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Tax Strategies For Charitable Donations

Gifts to Charities Can Offer Tax Benefits

If you donate to a charitable organization, there’s a good chance that you’ll have the opportunity to decrease your tax burden through a strategy of deducting charitable donations.

In order to take advantage of this strategy, you have to itemize your donations on your income tax return (Form 1040 or Form 1040-SR). If you donate items to a charitable organization such as Goodwill or the Salvation Army, make sure to get receipts in the unlikely case of a tax audit. An organization of that scale will have set values for commonly donated items that you can apply to your own contributions. If you donate items with a combined fair market value of more than $500 in a given tax year, attach Tax Form 8283 to your return.

Donating cash is a more straightforward tax deduction strategy. However, there are limits to how much you can donate and deduct. Generally, cash contributions can be claimed for a tax deduction up to 60% of your AGI (adjusted gross income.) You can also carry over contributions that exceed this limit into the following tax year.

NOTE: There has been a temporary suspension of the limits on charitable cash contributions, thanks to provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This means that individuals can deduct qualified donations of up to 100% of their AGI. Furthermore, a new special tax deduction allows most taxpayers to deduct up to $300 in cash donations to qualifying charities on their 2020 return without having to itemize.

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Capital assets (such as real estate, stocks and bonds) can be donated in an often overlooked tax strategy that many investors will find beneficial. If you have an investment that has appreciated in value, and is thus subject to capital gains tax, you can donate it to charity and it will be appraised at its current value rather than what you originally paid for it. This allows for an even larger deduction. The limit on deductions for appreciated non-cash assets is generally 30% of your AGI.

However, there are additional tax strategies that may come in handy. If you sell land or any other appreciated asset at an auction where the proceeds go to charity, you can generally deduct these contributions at fair market value even if they exceed 50% of your AGI. Appraisal fees, to find out what your charitable contribution is worth, can also be deducted.

If you are holding on to depreciated property, you may want to use the strategy of selling it and giving the proceeds to a charitable organization, rather than donating the property itself. Since a capital loss is deductible, this strategy will allow you to deduct your initial loss and then deduct the property again as a charitable contribution. Donating it directly will result in your only being able to deduct it once, and you will miss out on being able to deduct the difference between its current value and what you originally paid.

For more information about charitable contributions and what you can deduct on your tax return, see IRS Publication 526 (Charitable Contributions).

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