Summary
Donating to charity doesn’t just feel good and do good—it can also be a smart financial move! Yet, many donors miss out on tax benefits that could reduce their taxable income. Join us as we break down how to work smart with your donations.
As Americans, we love giving. Around two-thirds of American households donate to charity each year, according to Philanthropy Roundtable, but only 7.5% of tax returns claimed the deduction in 2022—about 1 in every 13 returns. This means that everyday donors aren’t claiming tax deductions for their contributions, leaving valuable savings on the table.
The majority of benefits from charitable deductions go to the richest 25% who know how to claim them. Since tax laws often favor wealthier donors who list deductions, it’s important to know how to structure your giving strategically, to benefit both your finances and the causes you care about.
Not all donations are created equally when it comes to tax benefits. Understanding how to maximize your contributions while making a meaningful impact is key.
Tax Deductions for Charitable Giving
When you donate to a qualified 501(c)(3) organization, you may be eligible for deductions that lower your taxable income. The amount you can deduct depends on the type of donation and your financial situation. A 501(c)(3) organization is a nonprofit that has received tax-exempt status from the IRS, meaning donations made to it are generally tax-deductible.
These organizations include charities, religious groups, and educational institutions that operate for the public good.
Cash donations are the most common and are generally deductible up to 60% of your adjusted gross income (AGI). However, donating appreciated assets, such as stocks or real estate, can provide even greater benefits. By contributing these assets instead of selling them first, you can avoid capital gains taxes while still claiming a deduction for their full market value.
If you’re 70½ or older, you have another tax-efficient option. This is making a Qualified Charitable Distribution (QCD) from your IRA to a qualified charity. This allows you to donate directly without increasing your taxable income, which can be particularly helpful for retirees looking to meet their required minimum distributions (RMDs) while supporting a cause.
Another powerful giving tool is a Donor-Advised Fund (DAF). This allows you to contribute cash, stocks, or other assets, claim an immediate tax deduction, and distribute the funds to charities over time, giving you more control over your philanthropic impact.
To take advantage of these benefits, you must itemize your deductions rather than take the standard deduction. However, since Black taxpayers are statistically less likely to itemize, many miss out on these tax-saving opportunities—emphasizing the need for strategic planning when making charitable contributions.
How to Find Reputable Charities
Not all nonprofits are created equally. Some maximize every dollar toward their mission, while others spend heavily on overhead. To ensure your donation truly makes an impact, follow these steps.
- Verify 501(c)(3) Status. Use the IRS Tax Exempt Organization Search to confirm eligibility for tax deductions.
- Check Transparency Ratings. Using the IRS Tax Exempt Organization Search, you can view the organization’s most recently submitted IRS Form 990, which details their compliance and programs.
- Assess Their Impact. Look for clear reports on how donations are used and scan their website to assess any examples of real-world results.
- Look for Red Flags. High-pressure tactics, vague mission statements, or excessive executive salaries are signals that you should do deeper research to assess if the organization is a good fit.
Maximizing Your Impact
Your donation has power beyond tax benefits. By putting your money to work towards causes that you are passionate about, you
- Support Community-based Nonprofits. Less than 2% of fundraising dollars go to Black-led organizations, despite their deep-rooted impact in underserved communities per statistics from the Association of Black Foundation Executives. Every intentional donation helps shift this number north and drive greater impact.
- Choose Unrestricted Funding. Many nonprofits struggle with restrictive grants which affects their ability to plan and act effectively. Instead of specifying which specific program or project, search for an option to give “unrestricted” funds that allow the nonprofit to allocate resources where they are needed most.
- Leverage Matching Gifts. Many companies offer matching gift programs, where they match employee donations to eligible nonprofits. This is an easy way to maximize your giving without additional out-of-pocket costs.
Charitable giving should be intentional—both for your financial health and the impact you want to create. By understanding tax benefits, researching impactful charities, and structuring donations effectively, you can give smarter and increase your impact.
A tool for financial wellness and social change, use charitable giving wisely and share these tips to help more people grow their financial literacy!
