For many of us, charitable giving is as much a part of the holiday season as giving presents to loved ones. We can extend the spirit of giving to organizations that may have special meaning to us or which are working extra hard this time of year to bring more joy to those in need.
Personal gifts are not tax deductible, as mentioned in our recent blog “Gifts, Taxes, and Deductions: What You Need to Know Before Giving This Year.” However your charitable gift may be tax deductible if the recipient is a recognized and eligible non-profit organization.
Before we get into explaining more about this, we should first define what exactly a gift is:
The IRS has specific rules regarding the following types of gifts:
- Business Gifts - Something (money, property, or another valuable asset) given “in the course of your trade or business” without an exchange of goods or services for this item
- Personal Gifts - Something (money, property, or another valuable asset) given to another person without getting anything in return (or you get something of lesser market value)
- Inherited Gift - Something (money, property, or another valuable asset) bequeathed to you upon someone’s death
- Charitable Gifts - donations of money or valuable property a Person or Business gives to recognized non-profit organizations
In this article, we’ll take a closer look at the tax ramifications of Charitable Gifts (Donations) so that you can understand your reporting requirements. (Learn more about Gifts, Inheritance & Estate Taxes or Business & Personal Gifts.)
Donating To Charity - Basic Considerations
Giving a charitable gift can be much more complex than donating used items to the Humane Society thrift shop or sending a check to the local food bank or the American Cancer Society. That’s why organizations always advise donors to consult their tax advisor.
At a minimum, you should answer the following questions to understand the tax impact and reporting requirements for giving gifts to eligible charitable organizations:
- What exactly is a charitable contribution?
- What are the tax reporting rules for businesses?
- What are the tax impact and reporting rules for individuals?
- Did you get a donation receipt?
Itemizing vs Standard Deduction
On your individual tax return, once you total up all your income sources, the federal government and individual states let you reduce your taxable income by allowable deductions. You can either itemize or take the standard deduction. Itemizing involves totaling specific transactions (such as charitable contributions, property taxes, interest payments, medical payments, etc.).
The standard deduction is $12,950 in 2022 and $25,900 if married and filing jointly.
Usually, a taxpayer would benefit from using the greater of either the Standard Deduction or the total of Itemized Deductions in any given year (although there are exceptions to this, of course).
How is it reported on my tax return?
For the purposes of this article, we are only discussing Charitable Gifts given by an individual. If your business entity gave a charitable gift, it could impact your tax basis and create issues with income tax returns. Consult with a tax professional to understand donations made by your business.
With few exceptions, unless you itemize deductions on your personal tax return, you cannot claim any charitable donations. Many states follow the IRS and require you to itemize your income tax returns to receive deductions for charitable giving.
Some other states (like Arizona) allow charitable deductions even if you don’t itemize.
See our previous post about Gift, Inheritance & Estate Taxes here.
Have Questions? Let ProAdvisor CPA be your Gift Giving Guide
Gift-giving is noble and generous, but it’s best to give in a way that benefits everybody without causing unwanted tax implications. At ProAdvisor CPA, we understand that it’s complicated. We’re here to guide you so you can be confident you’re not only doing the right thing, you’re doing it the right way.