains tax. If you own stocks, real estate or collectibles that have increased value, donating them to charity rather than selling them can provide greater tax savings.
Vehicles
Donating a vehicle to charity can be a generous act, and the IRS offers special tax benefits for it. When you donate a car, truck, boat, or plane to a qualified charity, you’re eligible for a tax deduction. But the amount you can deduct depends on what the charity does with the vehicle.
- If the charity uses the vehicle for its operations, makes significant improvements before selling, or donates it to a needy individual, you can deduct the vehicle’s fair market value.
- If the charity sells the vehicle, you must deduct the sales price, even if it’s lower than the market value.
The charity must provide you with a Form 1098-C or a similar statement specifying the vehicle’s usage or sale details. This form is essential for your tax records and claiming the deduction.
IRA funds
Through an IRA charitable rollover, you can transfer funds directly from your Individual Retirement Account (IRA) to a qualified charity—without counting this transfer as taxable income. Also, you don’t have to itemize to claim this deduction.
Here’s how it works:
- Direct transfer: You must directly transfer the funds from your IRA to the charity. This can’t be a withdrawal followed by a donation, as it must go directly from the IRA to the charity.
- Age requirement: You must be at least 70 1/2 years old at the time of the donation.
- Limitation: As of 2023, you can transfer up to $100,000 annually. This counts towards your required minimum distribution (RMD) but isn’t included in your taxable income.
Donating your IRA funds may be ideal if you don’t need your RMD for living expenses and prefer to use it for philanthropic purposes. It helps reduce your taxable income while supporting charitable causes you care about.
How tax-deductible donations work
The main way tax-deductible donations help lower your tax bill is by reducing your taxable income. When you itemize deductions instead of taking the standard deduction, you can deduct eligible charitable contributions from your income.
To qualify for this deduction, you must make donations to qualified nonprofit organizations like churches, schools, hospitals, and environmental groups. These charitable organizations will provide a receipt documenting your donation.
Timing your donations is also important. To claim a donation on this year’s tax return, it needs to be made by December 31st of this year. For example, you can include charitable donations made by December 31, 2023 on your 2023 tax return, which you file by April 2024. But if you make a donation on January 1, 2024, it won’t apply to your 2023 taxes.
The circle of giving
Whether you give away a tax refund or an old car, donating to charity has many tax benefits. These benefits provide a win-win situation for everyone involved. You get to make a difference through your generosity while strengthening your financial security at the same time. It’s a philanthropic act that keeps on giving.
Written by Cassidy Horton | Edited by Rose Wheeler
Cassidy Horton is a finance writer who’s passionate about helping people find financial freedom. With an MBA and a bachelor’s in public relations, her work has been published over a thousand times online by finance brands like Forbes Advisor, The Balance, PayPal, and more. Cassidy is also the founder of Money Hungry Freelancers, a platform that helps freelancers ditch their financial stress.
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This information is not intended to be tax advice. Prosper does not provide tax advice. Please consult a financial advisor for tax guidance.