As the holidays loom closer, you might be thinking about opening your heart and pocketbook and giving to the causes and people that you care about. The holidays indeed evoke generosity in most people to give all that they can. But there’s also good reason that the holiday season is when nonprofits get major boosts to their funding: year-end appeals are effective if you’re hoping to get some last-minute tax savings.
If you’re thinking about ways to get a tax break before 2018 rings in, seasonal giving can definitely be both a great and generous way to do so. However, there are many misconceptions about charitable donations and volunteering and your taxes. Here’s what you need to know about making year-end plans.
Your Donation Must Be Made to an Eligible Organization
In order to get a tax deduction, this means that you must donate to an IRS-approved charity. This encompasses most 501(c)(3) organizations that have a scientific, artistic, or community purpose. It also includes schools, fraternal lodges, and houses of worship.
It doesn’t include contributions to social clubs, political candidates or organizations, or civic organizations. The same is also true for community fundraisers that aren’t going to an eligible organization or gifts to individuals, such as donating to crowdfunding campaigns or other forms of direct giving.
If you have doubts that your donation will have an effect on your taxes, consult the IRS Select Check database to confirm that the organization you’re giving to is an eligible nonprofit. There is often a lot of confusion surrounding causes people support and whether or not those donations are tax-deductbile, but there are also many charity scams that abound during the holiday season. If you’re unfamiliar with the name of an organization, always run it through Select Check first.
While you may still feel compelled to give to people directly as well as raise funds in your community for other important purposes, bear in mind that unless your money is going to a qualified charity then you won’t see a difference on your tax return.
You Can Get a Deduction for Certain Expenses Associated with Volunteer Work
The holidays are a popular time for doing volunteer work and serving your community in addition to donating. And contrary to popular belief, you can get some tax benefits for volunteer work although there are a few caveats.
You cannot deduct the value of your time based on market rates for what you did, or a flat rate estimate, such as if you’re an attorney charging $400 an hour and you decide to help out a cause that you care about by handling their legal issues. However, you can deduct certain personal expenses incurred for doing volunteer work for a qualified organization. Travel costs are deductible such as airfare and public transit and if you’re driving in the course of volunteer work, you can also deduct $0.14/mile plus parking and tolls. Other related expenses such as supplies, uniforms and safety gear, and postage are also deductible.
Non-Cash Donations Require Additional Documentation
That is, documentation on both your part and the organization’s depending on the amount and nature of the donation.
Non-cash deductions are supposed to be deducted at their fair market value or appraised value and the organization is supposed to provide you with a letter or other acknowledgement for non-cash donations exceeding $250 in value. (A receipt alone isn’t enough.) When donating old clothing and household items to thrift stores, this deduction is commonly overvalued since the items aren’t catalogued and no acknowledgement is given unless it’s an unusually large amount donated. Goodwill posted a handy valuation guide on their site which can help you determine the value for thrift store donations of used clothing and household items which are definitely lower than the fair market value of buying them new.
If you are buying a new item specifically to donate, such as a boxed toy for a toy drive, proof of the actual amount that you paid should be sufficient but remember to request a letter from the organization you donated to if you donated enough new toys to reach that $250 threshold.
Then when it comes to items with higher average values than clothing and household goods that typically go to thrift stores, checking online marketplaces like eBay for average sale price relative to condition and saving the proof can help substantiate your deduction in addition to acknowledgement from the organization. When it comes to extremely high-value donations such as furniture, artwork, or collectibles, a professional appraisal is prudent. It is also required for non-cash donations worth $5,000 or greater. In either case, you can also get a deduction for the appraisal fee.
Donating Stock Can Help Avoid Capital Gains Tax
While donating household items and collectibles can result in a decent deduction, an efficient way to donate to causes that you care about which also nets you substantial tax savings is to donate appreciated stock or other financial assets.
Your donation is based on the fair market value on the day that the stock was donated, not what your basis is in that stock. If your stock significantly increased in value on the day that you donate it, you not only get a much larger deduction without having to sell the stock first but because there was no sale, you also avoid having to report the capital gain and pay tax on it.
Donations Made By Credit Card Still Count for 2017
Donations by cash, check, or credit card are all deductible for 2017, even if you don’t pay your credit card bill until January or later. Even if you make that donation on New Year’s Eve, so long as records show that it was made in 2017 then it will count for the 2017 tax year.
If you made any donations to qualified charities using digital currency, take note of what the cash value equivalent was at the date and time of your donation.
Giving to the people and causes you care about may not always result in a tax benefit although you should still do it if it makes you happy. But when it does, take note of the timing relative to your income and other itemized deductions for the year so far. By determining if you need tax savings now or next year, this can help map out your holiday giving plans. It can also help you decide if now is a good time to clear out your unwanted items or if you should hold off until the new year begins.