How to Lower Your Taxable Income By Giving to Charity
If you’re planning your end of year charitable donations, you’re likely wondering how your donations will affect your annual tax bill. Whether you want to donate cash or valuable items, you can help support charities that matter to you while also lowering how much you owe in taxes. This is a win-win and is a great way to celebrate the spirit of giving during the holiday season.
Keep reading for insight into how you can use charitable giving to lower your taxable income and to learn more about the steps you need to take to save on taxes.
Donate More than the Standard Deduction
All tax filers have the option to take the standard deduction in lieu of itemizing their taxes with individual deductions. As of 2022, the standard tax deduction for single individuals is $12,950 and $25,900 for those who are married and filing jointly. A head of household can qualify for a standard deduction of $19,400.
It’s important to keep track of all potential deductions and charitable contributions that you made throughout the year so you can calculate if this amount will be more than the standard deduction. Usually, taxpayers choose whichever deduction is larger—the standard or the itemized deduction.
It can be helpful to understand what other deductions you may be eligible for so you can determine if the itemized deduction will save you more money. Some popular deductions include mortgage interest, medical and dental expenses, and state and local tax.
Know What the Limit Is
If you’re planning to donate the maximum amount possible to save on taxes, then you need to plan your donations accordingly. There is a limit on how much you can claim as a charitable tax deduction on your taxes. Generally, you can only deduct up to 60% of your adjusted gross income (although some limit exceptions apply of 20%, 30%, and 50%) when you donate cash to a public charity. This doesn’t mean you can’t utilize other tax deductions though, so you may be able to write off more than 60% of your income.
Make a Charitable Deduction the Right Way
If you want to claim a charitable contribution deduction, you need to take the following steps:
Step 1. Confirm that the non-profit organization is a 501(c)(3) public charity. The charity must be designated as a 501(c)(3) organization by the Internal Revenue Service (IRS) in order to qualify for a tax deduction.
Step 2. Keep a record of your donation. Usually, charities offer a tax receipt that you can hold onto for proof of your donation.
Step 3. If you are making a non-cash donation (like donating a car or other valuable item), you must obtain a qualified appraisal that substantiates the value of your donation.
Step 4. Itemize your deductions and then file your tax return.
If you need help planning your charitable giving, we can assist you in making a plan that helps you save on taxes while meeting your philanthropic goals.