Charitable tax deductions and IRS rules

If reducing your taxable estate is an important estate planning goal, making lifetime charitable donations can help achieve that goal while benefiting your favorite organizations at the same time. Plus, by making donations during your lifetime, rather than at death, you can claim income tax deductions. But some of your charitable deductions could be denied if you don’t follow IRS rules, so it’s important to know the ins and outs of those guidelines — and luckily, we’re here to help break it down.

Three important things to know

First, the recipient charity must be a qualified charitable organization, meaning it must have a tax-exempt status. The IRS has developed a tool on its website — the Tax Exempt Organization Search — that allows users to search for a specific tax-exempt organization, check its federal tax status, and learn about tax forms the charity may file that are up for public review.

Second, the timing of pledging vs. payment of your charitable contributions can affect your deduction. Why? For most taxpayers, contributions are deductible only in the tax year they’re made. So if you pledged $5,000 in October 2022, but paid only $1,500 of your pledge to the charity by December 31, 2022, you’re allowed to deduct only the $1,500 amount on your 2022 tax return.

Third, if you donate property and receive something in return, it’s important to know the fair market value of each item. For example, if you donate a flat-screen TV to your child’s school and receive two tickets to a sporting event in return for your donation, you must first determine the value of your donation. Then, you may deduct only the amount exceeding the fair market value of the two tickets.

Substantiate your donations

You should also keep in mind that substantiation rules — i.e., providing proof of donations, like a receipt — also apply when giving cash or property to charity, and they vary based on the type and amount of the donation. For example, cash gifts of $250 or more require a “contemporaneous” written acknowledgment from the charity that includes information such as the gift’s amount, the date, and the estimated value of any goods or services received. For smaller gifts, a canceled check or credit card receipt may be sufficient.

If you’ve made substantial charitable donations, their deductibility depends on compliance with IRS rules, which go far beyond what we’ve discussed here; when in doubt, it’s always best to check with your tax advisor. And if you should need any assistance with estate planning or wealth management, your friends at UBT are here to help — simply visit us online to learn more about what we can do or find an expert to talk to.

Looking for more tax education? Check out our Tax Resource Page.