Charitable deductions are great deductions to take if you donate a lot to charities. A charitable contribution is a tax deduction that you can take if you itemize deductions rather than taking the standard deduction. To maximize your charitable deductions, you need to consider some crucial long-term strategies.
With the Tax Cuts and Jobs Act of 2017, which is currently in effect, conventional planning methods have been turned upside down; it’s more important than ever before to understand what to do and what not to do when it comes to donations to charitable organizations. Know how to best reduce your taxable income and adjusted gross income.
With some creative tax planning when filing your income taxes and a great amount of organization, you can maximize donation tax benefits. The key is to be taxpayer-specific, which means that what works for one donor or group of donors may not work for others. Because of this, tax planning is more critical today than ever before.
In the wake of new tax reform and tax laws, individuals and business owners are looking for ways to get the most benefits from their itemized deductions. The way to do this is to focus on ideal timing and specific methods of donations to charities in order to claim the maximum tax savings.
7 Strategies to Maximize Charitable Donations
1. Realize your out-of-pocket expenses matter.
The IRS allows charitable deductions of 14 cents per mile for volunteers who use their vehicles to perform duties on behalf of schools, religious institutions, hospitals, and other charitable organizations. Things like parking fees, tolls, away-from-home meals are tax-deductible, provided they relate to your charitable duties.
14 cents per mile is the tax rate for charitable driving for tax year 2019 and tax year 2020, so the tax return you will be filing in 2021 (your 2020 tax return) will allow for 14 cents per mile for volunteers who use their automobiles for charitable purposes. Be sure to keep accurate records, receipts, and a mileage log for tax purposes.
2. Organize and keep organized all of your receipts.
The IRS lists proper documentation for charitable giving to be receipts, bank records, letters from charities confirming receipt of your girl, and any electronic records, such as emails. Failure to have proper proof is a quick way to fail an audit.
Understand what is involved in a tax audit to best get a grasp on the type of documentation you will need to show as support in the event of an audit.
3. Record all loans to family and friends.
It’s common these days for anyone to have a cash-strapped family member or friend. Before loaning money to those in need, create documentation to establish those transactions as loans. You can do this by having your debtor, relative or friend, sign agreements, which specify when payments are due and the total amount lent.
4. Understand the non-cash gifts that count.
There is a wide list of non-cash gifts that benefit charities, which count for charitable deductions. You may have given away any of the following:
- Clothing
- Household Goods
- Appliances
- Jewelry
- Books
- Electronics
- Appreciated Stock Shares
You should keep detailed records of what you have donated to charities, including receipts or letters from the charitable organizations stating what you gave away.
Most charities will give you a statement or receipt upon the donation of the non-cash items, which includes the date of the donation, the estimated value of the goods, and the specific category of the non-cash items.
5. Give more to a select few.
An excellent strategy is to designate your giving across a select few worthy charities. Your charitable contribution will go further, and you’ll know the much greater impact your donation has on each charity.
It will possibly also make your record-keeping efforts easier if you only have to work with a few charities during tax season. Once you have a system in place for the records you need to hold on to, it’ll make it that much easier to stay organized for the future – something you will be happy you did when gathering all your tax documents together.
6. Consider Donor-Advised Funds (DAFs).
If you’re looking for ways to exceed the higher standard deductions, you might want to consider pooling several years’ worth of charitable contributions into a single contribution called a DAF. A Donor-Advised Fund (DAF) is a way to stash tax-favored cash and use allowable distributions to support the charities that you designate.
Basically, a Donor-Advised Fund is a way to donate without picking a charity right away. You can be a part of this without making that decision now.
Then, later you can decide which charity you wish the funds to go to. Meanwhile, your funds sit in your DAF account tax-free! So, you can tuck that money aside for a later date and use it as part of your charitable deduction.
7. Stack your donations.
Donor-Advised Funds are especially beneficial if you wish to stack your charitable donations. You can take the tax deduction in the year you contribute to the DAF, regardless of when the charity receives the grant. This can help you and the charity receive the most benefits out of your contributing efforts.
A Note About Filing Your Taxes
Realize that with charitable deductions, you are required to itemize your deductions, which is a good idea if you have more than the amount of the standard deduction for the year. If the standard deduction is greater than the items you wish to itemize, like charitable donations, you are better off not deducting your charitable contributions.
Be sure to check out the tax rates for the standard deduction for the year you are filing your taxes. It varies for each taxpayer and is dependent on your filing status and your income. For example, if you are a married couple and have decided to file a joint tax return for the tax year 2020, your standard deduction would be $24,800.
Remember that your itemized deductions also include any of your medical expenses, home office expenses if they relate to your business, and many other tax deductions, so if your total itemized deductions are greater than the standard deduction for the tax return you are filing, be sure to take it!
So, in the above example, we see that your total itemized deductions, like the home office deduction and the medical expense deduction, must be greater than $24,800. If your tax deductions are not that much, you will receive better tax benefits if you do not itemize and instead take the standard deduction.
Because itemizing deductions can be complicated, it’s a good idea to work with a tax consultant who is qualified to file your taxes for you or advise you on how to get the most out of your tax return. Find a tax accountant who knows what they are doing because the last thing you want is an audit notification when you are not prepared.
If you have filed your taxes and received or are expecting to receive an audit notification from the IRS, you should make sure that all of your backup documentation is in order. You will need proof for every tax deduction or tax credit that you decide to take. Without proof, you may end up owing the IRS money, which could cause you to have unexpected tax debt.
An enrolled agent, like Sherry Borshoff, can help you file your tax return the right way and represent you in the event of an audit. This is your best bet to have a favorable outcome with your tax audit. A tax audit is not the end of the world, especially if you have proper documentation ready to show the IRS representative. Just make sure you work with someone qualified.
Conclusion
Providing donations to worthy causes can be both rewarding on a personal level and exciting during tax season, as you may be able to take the charitable tax deduction, which will reduce your tax liability. However, it is crucial that you understand the landscape of charitable deductions.
Work with a seasoned tax professional when trying to maximize your charitable deductions. At Borshoff Consulting, we can help you determine your tax rate, show you what is tax-free, file your tax return for you, represent you in the event of an audit, and consult with you when making business decisions.
You can trust Indiana’s tax expert to steer you in the right direction! If we don’t have the answer for you, we will point you in the right direction. What are you waiting for?
Go ahead and book a free tax consultation today to find out the best tax benefits for you this year! Learn more about what goes on in a tax consultation to better understand what we can do for you and how to prepare for a meeting with our tax expert, Sherry Borshoff.
We’ll help you get organized and show you how to be better prepared for next year. We work with small businesses and individuals who need their taxes done. However, our vast array of services may meet other needs you have. Be sure to check out our many individual and business services to see how we can help you with financial and business matters.
