Donating old clothes and excess money might seem like it’s the opposite of maintaining your wealth. But donations can have significant financial benefits. In the US, the IRS allows you to claim tax benefits if you donate to a charitable organization. As long as a charitable organization has a 501(c) status, you can deduct the donations from your taxes.
These are some of the specific benefits of donating:
Lower Annual Tax Bill
The easiest way to reduce your tax bill is to reduce your taxable income. Certain tax exemptions and credits can help with this. But so can donations. Donations are a powerful itemized deduction on a tax return.
If you donate to public charities, you can lower your adjusted gross income by a maximum of 60 percent. Meanwhile, you can lower your AGI by a maximum of 30 percent if you donate to:
- Veterans organizations
- Cemetery organizations
- Frat societies
- Some private foundations
If you do donate beyond these limitations, you can claim the excess on your next year’s tax return. Donations continue being carried forward for up to five years.
The process can get slightly complicated, though. The type of donated asset has an effect on your taxable income limit. The percentage is different depending on whether it’s an investment, cash, or property.
Reduce Estate Taxes
Many estates face heavy estate taxes. By gifting your assets, you can reduce the estate’s size.
There is a monetary limit on how large an estate can be before it’s taxed. If you exceed the limit, the excess will face the highest possible estate tax rates. Gifted assets change hands before your estate is divided, so you’re less likely to meet the financial threshold.
Eliminate Taxes on Capital Gains
Maybe you have an investment portfolio that allowed you to receive compensation for low stock prices. Now the price is twice as much. To avoid being taxed significantly, you can give the stocks to an organization as a gift.
Stocks can be given to charities meeting certain requirements. Doing so eliminates your obligation to pay capital gains taxes. The charity also doesn’t have to pay any capital gains taxes on the acquisition.