Charitable Contributions and Taxes

Oct 8, 2012 by

IRS logoWe’re in the last quarter of the year, which means it’s time to elevate year-end tax planning on your priority list. Sorry if you’re like me and feeling like you just finished 2011’s tax return! But you can save some real dough by forcing yourself to think just a bit about your 2012 income taxes between now and December 31st. Over the next little while I’m going to do a few posts on year-end tax planning topics that may cut your tax bill enough to make them worthy of your attention (painful as it may be to be thinking about taxes just now).

Charitable Contribution Deduction

In the U.S., you may deduct from your taxable income contributions to qualified charitable organizations. First, please note that you get a deduction, not a credit. That means a $100 contribution doesn’t cut your tax bill by $100. Rather, if you’re in the 15% tax bracket for example, a $100 deduction would reduce your taxable income by $100, and that would cut your tax bill by $15 (15% of $100).

To whet your appetite, here’s a 41-second IRS video on the charitable contribution deduction:

Details of the Charitable Contribution Deduction

If you’re in a masochistic mood sometime you could scratch your itch by reading the 24-page IRS publication 526, Charitable Contributions. Until then here are some essential details you need to know about deducting charitable contributions:

  • You must itemize deductions (good ol’ Schedule A) to deduct charitable contributions. If you have a mortgage, you’re likely already itemizing. If not, unless you’re a very generous taxpayer, itemizing purely to deduct charitable contributions probably won’t make sense, tax bill-wise.
  • To be deductible, your contribution must be to a “qualified organization.” Qualified means
  1. “Must be organized and operated only for one or more of the following purposes”:
    • Religious
    • Charitable
    • Educational
    • Scientific
    • Literacy
    • Prevention of cruelty to children or animals
  2. War veterans’ organizations
  3. Fraternal societies, orders, and associations operating under the lodge system, IF the contribution is to be used solely for one of the purposes named in (1) above.
  4. Certain nonprofit cemetery companies (??)
  5. The United States, a state, a U.S. possession, or Indian tribal government
  • You may not deduct the value of your services given to a qualified organization. To Congress, your time is not worth money.
  • You may deduct certain expenses you incur in donating services to a qualified organization. Examples: Mileage, a required uniform.
  • You may deduct the “fair market value” of property you contribute to a qualified organization. The rules here are encyclopedic; better get some help unless you think like an accountant.
  • The amount of your deduction for charitable contributions is limited to 50%, 30%, or 20% of your Adjusted Gross Income, depending on a lot of stuff you probably don’t need to worry about.
  • I have to throw this one in, as a tribute to the U.S. tax code: “You may be able to deduct as a charitable contribution the reasonable and necessary whaling expenses paid during the year in carrying out sanctioned whaling activities.” Shiver me timbers.

In this political year, notice that political contributions are not deductible.

Act By December 31st!

To claim deductions on your 2012 tax return, you must make your contributions by December 31st. This is why your mail soliciting contributions takes off the last quarter of the year.

What About You?

Do your charitable contributions make a sizable dent in your tax bill? What do you think about the rule that those who take the standard deduction (instead of itemizing) can’t take any deduction? Might that discourage charitable contributions by taxpayers in this category, or will people contribute the same regardless of taxes?

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  • Jason @ WorkSaveLive

    We have quite a bit of charitable contributions and deductions each year. This year, now that I have my business, our deductions are going to be pretty insane compared to our income…I’m thinking we’ll have somewhere around $40,000 worth of deductions; it’s going to be pretty sweet!

    I’m not sure that charitable contributions are hurt by the people that can’t claim them as deductions: the people that are going to give, are going to give. If they have to the money to do so, and have the desire to do so, then they’ll do it. The people that don’t want to give just won’t…and I don’t think getting 15% of their contributions back would change their mind.

  • John S @ Frugal Rules

    We do quite a bit in terms of charitable contributions and deductions each year. Like Jason, we run our own business so we get to take advantage of some nice deductions.
    It will be interesting to see what changes after the election in terms of taxes. I think that makes planning things even more important. I think too often we wait til the end of the year to act, when we can be planning throughout the year.

  • Andy Hough

    My mom has a mortgage and has a couple thousand in charitable contributions per year but she still doesn’t have enough deductions to itemize. The charitable deduction is a nice extra if you get it.

  • Jason – I don’t know what the research says, but I tend to agree with you. People donate because they want to help the cause, not to save taxes. I suppose the law as written could have a depressing effect on the amount contributed for those who don’t itemize and so get no tax benefit, but that’s just speculation.

    Andy – Yes, it takes a fairly large accumulation of itemized deductions these days to beat the standard deduction ($11,900 for a married couple filing jointly). If you don’t have a sizable mortgage, for most people, the standard deduction will be preferable to itemizing.

  • frugalportland

    My state has a $50 tax CREDIT for political contributions — which is very bizarre to me.

    • Perhaps Oregon’s lawmakers feel the need to compensate taxpayers inclined to flush money down the toilet. 😉

    • frugalportland

      That’s entirely possible!

  • Also, don’t forget to find all your tax receipts – like Vehicle License Fees, which you can deduct as well!

    • Mad

      Not in all states. There is a list of states where you can.

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