Maximizing The Tax Benefits Of Charitable Giving

Generous donations can save you money

Americans tend to be very generous, and more often than not, our reasons for making these donations are completely altruistic. However, there's no harm in taking advantage of the tax benefits that the IRS allows. In fact, the organizations that benefit from this generosity want you to maximize the tax benefits so that you'll be in a position to donate in the future.

The benefit you receive from your donation depends on the rate at which you pay tax. If you're in the top tax bracket (35 percent), a $100 gift actually costs you $65 once you subtract the $35 in tax savings. The same $100 for someone in the bottom tax bracket (10 percent) would save only $10.

As you can probably see, after tax, the wealthy end up saving more than the people at the bottom of the income scale. On the surface, this might appear unfair. However, the system ensures that those in the best position to donate actually will. Furthermore, a charity might be able to convince the contributor that a gift of $154, on an after-tax basis, is the same as a $100 donation without the tax consequences factored in.

How much can you donate each year?

The answer to this question should be relatively easy, but it isn't. Many charitable organizations qualify for the 50 percent limit. This means you can donate up to 50 percent of your gross adjusted income in any given year. Any contributions above that limit carry forward for up to five years. IRS Publication 526 details what types of charities qualify for the full amount. Those that don't are eligible for a maximum of either 20 percent or 30 percent of your gross adjusted income. Consult the charity in question to confirm its contribution limit.

In addition to donating cash, charities have become very adept at accepting all kinds of items, including stocks, bonds, other financial securities, cars, computers, food, clothing and pretty much anything you can think of that has some tangible value. The competition among charities today is extremely competitive. Organizations have learned to accommodate unique donations.

Remember to keep a record of all donations in case there is a discrepancy between the charity and yourself. Further, hang on to your records for three years to satisfy any questions the IRS might have in the future. Any time you're dealing with taxes, it's best to prepare for any circumstance.

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