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Misunderstanding the rules around charitable giving can cost you. Find out how to give generously while maximizing your tax advantages. [[{“value”:”
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Being generous is a double-dip of joy. You get to make someone happy to receive your support, and you get a thank-you from Uncle Sam in the form of a tax deduction. Tax deductions can lower your taxable income so you can legally pay less in taxes. You can dial your financial savvy factor up a notch or two by learning how to maximize the benefits of charitable giving.
Here are two insider tips that could help you keep more money in your pocket.
Misconception No. 1: Only large donations are significant enough to deduct
It’s true that if all you gave was $20 last year, claiming it won’t give you a big tax refund. But if you make multiple small contributions, keep track of them. Smaller amounts throughout the year can add up to significant tax savings. They can also be easier to budget for than one whopping gift.
What you can do about it
Use an app to track donations year-round. Try It’s Deductible, from Intuit. It’s a free app that’ll even track the fair market value of non-monetary items you donate. At tax time, all qualified donations count, no matter how large or small. If you take a few minutes to itemize each batch of clothing and household donations that you bring to your favorite charity, you might be astonished at the total value of your contributions by the end of the year.
Misconception No. 2: It’s best to spread your giving out equally from year to year
You might save more money by hopping on the charitable giving rollercoaster. There’s a tax strategy called bunching that allows you to maximize deductions in a single year. It works for many itemized deductions, not just charitable giving.
The way it works is that you increase your tax deductions in a single year, and then reduce them in a subsequent year, opting for the standard deduction instead.
What you can do about it
You could make two or three years’ worth of charitable contributions in a single year.
Let’s look at how bunching could affect a married couple filing jointly. In the first scenario, they spread their charitable giving out:
Here’s what the same couple might accomplish with bunching. Instead of donating a steady amount, they make two years’ worth of donations in a single tax year, and then pare their giving down to zero the following year.
Bunching would allow this couple to deduct almost $10,000 more from their taxable income over the course of two years. The dollar amount they’ll save will depend on their tax bracket.
Costly mistakes to avoid when you give to charities
In addition to learning how to strategize your giving and pay less in taxes, review these common errors. A misunderstanding could lead to a big tax bill in the future if you’re audited.
Believing there’s no limit to charitable giving deductions: Some kinds of charitable contributions are, in fact, limited.Claiming charitable giving deductions that don’t qualify: Not all money that goes to a qualified nonprofit counts as a tax deduction.Failing to keep proper records of your charitable contributions: As with all things taxes, if a question comes up, it’ll be up to you to answer it in a satisfactory manner. Create an email folder called “receipts.” Download and save your account statements. Scan or photograph paper receipts and save them in an online folder or your bookkeeping software. Documentation is your friend.
Charitable giving can be part of a savvy tax-minimizing strategy, and it’s not always straightforward or easy to understand. Once your itemized deductions start approaching the general neighborhood of the standard deduction for that year, it’s a good idea to consider hiring a tax professional. Tax preparation software can help you answer questions, too.
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