Charitable giving tends to reside in our hearts and minds around this time of year. Whether it’s a few coins in the bucket at the grocery store or donating children’s toys to a local initiative, we all have our own ways of doing something for the greater good. Consequently, these acts of giving may also give back to you, in the form of income tax deductions. Let’s take a look at some of the ways your charitable gifts may be able to reduce your income taxes.
Standard and Itemized Deductions
According to the Internal Revenue Service (IRS), there are two main types of income tax deductions: the standard deduction and itemized deductions. Deductions reduce the amount of income to be taxed, so a smaller income means less tax. You can choose standard or itemized deductions, but you cannot choose both.
In general, you may only want to choose itemized deductions if the total amount of your charitable giving (plus other allowances like real estate taxes, personal property taxes, mortgage interest, etc.) is greater than the standard deduction for your filing status.
For tax year 2016, the IRS states the standard deductions as follows:
Married Filing Jointly: $12,600
Married Filing Separately: $6,300
Head of Household: $9,300
Qualifying Widow(er): $12,600
If you are a single taxpayer, and you have more than $6,300 in charitable gifts and other qualified deductions, then you may want to take itemized deductions. This may require you to do more paperwork and use additional tax forms, so be sure to speak with a qualified tax professional.
Limits to Charitable Giving
In most cases, there is no limit to how much you can deduct when it comes to donations. If you donate to a public charity known as a 50 percent organization, then you can only claim gifts that add up to no more than 50 percent of your adjusted gross income. If you happen to donate more, then you will have to wait until the next tax year to deduct the remaining amount over the 50 percent.
There are also limits for high-income earners. For tax year 2016, the IRS tells us the limitation for itemized deductions to be claimed begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).
Giving to your favorite charities is a wonderful notion that makes you feel good and may help you out at tax time. Before you make end-of-year donations, be sure to check with your financial advisor and tax professional for any other requirements or limitations that may reduce your income taxes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Always consult with your tax professional before making any decisions.