When tax season rolls around, you may be looking for ways to lower your taxable income. One simple and meaningful way to do that is by giving to a nonprofit organization. Not only are you helping others, but you can also benefit from a tax break. But how exactly does that work? Let us break it down in plain, everyday English so you can understand how it affects your taxes.
How does donating to a nonprofit lower your taxable income?
When you give money or certain items to a qualified nonprofit organization, the IRS allows you to deduct that donation from your taxable income. This means the more you give, the lower your taxable income could be, which might reduce the amount of tax you owe.
Here is what you need to know:
- You can only deduct charitable contributions if you itemize your deductions on your tax return. If you take the standard deduction, you cannot claim these donations.
- Your donation must be made to a qualified nonprofit organization that the IRS recognizes.
- You can donate cash, property, or other assets.
- You will need a receipt or proof of the donation for your records.
What percentage of your income can you deduct?
You may be wondering how much you can actually deduct. Here is a simple guide:
- In most cases, you can deduct up to 60 percent of your adjusted gross income (AGI) if you donate cash.
- For certain qualified contributions, you may be able to deduct up to 100 percent of your AGI.
- If you donate non-cash property, like clothing or household items, the limit is usually 50 percent of your AGI.
- Donations to private foundations and veterans organizations are limited to 30 percent of your AGI.
If your donations go over these limits, you can carry the extra amount over to the next tax year.
What type of organizations qualify?
Not every nonprofit is eligible for tax-deductible donations. Here are the types of organizations that qualify:
- Churches, mosques, synagogues, and other religious groups
- Charitable foundations
- Educational institutions
- Scientific and literary organizations
- Organizations that prevent cruelty to children or animals
- Veterans’ organizations
- Nonprofit volunteer fire companies
- Certain nonprofit cemetery companies
You can check if an organization is qualified by using the Tax Exempt Organization Search on the IRS website.
How do you claim the charitable donation on your tax return?
When you are ready to file your taxes, here is what you need to do:
- Keep proper records of your donations. For cash donations, you will need a bank record or a receipt from the charity.
- If you donate property, you will need to determine the fair market value of the items.
- Report your contributions on Schedule A (Form 1040) when you itemize your deductions.
- For large donations, the IRS may ask for additional forms or appraisals.
