We have devoted a lot of time to the topic of charitable giving. Whether it is incorporated into your annual financial plan, a general planned giving strategy or done on an as available basis, when done correctly donating to many of your favorite causes can be a win-win. The recipient receives a gift and the giver may receive a tax deduction.
People often donate and track contributions to causes or initiatives they support, such as St. Judes or March of Dimes. In a town like Tallahassee, people often donate and track contributions to universities through the Boosters or academic initiatives. While there are restrictions on the tax deductibility of certain donations, they can serve the dual-purposes of supporting a favorite cause and some level of tax advantage.
One type of donation that is frequently executed but far less closely tracked are religious donations. If you make a habit of dropping money into the basket every week, how closely are you tracking your donation and what type of proof do you have that you actually contributed the monies you said you did? After all, cash donations must be tracked as well and you never get a receipt for dropping a ten or twenty in the basket.
In the event that you are on a strict tithing schedule and are systematically donating substantial portions of your income, then you are more likely to be retaining records. Any single donations above a specific threshold, in 2016 it was $250, also require written acknowledgement from the church, so make sure if your tithing schedule exceeds the limits, you are diligently tracking that as well.
So, let’s say that you have been donating money to the church and you have also been keeping satisfactory record. Are your contributions eligible for a tax deduction? In general, yes. As long as the church operates solely for religious or educational purposes, it should qualify for the tax deduction. The same goes for property or good, such as clothing, although there is an extra step to determine the fair market value of the goods.
Let’s assume all of the prior conditions are met and the time comes to make the deduction. Now, the unfortunate reality is that you are only eligible to utilize the deduction if you itemize your returns. If you are taking the standard deduction, donations to churches do not receive additional tax benefits in the current year. Note, you can roll forward the deductions five years in the event that you switch to itemization in the future.
Your donations to your church are also subject to other limitations, as detailed in IRS Publication 526, which limits your total charitable tax deductions to 50 percent of your adjusted gross income (AGI). Similar to above, the donations can be rolled forward for up to five years. Another limitation would be if you received any benefit from the donation which would reduce the total amount that is tax deductible, similar to limited tax deductibility of Booster Club donations, for example, which often convey benefits to the giver.
Giving to religious organizations can help satisfy financial and personal goals. Just make sure that you are following the guidelines and, for heaven’s sake, track the donations you make by dropping cash in the basket.
This article is meant to be general in nature and is not intended, and should not be construed as personal financial advice. Waddell & Reed is not affiliated with any charities referenced. Please consult your financial advisor prior to making financial decisions. Gary Parsons is a Financial Advisor with U-Vest Financial®, a separate entity from Waddell & Reed and can be reached at 850.300.7055. Waddell & Reed, Inc., Member SIPC