Our resident finance expert, aka Mrs. Dow Jones, returns with her take on this hot topic, leaving you informed and savvy once again.
BY HALEY SACKS
There’s a reason rich people love donating to charity—you get to help people and also get a tax write-off!
And if you’re wondering why the government gives you a tax write-off for donating to charity—charities play a giant role in society and often outpace the government in the relief they’re able to provide to people in need. So the government in turn rewards people who are willing to donate their dollars to charities with these tax deductions.
However, it wouldn’t be a gift from the government if it didn’t include multiple hoops and red tape, so let’s break down how you can write off that donation in four easy steps.
Step 1: Make sure that the charity you donate to is legit (as determined by the IRS). You should be able to locate an organization’s tax-exempt status on its donation page or its FAQs. You should be doing this anyway when you donate to make sure that the organization is actually doing what it claims; there are an unfortunate number of “charities” whose goal is not to help people, but to prey on people’s emotions and keep the money for themselves. Once you have identified a charity that is recognized by the IRS, move on to Step 2!
Step 2: Keep track of your donations. If you’re an adult in America, you know that the IRS requires a paper trail for everything—and that includes donations! Maintain detailed records of your contributions to back up your claims for Uncle Sam. This can be bank statements, credit card statements, or written acknowledgment from the organization. It needs to show the date and the amount of your donation. The more evidence, the better!
Step 3: Choose itemizing over standard deduction. The government gives you two options when claiming your tax deductions—standard or itemized. The standard deduction is up to $13,850 for single taxpayers. So if you donated more than that, you’ll be better off itemizing on your taxes so you can deduct more. To be honest, I recommend trying both methods, to see which one maximizes your tax savings more.
Step 4: Optimize your strategy. As heard in every rom-com, timing is everything! And that applies to your charitable giving, too. You should consider the timing of your donations and to further enhance your tax deductions.
Like if your bonus bumped you up a tax bracket one year, pay it forward to your favorite organization to maximize your tax savings for that year. You’ll catch yourself a tax break that could bring you back down to that original pre-bonus tax bracket. This is called “bunching donations.” It’s when instead of making small contributions annually, you “bunch” your donations by giving more in specific years.
You could also create a Donor-Advised Fund. DAFs are funds that you create and fill with a lump-sum donation to receive immediate tax deductions. The charity doesn’t have to use it right away, allowing them flexibility, and you can even donate stocks (which will also offset your capital gains tax!). However, these have a history of being sketchy, so as long as you use it as intended (which I know you will), it’s an amazing way to pay it forward for years to come.
Also, if you’re 70 ½ or older, the IRS made something special just for you! You’re in a unique position to make qualified charitable distributions directly from your Individual Retirement Account. This allows you to meet the Required Minimum Distribution (RMD) of your IRA (yes, they make you take out a certain amount each year after you turn 70) while still excluding the distribution from taxable income.
By following those four steps, you can have a positive impact on society, and your tax bill. Rich people do this all the time, and you can, too! Follow your heart by donating to causes that are special to you and give yourself a much deserved (tax) break at the same time.