5 Ways to Maximize Your Tax Deduction

By donating to charity, you can feel good about helping those in need. As an added benefit, you can also use your charitable donations to reduce your tax bill.

You can deduct charitable donations of cash and goods given to qualified organizations to reduce your taxable income. Of course, some rules apply, the main one being that the charity must be designated by the Internal Revenue Service (IRS) as a 501(c)(3) organization.

A Look at the Rules

Deductions for charitable contributions generally cannot exceed 60% of your adjusted gross income (AGI), although limits of 20%, 30%, or 50% may apply in some cases. To claim the deduction, you need to itemize deductions on your taxes instead of claiming the standard deduction. If you decide to go this route, be sure to save your donation receipts.

You can also carry forward some of your unused contributions over the five-year period if they are the result of eligible donations.

Let’s dive into the details of how to get the most out of your charitable giving when it comes to taxes.

1. Plan your giving

Developing a charitable giving strategy can help you maximize your tax deductions. There are many tax planning opportunities with charitable donations that you can take advantage of to ensure you get the maximum deduction possible. For example, if you know that next year you will be in a higher tax bracket than this year, you can wait and take the deduction next year when it is higher.

Large charitable gifts should also be carefully planned to maximize deductions and minimize your out-of-pocket expenses. For example, if you have taxable income of $25,000 this year and you donate 60% of that amount, or $15,000, to charity, you will get a deduction for the entire gift and what you save in taxes is will reduce the cost of the gift for you. However, if you donate more than $15,000, you’ll have to carry the excess forward to the next tax year and won’t be able to take advantage of that portion of the deduction for another 12 months.

2. Get a receipt for your donations.

You need proof of charitable donations to claim them from the IRS. Any monetary donation of $250 or more requires a written confirmation of the gift from the organization, which must indicate whether you received goods or services in exchange for your contribution and, if so, the approximate value of the gift. For small cash donations, you only need a bank statement or a simple receipt from the charity.

If a donation of less than $250 is made through payroll deduction, you will need a pay stub, Form W-2, or some other record from your employer that shows the date and amount. Another option is to obtain a lien card from the organization stating that it did not provide goods or services for the amount charged.

Getting a receipt every time you make a donation will strengthen your tax filing if you pass the audit. If you made a large donation and don’t have (or can’t find) a receipt, the donation will almost certainly be rejected upon review. For this reason, it is best to create an accounting system at the beginning of each year.

3. Donate household goods.

If you want to save on taxes, give back to charity, and declutter your basement at the same time, you might want to consider donating household goods. There are many charities and church organizations that accept donations of clothing and household items to give away or resell to those in need.

The rules for non-cash donations are slightly stricter than for cash donations. You are allowed to donate items at their estimated value at the time of donation, not at the value they were when you first purchased them. For donations under $250, you must obtain a written receipt from the organization and prepare a list of items donated and their value.

For donations between $250 and $500, you need “contemporaneous written confirmation” from the charity. For donations over $500 but less than $5,000, you must complete IRS Form 8283 in addition to the acknowledgment. For donations of goods over $5,000, an official appraisal is required in addition to the acknowledgment and Form 8283.

4. Don’t forget about car expenses.

If you volunteer for a charity and have unreimbursed car expenses, you may be able to claim them as a charitable gift. For example, if you volunteer weekly at the same homeless shelter for a year, the mileage and gas you spent volunteering may qualify you for a deduction. The miles you drive in a year for charity must be recorded in a mileage log, including the date of each trip, the purpose of the trip and the total number of miles driven.

You can claim either actual expenses or a mileage allowance of 14 cents per mile in 2024. The latter is much easier to track and report. You must also obtain written confirmation from the charity for volunteer driving before applying.

5. Monitor transfers carefully

If you can’t deduct all of your charitable donations for the year because you’ve reached the maximum percentage of taxable income, you can carry them forward for up to five years, after which they expire and you can no longer use them. Tax loss carryforwards, also known as carryforwards, is a provision that allows a taxpayer to carry forward tax losses to future years to offset profits.

If you have tax rollovers, keep track of them so you can use them before they expire. If you feel like you’re at risk of losing your carryover balance, consider pausing the current year’s donations and using old ones. Otherwise, you may lose your deduction once you reach the five-year limit.

Bottom line

Donating to charity is a great way to give back to society and save on taxes at the same time. It’s a win-win situation. However, you should make sure you follow IRS rules and keep careful records to support your reported donations and help you keep track of the amount you donated so you can get the best tax benefits.