Looking to reduce your tax burden and do some good for your local community? In addition to demonstrating your company’s commitment to giving back, charitable donations provide a wealth of opportunities for tax savings. Here’s how to get the most bang for your buck while making the world a better place:
Make sure your donations qualify
Before you cut a check for a cause, make sure the IRS considers it a qualifying charitable organization. This classification typically consists of entities that serve religious, educational, scientific, or literary purposes, but can also include amateur athletic organizations and groups that advocate on behalf of children and animals. You may be able to deduct some donations to nonprofit entities, such as legal corporations, fraternal lodges, cemeteries, and veterans’ organizations. However, donations to these nonprofits must be expressly intended for qualifying charitable purposes. You may also be able to deduct donations to federal, state, or local government public works projects, such as the upkeep of a local park or library.
For further clarification on which organizations qualify, tax attorney Michelle P. Scott suggests that you read up on your chosen charity using the IRS Tax Exempt Organization Search tool. This handy tool will help you confirm an entity’s tax-exempt status and eligibility specifications for donations.
Know the limitations
To maximize your savings, it’s important to know how much you can donate. This limit varies according to the type of charity you’re funding. If the organization is classified as a private operating foundation, a public charity, or a qualifying private foundation in the IRS Tax Exempt Organization Search database, you can donate up to half of your adjusted gross income. According to the IRS, in order for a private foundation to qualify, it must distribute the donations it collects to public charities or private operating foundations within 2 1/2 months of receiving the money. Private foundations also qualify if they pool donations and pass along income or property to public charities.
Get familiar with itemization
If you plan on making substantial donations to charity, you will have to itemize your deductions. NerdWallet contributors Tina Orem and Ramona Paden warn itemization takes more time and effort than accepting the standard deduction. That means you may have to invest in more powerful tax preparation software or pay a premium to your tax preparer. In either case, it’s important to weigh your potential savings against the costs of itemization.
Keep good records
To claim your deduction, you’ll need a paper trail of your donations. Scott explains qualifying records include a pay stub or W-2 form, a receipt or written confirmation for your donation, or documentation from your financial institution, such as an account statement or credit card statement. Whichever form of documentation you choose, it needs to show the name of the charity, the exact amount you contributed, and the date of the donation.
If you made a contribution over $250 via cash, check, credit, debit, gift card, electronic transfer, or online payment, you should receive documentation from the receiving entity. This letter or email will also state whether or not you received any sort of compensation for the donation. If you don’t receive an acknowledgment, contact the organization to get the documentation you need.
Charitable donations can help you save money and express your company’s passion for charitable causes. For more guidance on reducing your taxable income via charitable donations, contact a tax professional.