Tax Exemption Guide for Donors in the US
Donating to charity doesn’t just bring you peace of mind but can be financially rewarding as well. Governments all around the world encourage donations by facilitating donors in different ways. The US federal government has a policy of tax exemption for individuals who donate to charities. This means donors can request tax exemption with proof of donations to cut down their annual taxes. In this guide, we will help you understand how this works.
Types of Donations
Fundamentally, there are three types of donations: monetary, goods or personal property, and vehicles. In the US, all of these can be used to get tax exemption.
Donations made via cheques, credit cards, PayPal, and online transfers are monetary. Such donations are convenient as the bank statement itself is the proof that you have donated to a particular organization. These donations also protect against charity scams.
Vehicle donations are also common. NGOs can use them in either improving their transport operations or sell them to get money for the organization. It is better to let the organization sell your vehicles instead of taking the matter in your hand. Charitable organizations usually sell these vehicles at auctions which brings more capital. When you donate the vehicle, you would have to transfer the title to the respective organization. Be sure to remove the license plate and registration from the donated car, truck or van.
Goods, Personal Property, and Stocks
Some charities accept the donation of household items such as clothing, beddings, etc. While donating to such charities it is important to keep record of each item that you have donated.
Other items such as jewelry, real estate, stocks, art, and patents can also be donated. But to estimate the value of such goods, you would need an expert appraisal.
Tax-deductible charitable contributions
While donating, you must know that not all donations can be deducted from your federal taxes. It only applies to those donations that are going to organizations that are 501(C)3 approved, which are also referred to as “qualified organizations”. If you’re planning to donate to a non-profit organization, as the first step, make sure that it has a 501(C)3 approval.
Documentation of Donations
In order to get a tax deduction, you must keep the documentation of each and every item or transactions that you process. For monetary donations, a bank record or paystub is a must. Similarly, if you have donated other items like clothing, jewelry, etc, you can get their fair market value by getting them appraised by an expert.
Furthermore, you must be mindful that for donations above $250, you must obtain a contemporaneous written acknowledgement from the receiving organization.
Maximum Amount of Deduction
Understanding the maximum amount of deduction that you can get on your taxes can be a bit challenging as there are several limits at play. By knowing these limits, you can manage your donations to maximize tax deductions.
The following table shows the types of donations and the corresponding deductibility limits.
|Donation Type||Deductibility Limit|
Credit card, cash, bank transfer, etc
|60% of adjusted growth income (AGI)|
|Capital Gain Asset
Investment asset with a long-term capital gain
|30% of the AGI at fair market value
50% of AGI if deducted at a cost
|Ordinary Income Asset
Investment asset with a short-term capital gain
|50% of AGI, deducted at cost|
Furnitures, vehicles, investments, clothes, etc
|50% of AGI, deducted at fair market value|
When you exceed the deductibility limit it does not mean that you cannot donate to charities anymore. It simply means that you cannot apply for further deductions from your taxes in that particular year. If the limit exceeds, you may be able to carry the remaining amount to the next year.
The Bottom Line
Tax deductibility should not be the sole purpose of charity but this additional benefit should not be ignored. Getting a tax deduction can help you save a lot. You can even consider donating the amount you saved. And when you decide to donate, do consider Transparent Hands, which is an officially 501(C)3 approved organization.
Transparent Hands is a non-profit organization working to make quality health care available to underprivileged individuals in Pakistan. We have been providing free medical treatments to those in need since 2014. We have successfully carried out over 2,000 life-saving surgeries and treatments. We have also organized hundreds of medical camps in different parts of Pakistan to identify and help deserving patients free of charge. Our operations are transparent and details of each case are displayed on our website.
Donate to a noble cause and get tax exemption.
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