Maximizing Tax Benefits: Year-End Charitable Donations and Deductions Guide

If you’re philanthropically minded, consider the benefits of a charitable donation before year’s end. If you make a gift of monetary value, in addition to helping a worthy cause, you might also reap substantial tax benefits. For example, donors who itemize their taxes can have increased deductions, which lowers their taxable income. On the other hand, those making qualified charitable distributions (QCDs) will have lower above-the-line income. Here are some things to bear in mind when giving tax-deductible donations to a nonprofit before the end of the year.

Tax-deductible donation rules

The IRS has a specific set of guidelines for taking advantage of tax breaks for giving.¹ For example, the nonprofit must be U.S.-based. Also, in most cases, the amount of charitable cash contributions taxpayers can deduct as an itemized deduction on Schedule A is limited to a percentage (usually 60%) of the taxpayer’s adjusted gross income (AGI), with a five-year carryover. The IRS also has a series of other rules for the types of donations and contribution amounts:

• Donation of securities is limited to 30% of AGI.
• If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property.
• For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property other than cash contributed.
• Note that donations to a GoFundMe account typically aren’t considered a charitable donation (exception is if a nonprofit is receiving the funds on the website).
• Donations must be made during the calendar year.

How to receive a charitable tax deduction

Tax benefits from donations to charities are available when deductions are itemized on your tax return. To itemize, your deductions should exceed the standard deduction, which is $ 13,850 for single, $20,800 for Head of Household (HOH) or $27,700 for married filing jointly (MFJ) in 2023 (or $14,600for single, $21,900 for HOH or $29,200 for MFJ in 2024). Other common itemized deductions are mortgage interest, investment interest, state and local income tax, and property tax (subject to limitations). In terms of gifts to charity, there are certain types that are deductible:

Cash, check, or credit card

1. One way to receive a tax benefit from donating cash to charities is a qualified charitable distribution (QCD) from an individual retirement account (IRA). If you’re above 70 1/2, you can contribute up to $100,000 of your required minimum distributions (RMDs) to charity. The distribution counts as part of your RMD but is excluded from your taxable income. Because it’s not part of taxable income, you won’t receive a deduction for this type of gift.
2. To substantiate a donation, the donor must obtain and keep bank records or a written communication from the donee (entity receiving the donation) as a record of the contribution.
3. A donor claiming a deduction of $250 or more during the year, is also required to obtain and keep a contemporaneous written acknowledgment to validate their charitable contributions.²
4. The deadline to make a QCD from an IRA is typically December 31 each year, which means it must be processed by your IRA custodian or trustee by year end to qualify for the current year’s tax benefit.

Personal property, clothing, household goods, and vehicles

1. b and c apply above
2. IRS Publication 561 offers guidance in helping to determine the fair market value of donated property.³
3. Form 8283 for non-cash charitable donations is required when total non-cash donations for the year exceeds $500 (some exceptions apply).
4. Non-cash donations over $5,000 require a qualified appraisal unless the donation is marketable securities or a new item.
5. The IRS provides the following guidance related to donations of vehicles: “Donors may claim a deduction of the vehicle’s fair market value as long as certain circumstances are met.”⁴

Appreciated securities

1. If you donate appreciated securities, no tax is owed on capital gains if the security has been held more than one year; this is in addition to the itemized deduction.
2. You’ll need to provide your tax preparer with the date of purchase and cost basis that will be used in preparing the required Form 8283.
3. Consider utilizing a donor-advised fund to receive the same benefits as described above.

Although your time isn’t deductible, transportation costs and related expenses may be. The standard mileage rate is 14 cents per mile driven in service of charitable organizations during that calendar year.

If you’re philanthropically inclined, you can “do good” and incorporate planned giving into your year-end tax strategy. Mitigating taxes, when possible, can help allow you to keep more of your hard-earned savings and can lead to a more successful long-term financial plan. As always, your Mercer Advisors team is here to answer questions on how to give to the causes you care about and discuss the long-term potential benefits.