Tax-Deductible or Not? Your Guide to End-of-Year Donations

At the end of the year, when holiday celebrations and expressions of gratitude are in full swing, many people think about making a charitable donation. Maybe it’s the animal shelter around the corner from your home, or perhaps it’s a scholarship fund at your alma mater that does amazing work. Whatever pulls at your heart and makes you feel like you’re doing the right thing can be a good cause for donations.

From early fall right up to December 31 can be a great time to dip into your bank account and give. Also, it’s a good time to squeak by with a contribution before the calendar year comes to a close.

The organization you give your money to benefits. You get to enjoy the good feeling that comes with supporting a project or cause that you believe in. And you may also be able to lower your tax bill.

Here are some things you may want to consider when planning and making your end-of-year charitable donations. Read on to learn:

•   What qualifies as charitable giving?

•   Can you deduct charitable contributions?

•   How much of a charitable donation is tax deductible?

•   How can I maximize my charitable giving?

What Qualifies as Charitable Giving?

In the eyes of the Internal Revenue Service (IRS), a charitable donation is a gift of money, property, or other asset that you give to a qualifying organization, known as a 501(c)(3). To find out if an organization you’d like to support is eligible to receive tax-deductible contributions, you can search for it on the IRS’s database.

You may want to keep in mind that money or assets given to political campaigns or political parties do not qualify as tax-deductible donations. In fact, no organization that qualifies as a 501(c)(3) can participate in political campaigns or activities.

Organizations that engage in political activities without bias, however, can still sometimes qualify. So, a group can educate about the electoral process and remain within guidelines. They just have to go about it in a nonpartisan way.

Recommended: What is a Charitable Gift Annuity and How Does it Work?

Can I Deduct My Year-End Charitable Donation?

In the past, charitable donations could only be deducted by tax filers who itemized their deductions. That means that rather than take the standard deduction, they chose the more complicated path of listing all of their eligible expenses.

There was a reprieve from this under the CARES Act which went into effect as the coronavirus pandemic unfurled. The IRS implemented a special new provision that allowed individuals to easily deduct up to $300, and joint filers to deduct up to $600, in donations to qualifying charities in 2021, even if they didn’t itemize. During this extremely stressful time, charitable giving became a bit easier for some thanks to this provision.

However, it’s important to note that this provision expired as of January 2022. Going forward, itemization is the way to go.

Recommended: 26 Tax Deductions for College Students and Other Young Adults

How Much of a Charitable Donation Is Tax-Deductible?

Wondering how much of a tax break you might get for your giving? The IRS sets limits on how much of a charitable contribution you can deduct from your taxes, and these are frequently updated. The amount is typically expressed in terms of the percentage of your adjusted gross income (AGI) that you may claim.

In 2021, this limit was increased to a full 100% of a person’s AGI. This change was made to entice people to donate to charities during what were perhaps among the most challenging times of the COVID-19 pandemic.

This guideline, though, has shifted for 2022. The limits were lowered again to an individual being allowed to deduct no more than 50% of their AGI for cash contributions to a charity. The top figure is 30% of AGI if you make a non-cash contribution, such as stock shares.

Of course, you are welcome to donate as much as you like. Just keep in mind that any charitable giving above those figures is not eligible for a deduction at tax time. Whether you’re looking to give $50 to your favorite local organization, or you’re considering a much larger charitable donation, these tax changes make it a particularly good time to do so.

Recommended: How to Reduce Taxable Income for High Earners

Tips for Making End-of-Year Donations

To ramp up both the impact and benefit of a charitable donation, here are some strategies you may want to keep in mind:

Making a Timely Donation

Don’t lose track of your timing: The deadline for charitable donations is December 31. If you’re looking to deduct the donation in the current tax year, you will want to make sure your charity has ownership of whatever asset you are donating by the close of business on the 31. You may also want to make sure that your preferred payment method is accepted by the charity so it doesn’t get kicked back and cause delays. Putting a reminder in your calendar for, say, mid-December can be a good way to make sure you don’t run late with your giving.

Recommended: What Happens If I Miss the Tax Filing Deadline?

Taking Advantage of Company Matching Programs

Your place of employment might have a matching program for charitable giving. They might, for example, match your donation amount dollar for dollar up to a certain amount. If so, it could significantly bump up the amount you could otherwise afford to give.

If you’re unsure about whether your company has a program, it can be worth reaching out to your HR department for further information.

Giving Rewards on Your Credit Card

If you are giving on a budget, you might consider donating rewards you earn on your credit cards, such as hotel points or airline miles. This can be a great way to use points or other rewards that would otherwise just expire. Many credit card companies, hotels, and airlines will make it easy to give your rewards to nonprofit organizations.

Recommended: Credit Card Rewards 101: Getting the Most Out of Your Credit Card

Donating Assets from your Brokerage Account

If you’re looking to lower your capital gains tax, you may want to consider donating assets from your brokerage account to a nonprofit. This may take some time and planning, but the benefits of donating an over-allocated position that’s outperforming can be worth it.

You may be able to receive tax advantages and rebalance your portfolio, while also helping an organization increase its assets.

Recommended: What Tax Bracket Am I In?

Setting up a Recurring Donation

You can get a headstart on next year by creating a recurring contribution now. Many organizations allow you to donate monthly through their websites using a credit card, so you might be able to earn rewards at the same time. By establishing your donation plans now, you won’t have to even think about end-of-the-year giving next year.

Keeping Good Records

If you want to deduct your donation on your taxes, you’ll want to make sure you have the right receipts to back up the transaction.

You’ll want to keep records of your donations. For cash donations under $250, you’ll either need a bank record (like a canceled check or bank statement) or a written acknowledgment from the charity which includes the date and amount of your contribution.

For cash donations over $250, a bank record isn’t insufficient. Instead, you’ll need something in writing from the charity which includes the date and amount of your donation.

If you are making noncash donations valued at $500 or more, you’ll need to fill out one or more of the IRS Form 8283. If the donation exceeds $5,000 in value (say, if you gift a car you no longer need to a favorite local organization), you’ll also need to get a written appraisal from a qualified appraiser. The appraisal only needs to be submitted to the IRS if the donation’s value exceeds $500,000. If less than that, you can simply hold onto the appraisal in case you are audited.

Speaking with a Professional

An accountant can help answer any questions you may have about how tax laws will impact your tax contribution, as well as help you make the most strategic and efficient charitable donation.

Recommended: Are 401k Contributions Tax Deductible? Limits Explained

The Takeaway

Giving can be a good idea for a number of reasons. In addition to helping a nonprofit organization meet its operating costs for the year, you can feel good about what you are doing with your money, and you may also benefit from tax deductions.

Giving can also help you get the new year started on the right foot. If you’re looking for other ways to get your financial life in order (now, or any time of year), you may also want to consider signing up for an online bank account with SoFi.

When you open a SoFi Checking and Savings with direct deposit, you’ll earn a hyper competitive APY, and you’ll pay no fees. These two perks can help your money grow faster. You’ll also spend and save, all in one convenient place; how simple is that?

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