156. Getting a tax break for your donations this year

Did you know that the US has offered tax breaks for charitable donations since income tax rates were increased to fund World War I?

What does the IRS recommend to ensure that your donations qualify you for tax breaks? And is all of that effort even worth it?

Tune in this week to find out more…

Links from today’s episode:
Tax deductions for charitable donations | Deloitte
https://www2.deloitte.com/ua/en/pages/press-room/press-release/2024/tax-discount-for-charitable-expenses.html

A History of the Tax-Exempt Sector| IRS
https://www.irs.gov/pub/irs-soi/tehistory.pdf

ICYMI another episode you might enjoy:
Episode#120 Where to find a financial advisor to help you invest according to your values

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Transcript

Welcome to Progressive Pockets! I go by GG, that’s short for Genet Gimja. This is a show about walking the talk with our wallets. We care about climate change, about inequality, about poverty, homelessness, our communities. This show is about finding practical ways to flex our wallets in alignment with those values.

If you’re new around here, there is a backlog of over a hundred fifty episodes with short sweet episodes with advice on finding climate friendly investments for your retirement account, or ways to start shopping locally. There are episodes on finding a bank that doesn’t support politicians working against your interests. All kinds of good stuff. There are also episodes on how to be thoughtful about donating our money. How to decide how much to donate, how to give more throughout the year, how to decide where to donate. You all have sent in really good questions. 

It’s that time of year when you might be scrambling to do some end of year financial moves. I know for me this is usually when I make sure that I made all the retirement contributions I intended to make for the year. This is also a popular time of year when a lot of people will make their donations, partly because they want to lock in the tax deductions.

I want to talk a little bit about this today. I am not a financial advisor, I am not a financial planner or professional of any sort. I’m not a tax accountant or tax expert of any kind. For that level of professional and legally defensible advice, you are absolutely going to want to go to a professional that is licensed in your state. Today I’m going to be sharing from my own experience as a non-licensed non-professional.

With those disclaimers out of the way, let’s start with some fun trivia. Can you name another country that also gives taxpayers a deduction for their charitable donations? Cue the Jeopardy music….

Any guesses?

Did you list Australia? Canada? Ethiopia? The United Kingdom? Germany? Lithuania? Czech Republic? Sweden? France? Portugal?

Globally, it seems that most countries are more likely to give a tax break to businesses that are making donations rather than to individuals who are making donations, but there are lots of countries that offer tax breaks for individuals. I listed some of them above, but there are others too.

Here in the US, the Revenue Act of 1917 is what introduced individual income tax deduction for
charitable donations. This deduction was conceived as a way to encourage charitable contributions at a time when income tax rates were rising in order to fund World War I.

You can go onto irs.gov anytime to read more about these policies, and I don’t know if you all have ever done this, but I’ve called the IRS lots of times to ask for help understanding specific lines of various forms.

And on the IRS website they share some basic tips to make sure your donations benefit you on your tax return. For example,
Give to Qualified Organizations: To get a tax deduction, you have to donate to a qualified charity. You cannot deduct donations made to a person or a political group. The IRS has information about what makes a charity qualified.
File the Right Forms: To deduct your charitable contributions, you need to fill out Form 1040 and itemize your deductions on Schedule A.
Know the Value of Benefits: If you receive something in return for your donation, like tickets or merchandise, your tax deduction will only be on the amount that is more than the fair market value of what you received. So the net value.
Value Non-Cash Donations: For clothing and household items that you donate, they generally need to be in good used condition or better to qualify for a deduction. You can also donate a vehicle and there are some guidelines to help with that.
Either way, whether you are planning to take tax deductions for cash or noncash donations, keep good records. If the donation was for more than $250 you’ll want to hang on to receipts or invoices from the charity where you donated.
If you donate some high value items, those are items worth more than $5,000, you will usually be required to get an appraisal by a qualified appraiser.

Those are the basic tips to keep in mind. You’re also going to want to make sure you:

Understand the Deduction Limits
So, for Cash Donations: Most years you can deduct up to 60% of your adjusted gross income (AGI) for cash contributions made to qualified public charities. I think they temporarily removed the limit during the pandemic in 2020 but generally speaking, that’s the limit. Around 60% of your AGI. 
Noncash Donations: For noncash contributions, such as property or appreciated assets, the deduction limits vary and can usually range from 20% to 50% of your AGI.
Itemize Your Deductions
Regardless of the size of your donations, to claim these deductions, you must itemize your deductions.
The thing is, for most tax payers, they won’t donate enough to surpass the standard deduction that we all automatically get. So you’ll have to do a gut check to see if itemizing your donations is even worth your time. Personally, I still think it’s worth going through and reviewing your annual giving while you’re preparing your taxes because I think it’s nice to check in every once in a while to see if you’re giving as much as you intend to.

If you are older or wealthier, there are some more complicated options, that I’m sure you’re already talking to your tax professionals about.

If you are age 70½ or older, you can make a Qualified Charitable Distribution (QCD) from your IRA. This allows you to donate up to around $105,000 per year directly to a charity without it being counted as taxable income. While QCDs do not qualify for a charitable deduction, they can help lower your taxable income.
Donate Appreciated Assets
Donating appreciated assets like stocks or real estate can be more tax-efficient than cash donations. When you donate these assets directly to a charity, you can avoid paying capital gains tax on the appreciation and claim a deduction based on the full market value of the asset.
As I said at the beginning of today’s episode, above all else, you’ll want to consult a Tax Professional. 
Given the complexities of tax laws and potential changes, it is advisable to consult with a tax professional who can provide you with personalized advice based on your financial situation and help you maximize your charitable contributions' tax benefits if that’s something that’s important to you. Although I’ve said it before on this show and I’ll say it again, please, if you are a millionaire or billionaire please don’t exert the energy to look for every single legally allowed loophole. You’ll find them. Please pay your fair share of taxes. Which for wealthy people, should be a lot more than it is for everyone else. To whom much is given, right?

So to recap, here’s what we covered today:
For most Americans, the standard deduction is going to be so high that even if they itemized their donations, they wouldn’t surpass the standard deduction, so unless you’re deductions are high and your donations are high, you don’t need to worry too much about how to document and file your donations.
The key things to keep in mind are to make sure that the donation is to a qualified charity, you keep receipts, and you itemize them.

If you have more time today, here’s another episode to check out…that’s episode 120 Where to find a financial advisor to help you invest according to your values. I’ll leave a link to it in the description for this episode.

I think that’s it for today. Whether or not you’re taking the tax breaks for your donations this year, above all else, I do hope you’ll take a moment to reflect back on your giving for this year and see if it matches up with what you had intended to give away. Doing our taxes is so tedious, I think one of the silver linings is that it forces us to take a step back and look at how much we donated, how much we earned, how our investments might have grown or shrunk over the past 12 months.

So as you work on getting your tax documents together, I want to wish you the best of luck!

Let’s end with a quote…
"Taxes are what we pay for civilized society." Those are words from Oliver Wendell Holmes Jr.
Let’s talk again soon!