Not Taking Charity Deductions? Uncle Sam Thanks You


Charity deductions: most people make charitable donations from their heart and are not concerned about the tax deduction, but, if you don’t take the tax deduction, then who gets that extra money? Uncle Sam. Every year I hear clients say, “But I didn’t give money to charity to get a tax deduction.” And unfortunately, all too often that’s exactly what happens. So, my response to clients is usually, “You didn’t agree to donate extra taxes to the government either, did you?”

So how much money in deductions are we talking about? Here is a typical example: Let’s say you donated $1,000 to the Red Cross and are itemizing and are in the 25% marginal tax bracket. If you don’t take the tax deduction, you just paid an EXTRA $250 in taxes to Uncle Sam. Ouch!

As tax season rolls around each year, most people look through their checkbooks or credit card statements and put together a wonderful list of donations.

However, this is only half of the documentation needed. According to the IRS, donations of $250 or more require that you be in possession of an actual written receipt from the charity dated BEFORE you file your taxes, showing the details of the donation, including the amount, date, and statement saying that no goods or services were received by you in exchange for your donation. What should you do now that it is already nearing the end of December? Find the receipts or the letters that in most cases came in the mail during the year. Can’t find them? Contact the charity and ask for a copy. They will likely be glad to hear from you again.

You may even decide to take the opportunity to make an additional contribution. The charity can send you a letter into the following year, as long as it refers to the donation made the previous year and is in your possession prior to filing. Make sure to give any copies to your tax preparer prior to filing as well.

Is it worth all this work? Absolutely! Every little bit towards reducing your overall tax burden can help. If you haven’t begun pulling together all of your paperwork for your taxes, not just your charitable receipts, now is the time to get started. Also, consider scheduling a pre-tax season planning appointment before the end of the year. They can be very helpful in getting you better organized and prepared for this tax season, plus you may benefit from some last minute suggestions that could help reduce your tax liability, as well as review your current withdrawals to prepare you for next season’s anticipated changes.

Most tax preparers offer pre-tax season planning meetings. If in the past you have handled preparing your own taxes or used someone who is not a tax professional such as an Enrolled Agent (EA) or Certified Public Accountant (CPA), this may be the year for you to consider using a professional. The ever increasing complexities of the tax code, especially from the new Affordable Care Act and other IRS mandates, cannot be overstated. Many people may find themselves paying significantly more in taxes than what they might save by doing their own return.