It’s almost the end of the year. The holidays are just around the corner, and so is the deadline for making charitable donations that can be claimed on this year’s taxes. The US tax code allows people to make deductions from their income taxes. This has the effect of increasing giving overall. Research shows that high net-worth individuals would reduce their charitable giving if they didn’t get this benefit.
Not everything can be claimed as a charitable donation. Money given to an individual, even a homeless one, can never be deducted. Time donated in the form of volunteer hours isn’t deductible, either. And not all organizations that accept donations are registered charities. Tax-exempt charities will have a letter from the IRS. Many organizations post this directly on their websites. Others will make it available upon request.
An alternate way of determining an organization’s status is to use a third-party website. Charity Navigator is a good example of a website that can be used to check this status. The exceptions to these rules about IRS status are churches, mosques, temples, and synagogues. Those religious organizations are always considered tax-exempt, with or without official documentation from the IRS.
Another important issue when claiming deductions is proof. It’s important to always get a receipt for any charitable donation. This is especially true when cash is given. Some organizations will send a letter stating the amount of each donation they receive, right when they receive it. It’s a good idea to save these communications. Other organizations automatically provide donation receipts at the end of the year. It’s a good idea for donors to track their gifts throughout the year. That way, they can request a receipt at tax time if one hasn’t come in the mail.
Finally, the IRS does set limits on what can be deducted. Though it’s not a problem for most people, anyone who gives away more than 20% of their income needs to be careful. The limits vary based on what kind of donation is made. The limits for cash donations, non-cash assets, and appreciated capital gains assets are all different. People who give generously should consult an experienced financial professional to discuss these limits and ensure their tax returns are prepared appropriately.