donating to charity how it affects your finances
Updated January 15, 2021

Donating to Charity? How It Affects Your Finances

Personal Taxes

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Donating to charity is a great way to give back to your community or a cause you believe in, but it also offers a number of financial benefits that many people aren’t aware of. The government provides a variety of incentives to give people even more reasons to give their money to charity.

This article will cover some of the key ways in which donating can affect your financial situation along with some things to consider beforehand. Giving to charity is a win-win that allows you to help people in need while accessing tax deductions and other notable perks.

Tax Deduction on Donations

Most people know that donations to charity are tax-deductible, but you may not realize how much it can affect your overall tax burden. Understanding the effect of charitable donations on your taxable income will make it easier to give more in the future without feeling like you’re hurting your financial outlook.

You can deduct donations from your taxable income in most cases, but there are some details you should be aware of. These restrictions could affect your ability to claim a deduction for charitable donations when filing taxes, and you should consider them now rather than during tax season.

Eligibility

You’ll need to meet a few requirements in order to receive this deduction. First, the donation must be given to a qualifying charity.

This rule prevents people from taking advantage of the deduction. While most reputable charities qualify, you should confirm your favorite organization’s eligibility with the IRS Tax Exempt Organization Search.

Unfortunately, donations made to organizations based outside the US typically aren’t tax-deductible, so you won’t gain any tax advantages by giving to foreign charities. There are a few exceptions for organizations from Israel, Mexico, and Canada, but you have to earn income from the country to which you’re donating to receive a deduction.

Limits

Limits on deductions are much higher than the average donor is likely to reach, but they’re still worth mentioning in case you plan to donate a substantial portion of your income. You can usually claim a deduction for charitable donations up to 60% of your adjusted gross income, which represents your gross income minus certain expenses such as student loan interest and contributions to health savings as retirement accounts.

The 60% limit represents an increase over the previous maximum of 50%. On the other hand, that limit decreases significantly to either 20% or 30% if you plan to donate assets instead of cash.

Of course, most readers won’t come close to even 20% of their adjusted gross income. Speak to a tax advisor if you’re concerned about reaching the maximum deduction.

The Standard Deduction

It’s worth mentioning that some relevant tax laws changed following the 2017 Tax Cuts and Jobs Act. This nearly doubled the standard deduction for federal income taxes from $6,500 up to $12,000 for single filers. The standard deduction for 2019 is $12,200 for single filers, $18,350 for heads of household, and $24,400 for married couples filing jointly.

In short, the standard deduction represents the amount that you can deduct from your income without itemizing deductions. Every taxpayer has the option to either use the standard deduction or itemize each deduction to determine their overall taxable income.

An increase in the standard deduction gives most people less of an incentive to itemize their deductions. A married couple with $20,000 in deductions, for example, no longer benefits by itemizing deductions since they wouldn’t reach the standard deduction.

While charitable donations are still tax-deductible under the new law, itemizing them is only worthwhile for people with more to deduct than the standard deduction. There’s effectively no tax benefit to donating to charity if you have less to deduct than the standard deduction.

Claiming Your Deduction

If you’ve never itemized deductions when paying taxes, claiming a deduction for charitable donations could be confusing. Fortunately, there are clear guidelines governing the evidence required to verify that a donation was made.

It’s critical to think about this when making a donation in order to avoid scrambling for receipts when filing taxes.

The IRS currently requires documentation and a written acknowledgement from the recipient for all claimed donations above $250. Most charities send automatic messages to record each donation.

Keep in mind that you’ll need to have this on hand for each individual donation, even if you gave to the same organization multiple times. Donations of less than $250 can be confirmed without a written acknowledgement as long as you have a record of the transaction.

Deciding how much to give to charity can be tough, and tax benefits remove some of the financial hardship involved in donating money. That said, you shouldn’t simply assume that your donations are going to be deductible—it’s important to understand the relevant laws and regulations when giving to charity.

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Alex McOmie

Alex McOmie currently serves as the Managing Editor for Money Done Right. He joined the Money Done Right editorial team in summer 2019. Learn more about Alex.

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