Not many people enjoy either filing or paying their income taxes. For one thing, it can take a considerable amount of time to gather all of the needed information.
Also, when you have to pay in, rather than receiving a refund, it can be almost painful to write the check. That is especially true if it is a large amount.
But if your tax liability looks as though it will be higher than you’d like this year, consider finding a way to reduce it.
One way to reduce your taxable income and do some good in the world around you is through charitable giving.
Here’s what you need to know about lowering your tax liability with charitable giving.
Income Tax Brackets
To really understand how to reduce your taxable income you need to understand how income taxes are calculated. You can look at the proposed 2017 federal income tax tables to see approximately how much you will owe in taxes this year. There is a summary of the tax brackets that makes it a little easier to understand, though.
For example, if you are single and will make around $40,000 this year, you will owe around $5,745 in federal income taxes. If you were to make a charitable contribution it will lower this amount.
If you are going to claim charitable contributions you will probably have to itemize your deductions on your tax return. But you should make sure they match or are more than the standard deduction before claiming them.
You can’t claim both type of deductions. Therefore, the standard deduction could benefit you more if it is a higher figure.
Another thing to keep in mind is that the value of your giving is not deducted from the total tax liability that you owe. The reason is because the donation lowers your taxable income which is what is used to calculate the amount of taxes you owe.
You would be wise to keep a receipt for the amount and date of the contribution you made. This will ensure you have proof of the charitable giving should you ever get audited.
Keep in mind you can only deductions within the calendar year in which you made them. Charging one with a credit card in December but paying it in January puts the date of the contribution in December not January.
New vs Used Items
When you gift items to charitable organizations that are not new they must still be in reasonably good condition. Also, the amount you can deduct is not the full price you paid for them. Instead, it would be the amount it would sell for at the time the contribution was made.
Depending on what the item is and its value, an appraisal may be necessary. In fact, for some items the IRS requires it, so check ahead when you have doubts.
Qualifications of the Recipient Matter
Some donations, whether they are cash, clothing, jewelry, or other items, do not qualify to be deducted from your taxes. However, it isn’t the classification of the item that is the issue. The problem lies with the recipient.
Let’s say you made a contribution to an individual. Under the IRS guidelines, this does not qualify as the type of charitable contribution you can deduct.
Surprisingly, a contribution to a tax exempt entity does not guarantee that you can claim a deduction either. Neither does a foundation. If you are in doubt, talk to your tax preparer before you donate or look at the IRS Exempt Organizations Select Check publication.
What You Can Give
Does any of this mean you shouldn’t make charitable contributions? Of course not. There are still many things you can contribute to charitable organizations and reduce your taxable income. In addition, it’s a great way to eliminate what you don’t need while helping others who have very little.
Examples include cars, cash, household items, and clothing. There are IRS rules pertaining to the donation of some of these items. To ensure you get the full value of your charitable giving, check before you give.
As you can see, you can reduce your taxable income through charitable giving. Just make sure you follow the tips above so you can claim all of the deductions you should be.
Have you used charitable giving to reduce your tax liability?