During this time of year, we often reflect on how blessed we are for all we have earned, but understand it can also be an extremely difficult time for many. The holiday season often turns into a time of giving and the IRS recognizes this.

A cynical person would say the increase in charitable gifts is just to obtain tax deductions. The fact is, there is probably a little truth in both but there is absolutely no reason to not take advantage of tax breaks while doing some good. After all that is why the deductions exist, to encourage more people to donate. It is surprising that only 26 percent of tax payers itemize charitable deductions on their returns.

This is a very important tax deduction as the charitable contribution is deducted before your income is actually taxed, therefore it can not only lower your overall taxable income but possibly get you into a lower tax bracket.

What is a Qualified Charity?

A qualified charity is a tax-exempt 501c3 organization. While most qualified charities will readily show they are a qualified 501c3 charity on their website or publications, the information can be verified on the IRS website. Generally speaking, a qualified charity will be one of the following:

  • Churches and other religious organizations
  • Tax-exempt educational organizations
  • Tax-exempt hospitals and some medical research organizations
  • Government agencies such as a state or division of a state
  • Organizations (aka federated funds), such as a community chest, that are supported by the public
  • Some private foundations that distribute the contributions they receive to public charities and some private operating foundations
  • Some membership organizations that receive more than a third of their contributions from the general public

Types of Donations

The three types of donations:

  • Cash donations. Usually, this type of giving is fully deductible for the exact amount you gifted. If you donate more than $250, you’ll need a receipt. If you gift the charity in cash, you’ll need to request a receipt no matter the amount.
  • Tangible assets.When gifting things that correlate to the charity, you can usually deduct the full amount of the items based on their current worth. If the assets have nothing to do with the organization’s aim or mission, you are allowed to deduct the amount you paid for it or the item’s reasonable value, whichever is the lesser of the two.
  • Appreciated long-term assets.In most cases, you can deduct the full fair market value of long-term securities that you have held for more than one year. However, the deduction is limited to 30 percent of your adjusted gross income (AGI) compared to the 50 percent limit for donating cash to charities. Donating your stocks directly to a charity can offer more tax benefits and can lower your income tax bracket.
  • Volunteering. Although you cannot deduct the time you spend volunteering, you can deduct the transportation costs and other expenses related to your charitable work.

When Does a Donation Qualify?

The charitable deduction qualifies the year it was made. The mailbox rule applies, meaning the contribution is considered paid when you place the check in the mail and not when it arrives. If you pay by credit card, the contribution is paid when it is charged to your credit card (not when you pay the credit card company). Make sure your donation is made by Dec. 31 of the year in which you plan to claim a deduction.

Regardless of how you want to give your time and money to charities, it is always a good idea to sit down with a qualified financial planner. A financial planner can offer advice on the types of donations that would work best for you, your estate, and your business.