In this article we will cover:

  • How to claim a deduction for charitable contribution

  • How much you can deduct from your tax burden via qualified charitable donations

  • Organizations that qualify for tax deductible charitable donations

  • How to reduce your taxable income via charitable donations

How does giving money to charity reduce your taxes?

There are many different types of nonprofit and charitable organizations you could donate to. According to the Internal Revenue Service (IRS), only the organizations that meet section 501(c)(3) requirements can qualify to receive charitable donations that would be tax deductible.

This type of deduction can lower both adjusted gross income and taxable income. This means you save on taxes when you donate to tax-exempt organizations.


How to claim a deduction for charitable contributions

Choose an organization qualified to receive contributions.

You can deduct your contributions only if you make them to a qualified organization. To find out if an organization is qualified, contact their help center and ask them directly whether they are an eligible organization or not. Most will be able to tell you.

Use the Tax Exempt Organization Search Tool to look up eligible organizations.


Know how much you can deduct.

What's the maximum amount I can claim as a charitable tax deduction on my taxes?

Here are the standard deduction amounts by filing status for tax year 2022:

You can deduct your contributions only in the year you donate.

Generally, you can deduct contributions of money or goods from qualified organizations. Some contributions you can't deduct, and others you can deduct partially. A general rule of thumb is your deduction for charitable contributions can't be more than 60% of your adjusted gross income (AGI), but you may be limited to 20%, 30%, or 50% in some cases.

If you give property to a qualified organization, you can generally deduct the property's fair market value (FMV) at the time of the contribution.

Some ways to contribute are through checks, online transactions, credit cards, stock certificates, options, loans, etc. It's also important to note that you can't deduct your contribution until there is no chance of a potential refund.

Know the types of contributions you can deduct.

Examples of deductible charitable contributions are money or property you give to:

  • Nonprofit schools and hospitals.

  • Dependencies: expenses paid for a student living with you that is sponsored by a qualified organization.

  • War veterans' groups.

  • Religious affiliations: Churches, synagogues, temples, mosques, and other religious organizations.

  • Federal, state, and local governments.

  • The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.

  • Qualified organizations that you volunteer for.

Know what records to keep.

As you donate throughout the year, you must keep records to prove the amount of contributions you made during the year. The kind of records you must keep depend on the amount of your contributions but are generally receipts and/or Contemporaneous Written Acknowledgement (CWA). CWAs provide detailed information about each contribution and dictate whether or not the donor provides any goods or services that need to be considered for the contribution.

The three major methods of contribution are:

  • Cash contributions 

    • This includes payments made by cash, checks, electronic funds transfer, online payment service, debit card, credit card, payroll deduction, or a transfer of a gift card redeemable for cash. Make sure all your records have your name and the qualified organization, the date of the donation, the amount donated, and the receipt for the donation. Suppose you made more than one contribution of $250 or more. In that case, you must have either a separate acknowledgment for each or one acknowledgment that lists each contribution and the date of each contribution and shows your total amount.

  • Non-cash contributions

    • Non-cash contributions are broken down into four general sections.

      • Less than $250.

      • At least $250 but not more than $500.

      • Over $500 but not more than $5,000.

      • Over $5,000.

Anything less than $250 requires a receipt, and anything between $250 or $5,000 or more requires a Contemporaneous Written Acknowledgment.

  • Out-of-pocket expenses when volunteering or donating your services.

    • Suppose you volunteer or provide services to a qualified organization and have unreimbursed out-of-pocket expenses of $250 or more. In that case, it can be deducted as long as you have adequate records to prove the amount of the expense and get an acknowledgment from the qualified organization.

Know how to report contributions.

To report your charitable contributions, use Schedule A on Form 1040, Form 8283 for non-cash donations over $500. For dependents, provide information on expenses paid for students living with you on your returns.

For more information, read the IRS' Charitable Contributions Document.

What is a way to reduce your taxable income by donating to charity?

You might want to consider thinking beyond cash donations by looking into donating long-term appreciated securities like stocks, mutual funds, bonds, real estate, private company stock, and other potential investments.

Consider a donor-advised fund for charitable giving.

A donor-advised fund is a private fund managed by a third party. It's a simple, tax-effective way to allocate money to charitable giving.

Examples of donor-advised funds:

  • Vanguard Charitable Endowment Program

  • Giving Account at Fidelity Charitable

  • Schwab Charitable donor-advised fund

One of the major benefits of donor-advised funds is that you get immediate tax benefits; however, you don't necessarily get the final say on which charities receive your donation. Because of this potential limitation, publicly funded foundations typically support a variety of causes, and they have public advisors who can help donor-advised fundholders find specific causes to supplement their donation list.

Private foundations have much stricter tax laws and regulations governing their actions than donor-advised funds. In certain circumstances, the strict regulation allows private foundations to make grants to organizations outside the IRS-qualified 501(c)(3) public charities.

The limit for deducting contributions to a donor-advised fund is 60% of your AGI.

Things to remember about tax-deductible donations

Tax-deductible donations must meet specific guidelines; otherwise, you will not be able to consider them on your tax return. Always remember to choose qualified organizations, and document every contribution thoroughly.

Do your research and pick a responsible charity to ensure your money is going towards a good purpose.