Do you want to know how to cut your tax bill by donating? This is a question asked every year at tax time, but the answer tends to change frequently because the United States tax code changes on a regular basis. Deductions allowed last year may not be permitted this year, and vice versa.
What follows IS NOT TAX ADVICE. If you have tax questions, consult a qualified tax professional or search the IRS official site for answers to specific questions about tax law. Do not assume your deductions from previous tax years will apply THIS year.
What You Need To Know About Donations And Tax Liability
Federal income tax deductions and the potential we’re discussing here for those deductions aren’t available to all taxpayers across the board. Much depends on how you file your taxes in certain cases, and more could hinge on issues such as what the fair market value of your charitable contribution is (in the cases of contributions of capital gains property, for example).
In some cases, deductions for capital gains property held for a year or less may be restricted to cost alone.
Lower Your Tax Bill By Itemizing
If you do not itemize deductions on your federal tax forms, IRS.gov says, in general, you cannot take charitable donation deductions.
Cash Donations Are Not The Only Donations Possible
Some financial advisors say donating cash is fine, but cash alternatives could provide a bigger tax break depending on circumstances and current tax law. What kinds of donations should you consider as an alternative to cash? According to some sources:
- Long-term appreciated securities like stocks, bonds, or mutual funds
- Real estate
- Certain S-corp stock
- Certain C-corp stock
Why do some choose to donate these instead of cash or in addition to it? Depending on the tax year’s laws, you may be able to avoid capital gains taxes by doing so. But there are caveats. You may be required to donate directly to a charity in this manner, and the documentation required may be quite specific.
Donor-Advised Funds
One way to donate cash that allows your donation to go farther is by contributing to a donor-advised fund. Your contributions go into an account benefitting a qualified public charity where they are allowed to accrue at the same time you get a tax break (depending on current tax laws, as always) for your charitable giving.
Donating As An Offset To Alternative Minimum Tax (AMT)
Those subject to the alternative minimum tax may be allowed to make charitable contributions they can itemize as deductions for the purpose of lowering the difference between “regular” income tax and AMT1. One option some may choose is to make a deferred donation that could contribute to a larger tax break in another tax year. Again, this is conditional on current tax law.
How To Learn What Deductions You Are Entitled To This Year
The best resource you have for learning how to lower your tax bill with the most up-to-date tax breaks for donations? A trained tex professional or the official site of the Internal Revenue Service. IRS.gov reminds, “You must fill out Form 8283, Noncash Charitable Contributions (PDF) and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A.”
Read more about these IRS requirements at the official site.
Joe Wallace specializes in personal finance, military affairs, and consumer protection topics. Since 1995, his work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and collects unusual vinyl records, which gives him an excuse to write the vinyl blog Turntabling.net.
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