How to Maximize Your Charitable Donations for Tax Purposes

Knowing how to maximize your charitable donations for income tax purposes will help you give more to good causes. At the same time, thoughtful donors can decrease their tax bill for the year and possibly even for years to come.

One way to increase the amount you can give is to keep track of your donations, so you can itemize them and take them off your taxable income. Donating appreciated assets also allows you to increase your charitable deduction and the amount you give. Another way to save on taxes and increase the amount you can afford to give is with a charitable remainder trust or unitrust.

Itemized donations

For charitable donations to be eligible for an itemized deduction, they must be to a nonprofit organization recognized by the IRS or to a religious organization. The organization you have in mind can tell you if it is eligible. Generally, political organizations, individuals and for-profit schools and hospitals are not eligible. The value of your donated labor is also not a charitable donation.

It is essential to keep records of charitable donations. Letters of acknowledgement, canceled checks and appraisals should all be kept with tax records. Eligible organizations will gladly document your gift. This means that when you give old furniture to the Goodwill or a used computer to an environmental group, you should get a receipt and keep track of it.

There are limits on the amount of your income you can deduct this way, and they vary in sometimes unexpected ways. The organization receiving your gift will probably be glad to help you figure it out.

Donating appreciated assets

Donating appreciated assets is not only for the truly wealthy. It is a way to increase the value of donations while decreasing tax bills. For example, consider someone who bought stock more than a year ago for a lower price. He or she can sell the stock and give the money to charity or can simply donate the stock.

The second option is a much better choice. If someone donates an appreciated asset, he or she gets to deduct the entire current value of the asset from adjusted gross income for tax purposes. He or she pays no taxes on the capital gain. When the organization sells the asset, it also pays no taxes on the gain.

Charitable remainder trusts and unitrusts

A charitable remainder trust provides an income stream to the donor or the person he or she designates. It also provides a gift to a designated charity, either after some years or after the donor's death. Its chief value for financial planning, though, is that it provides sheltered treatment of capital gains on assets that the trustee sells to diversify trust holdings.

In practice, this means that donors receive an annuity, which can be substantially larger than it would have been without the charitable donation. A donor who puts an appreciated asset into a charitable trust before it is sold legally avoids capital gains taxes on the proceeds when the asset is sold. Therefore, the amount of money in the trust, which provides his or her income, is substantially larger than it would otherwise have been.

Charitable remainder trusts pay a fixed percentage of the trust assets each year. Charitable unitrusts pay a fixed dollar amount, essentially regardless of the present value of the trust assets.

Each of these ways of donating to charity encourages taxpayers to be generous. Each rewards careful planning, too, as provided by a skilled financial planner. Knowing how to maximize your charitable donations can help you help the causes that matter most to you.