Charitable donations are a great way to contribute to the welfare of society and at the sametime ,get some tax savings at the end of the year. People usually expect huge deductions on their charitable donations but in reality, the IRS won’t give you a tax relief of $1 on every dollar that you have donated.
Charitable deductions will reduce your tax bill to some extent like a quarter dollar or so for every dollar that you donate. Still, charitable donations offer a tempting bonus and some decent savings. However, tax experts suggest that charitable giving will work best if it is coupled with other deductions, such as state or sales taxes, home mortgage interest, insurance premiums etc.
Here are a few tips to get the maximum tax relief on charitable donations in the USA which you may consider to save some extra bucks at the end of the year.
Maximum Tax Relief on Charitable Donation in USA
1 – Valuing Deduction:
2 – Itemized Deduction:
3 – Estimated Tax Savings:
4 – Limitation on deduction:
The value of your donated assetswillbe estimated based on the current market value of what you have donated.For example, if you donate a land you will be able to deduct the entire value of your property depending on the current market value.
If you donate a car then certain conditions will apply. If your donated car is used by the charity then you will be able to deduct the value of your asset based on the fair market value. If the charity sells the car you will only get the deduction for the selling price instead of the original.
If you buy items on discount for the charity you will be able to deduct only the price you had to pay for it and not the actual one.For example, if you buy woolen clothes for $3000 on a discount to donate to a charitable organization working for orphans but the actual price was $3600 then the IRS will allow you to deduct the discounted price of $3000 from your tax statements and not the original price.
You will need to itemize your deductions to claim a tax relief on your income tax returns. Itemized deductions will include any noncash items that you donate to a charity such as a car, land, furniture, groceries, food, clothes, voluntary expenses etc. Other itemized deductions will include your personal expenditures such as healthcare premiums, medical or dental expenses, state and local income taxes, sales taxes, mortgage interest,and investment expenses etc.
You should sensibly choose the standard deduction only when your itemized deductions are less than the standard scale. In this case, when your itemized deductions are of no use you won’t be able to claim a deduction for your charitable donations simply because it would not reduce your tax bill.
Estimated Tax Savings:
The United States law abides by the progressive tax system and the taxpayers are classified into different tax brackets based on their taxable income. Your income tax rate will increase proportionally to your taxable income.
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If your itemized deductions surpass your standard deduction (excluding charitable donations), estimate your tax savings by multiplying your marginal tax rate by the value of your deduction. Consider this example:
If you belong to the 35% tax bracket for the 2018 tax year and your itemized deductionis$25,000, it will save you about $8750.
If your itemized deduction is less than your standard deduction you must calculate your tax savings using that amount by which your charitable donations will make your itemized deductions higher than the standard deduction scale. Consider this example.
If the itemized deductions are worth $1,000 less than thestandard deduction and you have donated $9,000, and then subtract $1,000 from your donated amount to get $8,000. Now if you fall in the marginal tax rate bracket of 35%, you will need to multiply 0.35 by $8,000 to estimate your savings at $2800.
Limitation on deduction:
The IRS allows the taxpayers to claim up to a certain amount of deduction and according to their regulation,your deduction cannot surpass 50% of your adjusted gross income. In each case, the deduction limit will vary depending on the type of organization you are contributing.
- Donations to nonprofits like churchyards or veterans organizations are limited to just 30% of your AGI.
- If you donate appreciated property to charities that are subjected to 50% tax-exempt your donated assets will only receive 30% deductions of your AGI
- If you donate appreciated property to organizations that are subjected to 30% limitation you will only receive 20% deductions of your AGI
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