How To Make the Most of End-of-the-year Donations To Help Your Taxes
December 1st, 2022
Two things are certain in life: death and taxes. It is never too early to start thinking about your taxes, and thankfully, there are several methods you can use to decrease the amount of taxes you pay to the Internal Revenue Service (IRS).
Tax deductions are among the most popular ways to lower your taxable income. One easy way to increase your tax deductions is through end-of-year donations.
Keep reading to learn everything you need about tax deductions, end-of-year donations, and how to minimize your tax bill.
What Is a Tax Deduction?
Before diving into the world of end-of-year donations, it is essential to understand what a tax deduction is.
A tax deduction is an expense that can be subtracted from your taxable income, which means you save a certain percentage in taxes for every dollar spent on a deductible expense based on your tax bracket.
For example, if you make $50,000 a year and have $10,000 in deductions, your taxable income would be $40,000.
Tax deductions can be advantageous if you can use them to lower your income into a lower tax bracket.
What Are the Limits on Deductions?
Generally speaking, you can deduct 60% of your adjusted gross income (AGI). But depending on the type of asset you’re giving and the type of organization that is receiving it, the limit of the deduction can be reduced to 20%, 30%, or 50% of your AGI.
Set your donation goals for the new year having these limits in consideration and the standard deduction for the tax year in question. If the standard deduction is higher than your donations, you won’t have any extra tax benefit.
What Are End-of-Year Donations
End-of-year donations refer to donations made toward the end of the calendar year. These donations can be made to charitable organizations, non-profits, or religious institutions and can come from money or goods.
End-of-year donations are a popular way to lower your taxable income because they are often last-minute expenses you can deduct from your taxes for the current year. At the end of the year, you know what your income will be so you can determine precisely how much you need to donate to create the desired tax deduction.
What Is a Charitable Donation?
The IRS considers a donation charitable if you make it to a qualified organization. Qualified organizations include churches, non-profits, government agencies, and more.
How Can I Maximize My Tax Deduction With End-of-Year Donations?
There are several ways to maximize your tax deductions through end-of-year donations.
First, make sure you keep documentation of all donations made. Documentation includes holding onto receipts or bank statements for monetary contributions and getting a ticket from the organization for any goods donated. This documentation will be necessary for the IRS to verify your donations when filing your taxes.
Next, consider donating appreciated stocks or investments instead of cash. Not only does this allow you to deduct the total value of the stock from your taxes, but it also avoids any capital gains tax on the appreciation of the investment.
Finally, consider donating to a donor-advised fund. This type of donation allows you to make a lump sum donation at the end of the year and then disperse it to different charitable organizations throughout the following year, maximizing your tax deduction every year.
Other Methods for Maximizing Your Tax Deduction
Many assume the only way to make charitable donations is to give money to your favorite charity. However, there are several other ways you can donate money.
One of the best ways to clean your house and increase your tax deduction is by donating household goods. Household goods include clothing, furniture, appliances, and other household items. The key here is to ensure that things are in good condition, as they must be helpful for the organization to give you a tax deduction receipt.
In addition to donating goods, consider volunteering your time with a charitable organization. You may be able to deduct some of your expenses related to the volunteer work, such as mileage and supplies.
Donating a car or other vehicle can increase your tax deduction. The organization must be able to use the vehicle in their operations for you to receive a deduction receipt.
End-of-year donations are a straightforward way to lower your taxable income and save on taxes. By adequately documenting donations and considering alternative forms of donation, you can maximize your tax deduction and overall savings.
Other methods for maximizing tax deductions include donating household goods or using expenses from a vehicle used for charitable purposes.
Keep these tips in mind as you plan your end-of-year giving strategy. Happy saving!