How Charitable Donations Really Affect Your Tax Return, According to Tax Experts
Charitable donations can help a worthy cause, but your donations may also help your tax bill.
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In the past, charitable donations were a great way to reduce your taxes when itemizing. But with new law in place, donations may not actually save you anything in taxes at all.
To decipher the tax impact of charitable donations, we spoke to a few tax experts to share their insights as well as their best advice to ensure you’re getting the full tax benefit of your donations.
Not All Charitable Donations Are Tax Deductible
When you donate to charity, in most cases, it’s tax deductible. But not always. It depends on the organization, what you choose to donate and whether or not you file your taxes correctly.
Errica Brenning, financial expert at Cash Buyers, recommends verifying your chosen charity’s tax-exempt status before donating.
“The IRS has this nifty tool — the Tax Exempt Organization Search,” said Brenning. “It’s like doing a background check on your chosen charity. Ensure they have that official stamp of approval for tax-exempt status, so your contribution counts come tax season.”
When it comes to what you donate, Brian K. Seymour, II, Certified Financial Planner (CFP) and CEO of Prosperitage Wealth, said, “In addition to cash donations, non-cash contributions, such as clothing, household items, or appreciated securities, can also be deductible. The gifting of appreciated stocks is particularly advantageous since you do not have to realize the capital gains associated with the transaction personally and neither does the qualified charity.”
Most importantly, you have to file your taxes properly to ensure you’re getting the maximum benefit.
Seymour, II said, “There are specific rules and limitations regarding the deduction of charitable contributions. Generally, you can deduct up to a certain percentage of your adjusted gross income (AGI). Understanding these limits is crucial for maximizing the tax benefits of your charitable giving.”
“When filing taxes, you can either take the standard deduction or itemize deductions on your tax return,” said Zachary Hellman, enrolled agent and owner of Tax Prep Tech. “Taxpayers who choose the standard deduction won’t benefit directly from these donations on their tax returns.”
The standard deduction is a fixed dollar amount reducing your taxable income, varying by filing status. The 2023 standard deduction is $13,850 for single filers, $27,700 for joint filers or $20,800 for heads of household. People 65 or older may be eligible for a higher standard deduction amount.
Andrei Vasilescu, co-founder and CEO of Don’t Pay Full, explained, “Itemizing involves listing eligible expenses, like charitable donations, medical expenses and mortgage interest, which exceed the standard deduction. Many taxpayers opt for the standard deduction as it’s simpler and often higher than their total itemizable deductions.”
Therefore, if your itemized deductions actually exceed the standard deduction, you’ll receive some tax benefits on your charitable donations.
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There Might Not Be a Tax Benefit At All
While donating and earning a tax deduction is great, you might not actually get any tax benefit when donating.
According to J.P. Geisbauer, a Certified Public Accountant (CPA) at CenterPoint Planning, “With [the] standard deductions as high as they are… and the $10K state and local tax deduction limitation, charitable donations are harder to recognize on your return.”
He said, “Generally, you will likely need to have a mortgage balance, and a high one at that, in order to have enough itemized deductions for your donations to be tax deductible.”
You Still Might Save On Taxes Without Itemizing
Even if you don’t itemize your deductions, you might still be able to save on taxes with charitable donations through your state tax return.
“Remember, even if you don’t itemize, some states offer limited deductions or credits for charitable giving,” said Vasilescu. “It’s always a good idea to check your local rules to see if there are any additional benefits you can claim.”
Consider a Donor Advised Fund (DAF)
If you want to continue donating but don’t plan on itemizing, you may want to consider setting up a donor advised fund. It takes a bit of work, but you can get the tax advantages immediately.
One vehicle that has gained increased attention recently are Donor Advised Funds (DAFs).
According to Seymour, II, any contributions to a DAF are tax-deductible in the year you make the contribution. This immediate tax deduction can be advantageous, particularly when you have a windfall or expect a higher-than-average income year.
“By contributing to a DAF, you can receive the tax benefit upfront while having the flexibility to recommend grants to charitable organizations over time.,” said Seymour, II.
“Once the funds are in a DAF, you can decide when to recommend grants to specific charitable organizations. This can be particularly useful if you’re uncertain about which charities to support immediately but want to secure the tax deduction in the current year.”
You Can Still Give — Even Without The Tax Benefits
Whether you itemize your tax return and gain some tax benefits from charitable giving, or just claim the standard deduction, it’s still a great idea to give.
“Financially, the value of donating to charity isn’t typically about tax benefits but more about personal values and the desire to support causes,” said Hellman. “From a strict financial perspective, the tax benefit only partially offsets the cost of the donation. It’s worth consulting a tax professional to understand your specific situation.”
“Think of your donations as an investment in a cause you care about, with the added bonus of a tax perk if you choose to itemize,” suggested Vasilescu. “Ultimately, the decision to donate and how you approach it is a personal choice. Give because you believe in the cause, and if the tax benefit comes along, consider it a welcome bonus. Don’t let tax calculations be the sole motivation for your generosity.”
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