What you need to know about charitable giving going into the giving season?

It’s no secret amongst non-profits that the holiday season is prime time for asking for donations. During the holidays, people feel a little more generous. Many families who have enough “stuff” opt to do “alternative giving” by donating to charities they know the recipient care about. And some taxpayers are still under the impression that a charitable donation can lead to tax savings during the filing season. While charitable donations are technically still deductible, the deductibility has become a little more difficult in recent years.

There are two types of deductions on the 1040: the standard deduction and itemized deductions. After the Tax Cuts and Jobs Act doubled the standard deduction, it made itemizing less likely to be the more beneficial option to the taxpayer. Charitable contributions are one of the many items included among itemized deductions, so if a taxpayer chooses the standard deduction, they won’t be able to deduct charitable contributions. There was a temporary credit allowed directly from gross income of $300 ($600 for married couples filing jointly) during Covid, but that credit has since been discontinued.

That being said, a large amount of charitable contributions, we’re talking several thousand dollars, may be enough to make a taxpayer’s itemized deductions greater than the standard deduction. Some taxpayers will also donate stock that has appreciated in value to a non-profit in order to avoid a large capital gain. For taxpayers who are required to make Required Minimum Distributions from an IRA account, they may also choose to pay that distribution directly to a non-profit to avoid the tax obligation that the RMD will trigger. These are just a few ways that a taxpayer may successfully use charitable donations to lower their tax liability. But keep in mind that the benefit of making the donation is only equal to the amount of the donation multiplied by your effective tax rate. It is not a dollar-for-dollar benefit.

A word of caution regarding large donations: they do need to be made to a legitimate 501(c) organization, so donating to your friend’s Go Fund Me, while it is greatly appreciated, is not deductible. And just because someone says they are operating a non-profit, doesn’t necessarily mean they are. There have been issues recently with people setting up an LLC and operating as if they were a non-profit, but never reached out to a lawyer to obtain tax-exempt status. Most legitimate organizations will give you a letter with their tax-exempt ID. If not, you can search for eligible tax-exempt companies by going to https://apps.irs.gov/app/eos/.

If you’re a business owner, you should also consider whether or not your company is considered a pass-through entity before deducting charitable contributions as a business expense. Pass through entities are companies that don’t pay federal or in some cases state taxes, but instead pass the income and the tax liability to the owner and the owner pays the taxes for the business on their personal return. Because of this, certain items with special tax treatment, such as interest or charitable contributions, are reported separately from the income of the business. Interest and dividends will be reported with the owner’s investments and charitable contributions are reported on the owner’s schedule A along with their other itemized deductions. And if the business owner doesn’t itemize, then the charitable contribution is essentially not deductible.

What I tell my clients: the motivation behind charitable giving should always be a desire to give. There is minimal, if any, tax benefit to donating to a nonprofit, but that shouldn’t discourage you from contributing to causes that you care about. Especially during the holiday season, some people find that the real value to donating to their favorite charity is feeling like they are doing their part to make the world a better place. After all, isn’t that what the holiday spirit is all about?

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