‘Tis the season when many Americans embrace the giving spirit and contribute to their favorite charities by donating items, time, and money. With the end of the year rapidly approaching, it’s a good time to review how your generosity may play a role in your 2022 tax preparation and planning.
Donations and charitable contributions can have a big impact on your annual taxes. However, there are key factors and considerations to remember before you donate to your favorite organization. From how much you can claim to what counts as a tax deduction, here is what you should know and how it affects your annual tax preparation.
The Basics of Tax-deductible Donations
The IRS allows you to deduct cash, property, and other items you donated to a qualified organization (such as a nonprofit religious charity or an educational organization) throughout 2022.
As a rule of thumb, you can claim these charitable contributions if they total less than 60% of your adjusted rate income for the year. However, this rate may vary based on the organization and what is donated. The IRS Publication 526 provides a framework for calculating deductions and is a helpful resource for specific questions about qualified organizations or property-based deductions.
Ensure That the Organization is Approved Before Claiming a Deduction
For a donation to be deductible, it must be given to a nonprofit organization that has been vetted and approved by the IRS.
All nonprofit organizations with a 501(c)(3) status are eligible, but you can also claim deductions without this status, in certain cases. In these scenarios, check out the organization online via the IRS Tax Exempt Organization Search Tool to confirm that your donation is deductible. The Better Business Bureau also offers insight into the validity of charities online at Wise Giving Alliance.
Save All Necessary Documentation
When you itemize your deductions on your 2022 tax return, you’ll need documented proof of the contributions you made in the last year. Generally, accepted documentation can be as simple as a bank statement, credit card statement, receipt from the charity (with the organization’s name, the date, and the amount), or a canceled check. However, the documentation requirements may be complicated regarding more significant donations.
For example, if you make a cash or property donation that is more than $250 in value, you’ll also need a written letter of acknowledgment of the gift from the charity. Luckily, most established nonprofits readily provide this form when you give the donations . However, if you don’t receive it immediately, keep in mind that you’ll need this letter by the date that you file your 2022 tax return.
Additionally, if you deduct $500 or more in non-cash donations, there may be some extra paperwork, as you will need to fill out IRS Form 8283. You will also need documented appraisals for any donated items estimated at $5,000 or more.
Additional Charitable Deductions for Volunteer Work
When taxpayers think of charitable deductions, they tend to solely consider cash or property gifts, but your volunteer time throughout 2022 could also be deducted.
While you can’t deduct the value of the time you spent volunteering, (like an hourly wage), you can deduct the expenses related to your volunteer work. This includes your mileage while driving and from the charitable organization where you volunteered. Furthermore, any on-the-job expenses, like meals or equipment, that came out of your own pocket could be eligible for a deduction.
In these cases, just be sure you have receipts, and that any expenses are solely connected to your volunteer work. You will need documentation for all travel and work expenses in case of a future audit.
Charitable Deductions Can Be Complicated
You can opt for the standard deduction on your 2022 tax return (which is $12,950 if you’re single and $25,9000 if you’re married and filing jointly). However, you’ll need to itemize all gifts to charity from the items dropped off at a nonprofit thrift store to the $50 you may have donated at a fundraising event.
As such, charitable donations can create a lot of extra work when these items and donations start to add up, and it’s easy to miss out on opportunities that can enhance your deductions across the board.
Start the New Year with Efficient Tax Planning with Saddock Advisory
Lastly, when it comes to your 2023 tax preparation and planning, your best bet is to have an experienced partner to handle the details. At Saddock Advisory, we act as your personal CFO to ensure that you have the most deductions possible without the excess legwork.
Understanding the tax laws in all arenas is a core strength of Saddock Advisory. Our team is here to ensure that your season of giving can provide big benefits when the 2023 tax season rolls around in the New Year.